The portfolios expected return of 670 percent is less

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The portfolio’s expected return of 6.70 percent is less than the return objective of 7.38 percent. 28-17
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Chapter 28 - Investment Policy and the Framework of the CFA Institute b. Note: The Maclins have purchased their home and made their charitable contribution. Cash: 0% to 3% The Maclins do not have an ongoing need for a specific cash reserve fund. Liquidity needs are low and only a small allocation for emergencies need be considered. Portfolio income will cover the annual shortfall in living expenses. Therefore the lowest allocation to cash is most appropriate. U.K. Corporate Bonds: 50% to 60% The Maclins need significant exposure to this less volatile asset class, given their below- average risk tolerance. Stable return, derived from current income, will also be needed to offset the annual cash flow shortfall. Therefore the highest allocation to U.K. Corporate Bonds is most appropriate. U.S. Equities: 20% to 25% The Maclins must meet their return objective while addressing their risk tolerance. U.S. Equities offer higher expected returns than bonds and also offer international diversification benefits. The risk/return profile is also relatively more favorable than it is for either U.K. Bonds or Barnett stock. Therefore the highest allocation to U.S. Equities is most appropriate. Barnett Co. Common Stock: 0% to 5% The Maclins’ below average risk tolerance includes a shortfall risk limitation of –12 percent return in any one year, and the Barnett stock is very volatile. There is too much stock-specific (non-systematic) risk in this concentrated position for such an investor. They also have “employment risk” with Barnett. Therefore the lowest allocation to Barnett stock is most appropriate. The following sample allocations are provided to illustrate that selected ranges meet the return objective. Sample allocation 1: Asset Class Weight (%) Return (%) Weighted Return (%) Cash 1 1.0 0.01 U.K. Corporate Bonds 55 5.0 2.75 U.K. Small-capitalization Equities 10 11.0 1.10 U.K. Large-capitalization Equities 10 9.0 0.90 U.S. Equities 20 10.0 2.00 Barnett Co. Common Stock 4 16.0 0.64 Portfolio Expected Return 7.40 28-18
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Chapter 28 - Investment Policy and the Framework of the CFA Institute Sample allocation 2: Asset Class Weight (%) Return (%) Weighted Return (%) Cash 1 1.0 0.01 U.K. Corporate Bonds 50 5.0 2.50 U.K. Small-capitalization Equities 10 11.0 1.10 U.K. Large-capitalization Equities 10 9.0 0.90 U.S. Equities 24 10.0 2.40 Barnett Co. Common Stock 5 16.0 0.80 Portfolio Expected Return 7.71 28-19
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  • Fall '10
  • SMITH
  • investment policy, CFA Institute, risk tolerance, time horizon

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