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:
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