4% = 10.3% X W + 1% (1-W) SOLVING FOR W = .25 WHERE

9.4% = 10.3% x w + 9.1% (1-w) Solving for w = .25 Where: w = percentage of overall portfolio invested in Portfolio 3 Therefore, the optimal weighting of Portfolio 3 equals 25% and the optimal weighting for Portfolio 4 equals 75%. The weight of total equities in the portfolio = weight of US equities + weight of non-US equities. The weight of US equities = (the weight of portfolio 3) x (the allocation to US equities in portfolio 3) + (the weight of portfolio 4) x (the allocation to US equities in portfolio 4) The weight of US equities = .25(74.1%) + .75(33.7%) = 43.8% The weight of non-US equities = (the weight of portfolio 3) x (the allocation to non-US equities in portfolio 3) + (the weight of portfolio 4) x (the allocation to non-US equities in portfolio 4) The weight of non-US equities = .25(4.0%) + .75(12.0%) = 10.0% Therefore, the weight of total equities = 43.8% + 10.0% = 53.8%. 2008 Level III Guideline Answers Morning Session – Page 14 of 40 Question: 4 Topic: Portfolio Management – Asset Allocation Minutes: 17 PART B i. The most appropriate asset allocation is 106.5% of investable funds to Corner portfolio 4 while borrowing 6.5% of investable funds at the risk-free rate. Thurlow’s return requirement is 9.4%. Therefore the optimal allocation to Portfolio 4 is determined as: Required Return = (Return on Portfolio 4) x (percentage of overall portfolio invested in Portfolio 4) + (Risk-free rate) x (1 - percentage of overall portfolio invested in Portfolio 4)