Reading 18: Asset Allocation BB examples

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shash0678

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Example 9 talks of a six month bank-deposit which earns 2 percent. Solution 1C has (1.02)^0.5 - if its a 2 percent over the 6-month period, it should not have the 0.5 and if its a 2 per cent annual return, the effective return for the six month period should be 1 percent (2/2). Am I missing something here …
Example 10 mentions a required rate of return of 6.5 percent. Should that not be the threshold return used for the RSF ratio, instead of the 4 percent used (which I guess is due to the annual spending rate).
 
For 1). the bank deposit is NOT A LIBOR rate. you would do 1.01 if it were a LIBOR rate of 2% for 6 months.
 
It depends on whether the rate is quoted as an effective rate (which is the case here), or a nominal rate (as cpk’s LIBOR reference). In either case, the 2% number is an annual rate: interest rates are always – always! – quoted as annual rates.
 
Thanks cpk and s2000magician.
Any pointers on the second question - example 10 …
 
RTFQ please completely. This is where you get tripped up ever so often.
Quote:
Risk Objectives:
1 CEFA’s portfolio should be structured to maintain diversification levels that are consistent with prudent investment practices.
2 CEFA has a capacity to accept a standard deviation of return of 12 percent or less.
3 CEFA’s portfolio should be constructed with consideration of minimizing the probability that the annual portfolio return will fall below CEFA’s spending rate.
Click to expand...
read pt 3 and then decide to ask your question again please.
 
Thanks, saw that in the question, but then the solution rejects portfolios 5, 6 and 7 which do not meet the return objective of 6.5 percent. If the pt 3 above has to be considered, should we not consider portfolios 5 and 6 too.
How can we have two values for the expected return/ threshold return in the same question …. Am sorry if I appear daft, but this is what confused me …
 
the portfolio’s selected first need to meet the absolute return criterion - and then after that meet the highest sharpe ratio.
remember that something with a lower return (< 6.5%) will have a lower Sharpe ratio as well.
 
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