Prepare for Level III with item sets and essays.

Daniel Whitlock, CFA, runs a multi-family office that advises individuals, a corporate pension plan and a charitable foundation. At this month's investment meeting he reviews four questions raised by his team.

The first concerns two new individual clients, both aged 45, with similar financial wealth, the same stated willingness to take risk and no plans to retire for at least 20 years. Lena Ortiz is a tenured professor at a large public university; her salary rises with a fixed pay scale and she will receive a defined benefit pension. Marco Bell is a residential real estate broker paid entirely by commission; his income has swung widely with the housing market and the wider economy. The team is preparing a strategic asset allocation for each client's financial portfolio.

The second concerns the foundation's list of asset classes. An analyst proposes adding a new class called "Other alternatives" that would hold a long-short equity hedge fund, a timberland partnership, a music royalties fund and a portfolio of litigation finance contracts. None of these holdings appear in any other asset class, the foundation could invest the planned amount without strain, and the class's historical correlation with the foundation's equities is a moderate 0.45. The four holdings have very different sources of return and risk.

The third concerns the Ostrand Corporation, which sponsors a defined benefit pension plan for its employees. The plan's benefit payments are set by formula and are projected for the next 60 years. The plan is 92% funded, and Ostrand's board wants the asset allocation to reduce the risk that the funding gap widens.

The fourth concerns rebalancing for the foundation. The foundation uses percentage-of-portfolio corridors around each target weight and rebalances when a weight moves outside its corridor. The committee wants to set corridor widths that reflect each asset class's characteristics, using the following data. The foundation's risk tolerance is the same across all asset classes.

Exhibit 1. Foundation asset class data

Domestic equities: round-trip trading cost 0.10%; volatility 16%; correlation with the rest of the portfolio 0.55

Emerging market equities: round-trip trading cost 0.45%; volatility 24%; correlation with the rest of the portfolio 0.60

Core private real estate: round-trip trading cost 1.50%; volatility 10%; correlation with the rest of the portfolio 0.75

Daniel Whitlock, CFA, runs a multi-family office that advises individuals, a corporate pension plan and a charitable foundation. At this month's investment meeting he reviews four questions raised by his team.

The first concerns two new individual clients, both aged 45, with similar financial wealth, the same stated willingness to take risk and no plans to retire for at least 20 years. Lena Ortiz is a tenured professor at a large public university; her salary rises with a fixed pay scale and she will receive a defined benefit pension. Marco Bell is a residential real estate broker paid entirely by commission; his income has swung widely with the housing market and the wider economy. The team is preparing a strategic asset allocation for each client's financial portfolio.

The second concerns the foundation's list of asset classes. An analyst proposes adding a new class called "Other alternatives" that would hold a long-short equity hedge fund, a timberland partnership, a music royalties fund and a portfolio of litigation finance contracts. None of these holdings appear in any other asset class, the foundation could invest the planned amount without strain, and the class's historical correlation with the foundation's equities is a moderate 0.45. The four holdings have very different sources of return and risk.

The third concerns the Ostrand Corporation, which sponsors a defined benefit pension plan for its employees. The plan's benefit payments are set by formula and are projected for the next 60 years. The plan is 92% funded, and Ostrand's board wants the asset allocation to reduce the risk that the funding gap widens.

The fourth concerns rebalancing for the foundation. The foundation uses percentage-of-portfolio corridors around each target weight and rebalances when a weight moves outside its corridor. The committee wants to set corridor widths that reflect each asset class's characteristics, using the following data. The foundation's risk tolerance is the same across all asset classes.

Exhibit 1. Foundation asset class data

Domestic equities: round-trip trading cost 0.10%; volatility 16%; correlation with the rest of the portfolio 0.55

Emerging market equities: round-trip trading cost 0.45%; volatility 24%; correlation with the rest of the portfolio 0.60

Core private real estate: round-trip trading cost 1.50%; volatility 10%; correlation with the rest of the portfolio 0.75

Daniel Whitlock, CFA, runs a multi-family office that advises individuals, a corporate pension plan and a charitable foundation. At this month's investment meeting he reviews four questions raised by his team.

