Download Chapter 5 Practice questions 1. For the following types of investors

Chapter 5 Practice questions
1. For the following types of investors, appraise the importance of using the specified asset
class for strategic asset allocation.
A. Long-term bonds for a life insurer and for a young investor.
B. Common stock for a bank and for a young investor.
C. Domestic tax-exempt bonds for an endowment and for a mid-career professional.
D. Private equity for a major foundation and for a young investor.
2. The table below shows William Smith’s financial and human capital in constant dollars terms
at 30, 50, and 65 years of age. Smith’s target asset allocation for total wealth (i.e., financial plus
human capital) is 60/40 stocks/bonds. Assume that his human capital is approximately risk free
and uncorrelated with stock returns. Determine Smith’s optimal asset allocation for stocks and
bonds in his financial portfolio at the following ages:
A. 30
B. 50
C. 65
D. Discuss whether your conclusions in Parts A, B, and C are consistent with experience based
approaches to asset allocation.
Age
30
50
65
Financial capital
$ 100,000
$ 900,000
$ 2,000,000
Human capital
$ 2,100,000
$ 1,300,000
$ 200,000