Consider an US-based foundation with spending rate of 3 perc…
Consider an US-based foundation with spending rate of 3 percent and cost of earning investment returns has averaged 50 basis points annually. The asset allocation and the set of capital market expectations are shown below. The expected long-term inflation rate is 2.5 percent. Table 3 Capital Market Expectations Asset class E(ri) si Correlations A B C D A US equities 9% 18% 1 B Ex-US equities 8 14 0.60 1 C US bonds 4 8 0.30 0.20 1 D Real estate 1 7 0.50 0.40 0.10 1 Table 4 Corner portfolios Portfolio E(rp) sp Sp wi A B C D 1 9.0% 18.0% 0.39 100% 0% 0% 0% 2 7.9 16.7 0.35 65 35 0 0 3 7.5 15.4 0.38 37 53 0 10 4 5.0 12.4 0.36 0 25 43 32 5 4.6 10.1 0.32 0 11 55 34 Between which two corner portfolios will be situated the strategic asset allocation that satisfies the foundation return requirement?