Walker Patel is a portfolio manager at an investment management firm. After successfully implementing mean–variance optimization (MVO), he wants to apply reverse optimization to his portfolio. For each asset class in the portfolio, Patel obtains market capitalization data, betas computed relative to a global market portfolio, and expected returns. This information, along with the MVO asset allocation results, are presented in Exhibit 1.

The risk-free rate is 2.0%, and the global market risk premium is 5.5%. Contrast, using the information provided above, the results of a reverse optimization approach with that of the MVO approach for each of the following:
i. The asset allocation mix ii. The values of the expected returns for US equities and global bonds Justify your response.

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EXHIBIT 1 Asset Class Data and MVO Asset Allocation Results Market Cap Asset Class (trillions) Beta Expected Returns MVO Asset Allocation Cash $4.2 0.0 2.0% 10% US bonds $26.8 0.5 4.5% 20% US equities $22.2 1.4 8.6% 35% Global equities $27.5 1.7 10.5% 20% Global bonds $27.1 0.6 4.7% 15% Total $107.8