Question
Suppose you are a chief officer for a money management firm that specializes in advising individual investors. You use an integrated asset allocation strategy. You
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| Suppose you are a chief officer for a money management firm that specializes in advising individual investors. You use an integrated asset allocation strategy. You are trying to establish a strategic asset allocation for two clients, Mrs. Howard and Mr. Thomson. Mrs. Howard has a risk tolerance factor of 7. Mr. Thomson has a risk tolerance factor of 32.
The table below shows the characteristics of four possible portfolios. | |||||||
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| Asset Mix |
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| Stock | Bond | ER | s2 |
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| Portfolio 1 | 10% | 90% | 6% | 5% |
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| Portfolio 2 | 30% | 70% | 7% | 11% |
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| Portfolio 3 | 70% | 30% | 8% | 19% |
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| Portfolio 4 | 90% | 10% | 9% | 29% |
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- Calculate the expected utility for each possible portfolio for each of the two clients. Show your calculations.
- Which portfolio is the optimal strategic allocation for Mrs. Howard?
- Which portfolio is the optimal strategic allocation for Mr. Thomson?
- Why is there a difference between the strategic allocations of Mrs. Howard and Mr. Thomson? Explain.
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