The following information relates to Questions 7-12 Celiu Deveraux is chief investment officer for the Topanga Investors Fund, which invests in equities and fixed income. The clients in the fund are all taxable investors. The fixed-income allocation includes a domestic (US) bond portfolio and an externally managed global bond portfolio The domestic bond portfolio has a total return mandate, which specifies a long-term retum objective of 25 basis points (lops over the benchmark index. Relative to the benchmark small deviations in sector weightings are permitted, such risk factors as duration must closely match and tracking error is expected to be less than 30 bps per year. The objectives for the domestie bond portfolio include the ability to fund future liabilities, protect interest income from short-term inflation, and minimize the correlation with the fund's equity portfolio The correlation between the fund's domestic bond portfolio and equity portfolio currently 0.14. Deveraux plans to reduce the fund's equity allocation and increase the allocation to the domestic bond portfolio She reviews two possible investment strategies Strategy 1 Purchase AAA rated fixed-coupon corporate bonds with a modified duration of twa years and a correlation coefficient with the equity portfolio of -0.15. Strategy 2 Purchase US government agency floating.coupon bonds with a modified duration of one month and a correlation coefficient with the equity portfolio of -0.10. Deveraux realize that the fund's retum may decrease if the equity allocation of the fund is reduced Deveraux decides to liquidate $20 million of US Treasures that are currently owned and to invest the proceeds in the US corporate bond sector. To fulfill this strategy, Deveraux asks Dan Foster, Dewly hired analyst for the fund, to recommend Treasures to sell and corporate bonds to purchase. Foster recommends Treasures from the existing portfolio that he believes are overvalued and will generate capital gains. Deveraux asks Foster why he chose only overvalued bonds with capital gains and did not include any bonds with capital losses. Foster responds with two statements Statement 1 Taxable investors should prioritize selling overvalued bonds and always sell them before selling bonds that are viewed as fairly valued or undervalued Statement 2 Taxable investors should never intentionally realize capital losses Regarding the purchase of corporate bonds, Foster collects relevant data, which are presented in Exhibiti Scanned with Camscanner Exhibit 1. Selected Data on Three US Corporate Bonds Bond Characteristies Credit que Issuesize(S milions) Matky (yes) Totalice outstanding (5 millions) Months since isce Bond ANA 100 $ 1.000 Road 2 Boad 3 AA A 75 75 7 7 1,500 1,000 3 6 New issue Deveraux and Foster review the total expected 12- mooth refum (assoming to reinvestment income) for the global bond portfolio Selected financial data are presented in Exhibit 2. Exhibit 2. Selected Data on Global Bond Portfolio 200 225 Arc Notional principal of particle ( ) Average bond coupon payment per 100 par vale) Coupon frequency Current average bond price 98.45 Expected average bond price in one year (sing a cheged yield curve) 9862 Average bond convey 022 Average bondsoodied duration 5.19 Expected Berage yield and yield spread change 0.154 Expected credin losses Expected currency gains appreciation vs. S) 0.656 Deveraux contemplates adding a new manager to the global bond portfolio. She reviews three proposals and determines that each manager uses the same index as its benchmark but pursues a different total return approach, as presented in Exhibit 3. 0.139 1 Exhibit 3. New Manager Proposals Fixed Income Portfolio Characteristics Sector Weights () Manager Manager Manager Codex Governet 333 525 475 541 Action 162 164 DA 160 200 222 25.1 19.8 SEBS 103 89 133 101 Corporate Risk and Return Characteristics Manager Masa B Manager Index AIRemamy 05) 163 184 8.55 735 Modified (2) 523 53 6.16 522 Average yield( 198 205 212 199 Tanove 207 205