5-year time horizon. Portfolio C has an expected return sufficient to achieve the $2,600,000
value in five years but it has a higher cash level than is necessary and, more importantly, it has a
standard deviation of returns that is too high given the low risk tolerance of the trust portfolio.
Portfolio D has a high enough return and the appropriate cash level but a clearly excessive risk
(standard deviation) level. Portfolios C and D share the flaw of having excessive equity
allocations that fail to recognize the relatively short time horizon and that generate risk levels
that are much higher than necessary or warranted.
Level III: Question 6
Topic: Derivatives
Minutes: 33
Reading Reference:
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