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Part B: SHORT ANSWER QUE QUESTION I (8 marks) You are an investment analyst working in the finance department of a manufacturing company with headquarters in Kansas City, Missouri. The company's operations are all located in the belong to a defined benefit pension plan. Your employer hired a consultant to conduct a mean-variance optimization and provide a recommendation for the plan s asset allocation. The available asset classes for the plan are: U.S. equities, foreign equities, U.S. fixed income, and commodities. The report is dated January 25, 2020. The inputs and recommendations are below: Ten-Year Annual Returns, Standard Deviations, and Correlations of Returns for Selected Asset Classes January 2010 December 2019 Commodities US Equities 10-Year Return Standard Deviation US Fixed Income Equities US Equities 12.5% 15.21% 1.00 Foreign Equities 14.0% 14.44% 1.00 .62 US Fixed Income 5.5% 1.00 11.10% .25 .06 Commodities 15.0% 1.00 19.43% (.10) (.07) .01 Recommended Asset Allocation Asset Class Weight US Equities 0% Foreign Equities 55% US Fixed Income 20% Commodities 25%

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Answer 1

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Four concerns regarding the recommendation. 6 US Fixed Income sogr o -20% of the tan portfolio holds us lixed income where the returns are no dist and the di riskie Standard deviation is high as per the retums but least when compared with the other asset class : So, a part of it can be uwested in the I thigh yield bonds or unk bonds which offers similar returns as stock but hold less risk than stocks, J on Also odwobeerus fixed income bondon - Too often the westor considers only no credit risk and interest rate a while there are other risks as well - that can affect the fixed income. offering

Plus Cavery small portion) @ some part of the portfolio should have cash and cash equivalents such as savings deposits treas way bills, un money market funds as these are the safest investments, but offer tow. retwins. In case of extreme scenarios, the chances of loosing money is extremel lowongan 2 10% of the portfolios a should have w been assigned to us equites as these are the most rewarding and offers the greatest potential for growth. Though volatility is very high in but. a portfolio can be balanced will accordingly. Also, this needs to be remembered that stock over a long periods of time, generally have been es euwarded with strong positw e retwins exte uw toelio nos ton

4) Instead of celying completely on a single stock of or Foreign equities, a portion be invested into mutual funds or index funds As different stratequo could have worked while investing in mutual - funds eg: value or growth of boosting yearly returns It invowes increased diversification.