Use the 4 Steps for Asset Allocation for an Individual Investor and the information about the individual client below to help answer questions 28-32

• Currently (T=0), the client has $275K in financial assets, but needs $1,000K to retire in 30 years (T=30)
• No additional contributions to financial assets will be made from now until retirement
• Any capital gains on the financial assets will be taxed at 30.0%
• Inflation is forecasted to be 2.0% per year
• The client will invest their financial assets in either stocks or bonds
• Stocks are expected to return 17.0% with 12.0% of total risk
• Bonds are expected to return 8.0% with 5.0% of total risk
• The correlation of stocks and bonds is assumed to be 0.65
• The risk free rate is 2.5%
• You are trying to help the client decide between 11 different portfolios with the following weights of stocks and bonds:

1. (Asset Allocation) If 85% of the financial assets are invested in stocks and 15% of the financial assets are invested in bonds, the expected total risk of this 85/15 portfolio is closest to:

1. 10.68%
2. 10.70%
3. 10.72%
4. 10.74%
5. 10.76 %

2. (Investment Policy Slides 1 to 45 only) The clients nominal pre-tax return required is closest to:

1. 4.4%
2. 5.8%
3. 6.4%
4. 9.1%
5. 10.3%

0% 9.44% Portfolio Weight Stock Weight Bond Port. Return Port Risk 100% 17.00% 12.00% 2 90% 10% 16.10% 80% 20% 15 20% 70% 30% 14.30% 5 60% 40% 13.40% 8.63% 50% 50% 12.50% 7.86% 40% 60% 11.60% 7.12% 30% 70% 1070% 6.45% 20% 80% 9.80% 5.85% 10% 90% 8.90% 5.36% 11 0% 100% 8.00% 5.00% Sharpe Ratio 1 2083 12218 12356 12495 1 2623 1 2726 12773 1 2715 1 2475 1.1944 1.1000