Use the data in Exhibit 5-3 to address Problems 1-3

EXHIBIT 5-3 Forecasts

Investors Forecasts

Asset Allocation Expected Return Standard Deviation of Return

A 11.5% 18%

B 8 14

C 6 10

1) On the scale discussed in the text, Robert Langlands risk aversion (RA) is 5. Recommend an asset allocation for him.

2) The Garrett Foundation would like to choose an asset allocation that minimizes the probability of returns below its annual spending rate of 3.5 percent. Recommend an asset allocation for the foundation.

3) William Ernst needs to spend 5 percent from his portfolio annually. He anticipates that inflation will be 2.4 percent annually. Ernst incurs expenses of 60 basis points a year in investing his portfolio. Which asset allocations satisfy Ernsts return requirement?