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Cecil Boller is the portfolio manager for a $500 million defined benefit pension fund. Boller has been conducting a great deal of analysis to select the appropriate allocation for the fund. He has come up with the following long-term expectations for various asset classes.
Based on these expectations, Boller identifies an efficient frontier with four corner portfolios with the characteristics shown below. The risk-free rate is assumed to be equal to the T-bill rate of 3.0%. Boller has determined that the fund has a spending rate of 7.5%. Inflation is expected to be 2.5% per year, and the cost of managing the fund is expected to be 0.50%. The expected return on the portfolio is therefore (1.075)(1.025)(1.005) – 1 = 10.74%. Boller has also stated that he does not want the standard deviation of the pension portfolio to exceed 9.0% and there is a constraint against short selling. Conclusion 1: The weight given to U.S. equity in the pension portfolio should be greater than 11.0%. Conclusion 2: The weight given to corporate bonds in the portfolio should be exactly 30.78%. Conclusion 3: The weight given to alternative investments in the portfolio should be greater than 13.0%. Given this information, which of the following conclusions drawn by Boller are CORRECT? A. Conclusion 3 only. B. Conclusions 1 and 2 only. C. Conclusions 1 and 3 only. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||