EXHIBIT 1 RETURNS, STANDARD DEVIATIONS AND CORRELATIONS EXPECTED...

1. Exhibit 1 Returns, Standard Deviations and Correlations Expected Return Current Portfolio (£) 11.5% Standard Deviation of Returns Current Portfolio (£) 13.5% Expected Return of US Index ($) 14.5% Standard Deviation of Returns of US Index ($) 16.0% Correlation of US Index Returns (£) and Current Portfolio Returns (£) 0.65 Expected Percentage Change in Exchange Rate (£/$) 6.7% Standard Deviation of Exchange Rate Change (£/$) 8.5% Correlation of US Index Returns($) and Percentage Exchange Rate Change (£/$) 0.45 Severn states: “In general, changing the asset allocation to include developed and emerging market international securities to the current portfolio will result in a new efficient frontier of portfolios where each new portfolio will offer higher levels of return but at higher levels of risk, provided the international securities have low correlations with the current portfolio.” James Bruch, a committee member, responds “I think we should not expand our investments to international markets.” He elaborates with the following statements: Statement 1: “Currencies can fluctuate wildly and investing in U.S. stocks exposes us to currency risk which could negatively impact returns, for this reason we should not invest in international markets.” Statement 2: “Because most U.K. companies have an international presence, we should focus on diversifying across different industries in the U.K. and not worry about diversifying globally across different countries.” By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose. Statement 3: “Emerging markets are volatile and expose us to political risks. They are prone to suffering frequent financial crises, and offer no risk diversification benefits during these times because correlations with developed markets such as the U.K increase.” Severn responds to Bruch: “Currency risk should not prevent us from investing globally. Currency risk can be eliminated by hedging with currency forwards or by diversifying across multiple currencies. Furthermore, the correlations between equity and currency markets are so low that overall currency risk is minimal.” “It is true that emerging markets are subject to periodic crises, but most of the time the crisis does not spread beyond the local region and correlations between emerging and developed markets remain low. Emerging markets are more likely to enjoy superior economic growth and over the years have become more integrated with developed economies. This increased integration with developed markets will result in attractive equity market returns.”