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bachelor in business administration
Polytechnic State University Sanluis
Jan-2006 - Nov-2010
CPA
Polytechnic State University
Jan-2012 - Nov-2016
Professor
Harvard Square Academy (HS2)
Mar-2012 - Present
A client has a portfolio of common stocks and fixed-income instruments with a current value of £1,350,000. She intends to liquidate £50,000 from the portfolio at the end of the year to purchase a partnership share in a business. Furthermore, the client would like to be able to withdraw the £50,000 without reducing the initial capital of £1,350,000. The following table shows four alternative asset allocations.
Mean and Standard Deviation for Four Allocations (in percent) |
 |  |  |  |
 |
A |
B |
C |
D |
Expected annual return |
16 |
12 |
10 |
9 |
Standard deviation of return |
24 |
17 |
12 |
11 |
Address the following questions (assume normality for Parts B and C):
A. Given the client"s desire not to invade the £1,350,000 principal, what is the short fall level, RL? Use this shortfall level to answer Part B.
B. According to the safety-first criterion, which of the three allocations is the best?
C. What is the probability that the return on the safety-first optimal portfolio will be less than the shortfall level, RL?
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