1 PERCENT) AND THEREFORE SHOULD NOT AFFECT HIS DECISION. ACCORDINGL...

17.1 percent) and therefore should not affect his decision. Accordingly, if Rose believes Scenario I is most likely, all funds would remain invested in the domestic market, and none invested internationally, because no (or little) diversification, return, or volatility benefit is expected to be derived from investing in either the international developed market or the international emerging market. B. Rose should pursue Strategy #3, the 50 percent domestic market and 50 percent international emerging market strategy. The correlation of the domestic market with the international emerging market (0.33) is low compared to the correlation between the domestic market and the international developed market (0.80). Thus, under Scenario II, the international emerging market is expected to provide significant diversification benefits to domestic market exposure, thereby improving the expected risk-reward profile of the overall portfolio. The international developed market is not expected to provide meaningful diversification benefits to either the international emerging or domestic markets because of its relatively high correlation with each market (0.66 and 0.80, respectively). All three markets have similar expected returns (8.7 percent, 8.4 percent, and 8.4 percent) and similar expected standard deviations (14.3 percent, 14.1 percent, and 14.0 percent). Therefore, neither return nor volatility is a useful discriminator in Scenario II.

LEVEL III, QUESTION 4

Topic: Portfolio Management Minutes: 18Reading References: