The objective this week is to determine adiversifiedallocation amongst the assets in the list below that will, over time (ie 20 years) have a high probability of achieving your target return for your Xanadu Government Investment Fund.You are limited to the following assets, which are expected to deliver the returns shown in the table.

Hint 1:a fund that is to return 7%pa will have a 70% allocation to growth assets, which are equities and property, and a 30% allocation to defensive assets, which are fixed interest and cash.So, for this exercise this fund might have an allocation of; 25% domestic equities, 25% global equities, 10% domestic property, 10% global property, 12.5% domestic fixed interest, 12.5% global fixed interest, 5% cash.

Hint 2: if your fund has a target return less than 7%, I would expect you to have a higher allocation to DEFENSIVE assets than the above example.The lower your return, the greater your allocation to defensive assets.

Hint 3: if your fund has a target return greater than 7%, I would expect you to have a higher allocation to GROWTH assets than the above example.The higher your return, the greater your allocation to growth assets.

For some of you, your target return is higher than the highest returning asset class.Please state that fact.However, you have to "try your best", because that is what we face in the real world.If that is your situation, you would have a very high allocation to growth assets and a minor allocation to defensive assets.

Hint 4: Returns are additive.

Rule 1: Your total allocation MUST add up to 100%

Rule 2: You MUST diversify.You must allocate to a minimum of 5 asset classes.

Rule 3: No HERO trades.In other words, do not aim to overshoot your target return, because volatility plays a large role in the outcome.

Rule 4: Please spend less than 15 minutes on this exercise. You will learn how to determine this allocation properly in a few weeks.

Objectives of the Exercise: There are three objectives of this exercise:

• Appreciate that risk and return are related
• Think about the importance of diversification
• Appreciate that your asset allocation is the prime driver of return outcomes

Table 1: Asset Classes

Asset Class

Expected Return

Domestic Equities

9%pa

Global Equities

9%pa

Domestic Property

7%pa

Global Property

7%pa

Domestic Fixed Interest

6%pa

Global Fixed Interest

6%pa

Cash

5%pa

note: return value = 7.25% also another return value 8% so its 2 solve plz

thx