Viktoria Johansson is newly appointed as manager of ABC Corporation’s pension fund. The current market value of the fund’s assets is \($10\) billion, and the present value of the fund’s liabilities is \($8.5\) billion. The fund has historically been managed using an asset-only approach, but Johansson recommends to ABC’s board of directors that they adopt a liability-relative approach, specifically the hedging/return-seeking portfolios approach. Johansson assumes that the returns of the fund’s liabilities are driven by changes in the returns of index-linked government bonds. Exhibit 1 presents three potential asset allocation choices for the fund.

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EXHIBIT 1 Potential Asset Allocations Choices for ABC Corp's Pension Fund Asset Class Allocation 1 Allocation 2 Allocation 3 Cash 15% 5% 0% Index-linked government bonds 70% 15% 85% Corporate bonds 0% 30% 5% Equities 15% 50% 10% Portfolio Statistics Expected return Expected standard deviation 3.4% 7.0% 6.2% 12.0% 3.6% 8.5% Determine which asset allocation in Exhibit 1 would be most appropriate for Johansson given her recommendation. Justify your response. Determine which asset allocation in Exhibit 1 would be most appropriate for Johansson given her recommendation. (circle one) Allocation 1 Justify your response. Allocation 2 Allocation 3