Asset Allocation

a) Define mean/variance asset allocation optimization. Include an objective function and two constraints in your answer (either in words or equations, both is better). An illustration is encouraged.

b) Intuition is the key ingredient to answering this question effectively. If the expected return on stocks is 10% and the expected return on bonds is 5%, propose specific feasible portfolio weights (one set of two reasonable, defensible weights that total to 100%) of the two asset classes and explain why you proposed them. Be sure to utilize mean variance concepts, the stated expected returns and what you know about stock & bond risk.

Bond Weight: _______________, Stock Weight: ______________

Why?

c) Name an alternative quantitative asset allocation technique to standard mean/variance optimization, for setting asset allocation, and list one advantage and one disadvantage relative to mean/variance.

The Alternative Technique:_____________________________________________

One Advantage:

One Disadvantage: