CFA Institute Exam CFA-Level-III Topic 1 Question 2 Discussion

Actual exam question for CFA Institute's CFA-Level-III exam

Question #: 2
Topic #: 1

HAS THREE PARTS Wyatt Washington is the portfolio manager for Mark Beitia, a recent retiree. He is currently exploring a change in Beitia's strategic asset allocation. He gathers data on the expected returns, standard deviations, and correlations for five assets. Using these market expectations, he derives an efficient frontier. Washington uses the following information in his construction of the asset allocation:

* Beitia's asset base = $5,000,000.

* Annual after-tax spending amount = $150,000.

* Estimate of future inflation = 3.5%.

* Beitia will donate $750,000 to his alma mater in one year in one lump sum.

* Risk-free rate = 4.0%.

* Beitia's income tax rate = 25%.

Washington forms four corner portfolios from his efficient frontier and calculates the following expected returns and standard deviations:

ACalculate the required before-tax return for Beitia's portfolio and Beitia's expected utility from holding each of the corner portfolios.

BAssuming that Washington combines two corner portfolios to meet Beitia's desired return

CAssuming that Washington combines a corner portfolio with the risk-free asset to meet Beitia's desired return (calculated in Part A), calculate the weights of the appropriate corner portfolio and the risk-free asset that will be used (assume no borrowing) and the resulting portfolio standard deviation.

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Suggested Answer: B

by Johnetta at May 10, 2022, 01:08 AM

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