A client wants to make a year end charitable donation of $10,000 from her portfolio of stocks and bonds which is worth $400,000 on June 30, but she wants to be able to make the donation without invading the current principle of $400,000. You estimate from her current allocations that the mean expected return on her portfolio over six months would be 5.7% with a standard deviation of 4.0%. You consider two possible reallocations. The more aggressive reallocation would have an expected return of 8.9% with a standard deviation of 9.6%, while the more conservative reallocation would have an expected return of 3.7% with a standard deviation of 6%.

1. Given her desire to make the donation without invading her $400,000 principle, what is the shortfall level to use for the safety-first rule?
2. According to the safety-first criterion, should you recommend the more aggressive reallocation, the more conservative reallocation, or the current allocation?
3. For the portfolio that is optimal according to the safety-first criterion, what is the probability that the return will be less than the shortfall level?