The first concerns two new individual clients, both aged 45, with similar financial wealth, the same stated willingness to take risk and no plans to retire for at least 20 years. Lena Ortiz is a tenured professor at a large public university; her salary rises with a fixed pay scale and she will receive a defined benefit pension. Marco Bell is a residential real estate broker paid entirely by commission; his income has swung widely with the housing market and the wider economy. The team is preparing a strategic asset allocation for each client's financial portfolio.

The second concerns the foundation's list of asset classes. An analyst proposes adding a new class called "Other alternatives" that would hold a long-short equity hedge fund, a timberland partnership, a music royalties fund and a portfolio of litigation finance contracts. None of these holdings appear in any other asset class, the foundation could invest the planned amount without strain, and the class's historical correlation with the foundation's equities is a moderate 0.45. The four holdings have very different sources of return and risk.

The third concerns the Ostrand Corporation, which sponsors a defined benefit pension plan for its employees. The plan's benefit payments are set by formula and are projected for the next 60 years. The plan is 92% funded, and Ostrand's board wants the asset allocation to reduce the risk that the funding gap widens.

The fourth concerns rebalancing for the foundation. The foundation uses percentage-of-portfolio corridors around each target weight and rebalances when a weight moves outside its corridor. The committee wants to set corridor widths that reflect each asset class's characteristics, using the following data. The foundation's risk tolerance is the same across all asset classes.

Exhibit 1. Foundation asset class data

Domestic equities: round-trip trading cost 0.10%; volatility 16%; correlation with the rest of the portfolio 0.55

Emerging market equities: round-trip trading cost 0.45%; volatility 24%; correlation with the rest of the portfolio 0.60

Core private real estate: round-trip trading cost 1.50%; volatility 10%; correlation with the rest of the portfolio 0.75

Daniel Whitlock, CFA, runs a multi-family office that advises individuals, a corporate pension plan and a charitable foundation. At this month's investment meeting he reviews four questions raised by his team.

The first concerns two new individual clients, both aged 45, with similar financial wealth, the same stated willingness to take risk and no plans to retire for at least 20 years. Lena Ortiz is a tenured professor at a large public university; her salary rises with a fixed pay scale and she will receive a defined benefit pension. Marco Bell is a residential real estate broker paid entirely by commission; his income has swung widely with the housing market and the wider economy. The team is preparing a strategic asset allocation for each client's financial portfolio.

The second concerns the foundation's list of asset classes. An analyst proposes adding a new class called "Other alternatives" that would hold a long-short equity hedge fund, a timberland partnership, a music royalties fund and a portfolio of litigation finance contracts. None of these holdings appear in any other asset class, the foundation could invest the planned amount without strain, and the class's historical correlation with the foundation's equities is a moderate 0.45. The four holdings have very different sources of return and risk.

The third concerns the Ostrand Corporation, which sponsors a defined benefit pension plan for its employees. The plan's benefit payments are set by formula and are projected for the next 60 years. The plan is 92% funded, and Ostrand's board wants the asset allocation to reduce the risk that the funding gap widens.

The fourth concerns rebalancing for the foundation. The foundation uses percentage-of-portfolio corridors around each target weight and rebalances when a weight moves outside its corridor. The committee wants to set corridor widths that reflect each asset class's characteristics, using the following data. The foundation's risk tolerance is the same across all asset classes.

Exhibit 1. Foundation asset class data

Domestic equities: round-trip trading cost 0.10%; volatility 16%; correlation with the rest of the portfolio 0.55

Emerging market equities: round-trip trading cost 0.45%; volatility 24%; correlation with the rest of the portfolio 0.60

Core private real estate: round-trip trading cost 1.50%; volatility 10%; correlation with the rest of the portfolio 0.75