A. “ASSET ALLOCATION” (STUDY SESSION 11) N) DETERMINE AND JUSTIFY A...

1. A. “Asset Allocation” (Study Session 11) n) determine and justify a strategic asset allocation, given an investment policy statement and capital market expectations; p) critique and revise a strategic asset allocation, given an investment policy statement and capital market expectations. 2006 Level III Guideline Answers Morning Session - Page 15

Guideline Answer: Part A The most appropriate portfolio for ACLP is portfolio D. Justification: • Portfolio D has the minimum required cash equivalents to fund the expected lump sum payments ($200,000 per employee × 100 employees = $20 million or 10% cash requirement). • Portfolio D meets the shortfall risk objective (9.04 – (2 × 8.19) = –7.34%) • Portfolio D has reduced exposure to the stocks of other companies in the cruise industry. Because the plan sponsor (ACL) and cruise industry equities are highly correlated, minimizing exposure to other companies in the cruise industry is desirable to meet the policy objective. Part B Portfolio A is not most appropriate because • Portfolio A does not match assets and liabilities, particularly in the short-term where there is insufficient cash. • Portfolio A contains additional exposure to cruise industry equities. Portfolio B is not most appropriate because • Portfolio B does not meet the shortfall risk objective. Portfolio C is not most appropriate because • Portfolio C does not match assets and liabilities, particularly in the short-term where there is insufficient cash. Portfolio E is not most appropriate because • Portfolio E does not match assets and liabilities, particularly in the short-term where there • Portfolio E does not meet the shortfall risk objective. Morning Session - Page 16Question: 6 Topic: Portfolio Management – Institutional IPS Minutes: 12 Reading References: