3W = 2 W = 0.923 VI. INVEST 92.3% IN DELTA AND 7.7% IN EPSILON....

1.3w = 1.2 w = 0.923

vi. Invest 92.3% in Delta and 7.7% in Epsilon. vii. Candidate discussion: This is an efficient frontier question. Blend the two modules that most closely bracket the required return and would plot as optimal in relation to the EF; in other words, to the right and up. Right and up is lower risk to return. Note that if you pick portfolios other than the two closest corner portfolios, the straight line interpolation you are making (that is what a weighted average is) will be further from the curved efficient frontier. The reference to corner portfolios is essentially footnote information in the readings, but the question and case facts are sufficient to solve the question. And now you know, when working with corner portfolios, choose the two closest bracketing portfolios. viii. 1 point for selecting Delta and Epsilon, 1 point for setting up the weight calculation, and 1 point for the two weights. ix. (Study Session 8, LOS 17.c, d, e, g) Norton's boss has asked him to consider applying their module approach to goals-based asset allocation (GBAA). In GBAA, a specific module will be used to meet a specific client goal based on the time horizon and urgency of the goal. Norton has the GJA risk analytics team to compute real (nominal return less expected inflation) returns for each of the modules over a variety of time horizons and required probabilities of success. This analysis is presented in Exhibit 2: Exhibit 2: Model Portfolio Annualized Minimum Real Returns

Model Porfolio: Alpha Beta Gamma Delta Epsilon Zeta

Time Horizon (years): 10

Required success 95% −1.25% 0.37% 1.24% 1.52% 0.58% −1.69%

85% −0.31% 1.60% 2.74% 3.70% 3.59% 2.97%

75% 0.26% 2.34% 3.64% 4.99% 5.38% 5.74%

60% 0.91% 3.19% 4.68% 6.50% 7.45% 8.96%

Time Horizon (years): 20

Required success 95% −0.50% 1.35% 2.43% 3.24% 2.96% 2.00%

85% 0.16% 2.22% 3.49% 4.78% 5.09% 5.29%

75% 0.56% 2.74% 4.12% 5.70% 6.35% 7.25%

60% 1.02% 3.34% 4.86% 6.76% 7.82% 9.53%

For example, for a 10-year horizon, Alpha has a 75% chance of earning at least a compounded 0.26% return per year for the 10-year period. Norton next applies the information in Exhibit 2 to one of his clients, Paula Anton. Anton is 75 years old and has total financial assets of $5 million. She has two financial goals: