Hey all, hope everyone’s study is going well. I just got stuck with one question from the EOC as below. Would appreciate if anyone can enlighten on what I am missing. I couldn’t include a picture of the Exhibit 1 and 2, so please refer to the below link for the Exhibits. Many Thanks!!
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Question 3. Based on Exhibits 1 and 2, to attempt to profit from the short-term excess return forecast, Capara should increase KUE’s portfolio allocation to:
A. developed markets equity and decrease its allocation to infrastructure.
B. emerging markets equity and decrease its allocation to investment-grade bonds.
C. developed markets equity and increase its allocation to private real estate equity. (Institute 376)
The answer is A. The forecast for expected excess returns is positive for developed markets equity and negative for infrastructure. Therefore, to attempt to profit from the short-term excess return forecast, KUE can overweight developed markets equity and underweight infrastructure. These adjustments to the asset-class weights are within KUE’s lower and upper policy limits.
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The way I see it is that since ALL the current/target weight asset class is within the Lower and Upper Policy Limit, I should increase allocation to the one with the highest expected excess return and decrease allocation to the one with the lowest expected excess return. In this case, my choice was B. But the curriculum is picking a sub-optimal pf.
Can any one give me a nudge on this?