the thing that complicates things in this particular problem is not any of the above factors - that it is an Pension Fund- and thus happens to be a LONG TERM INVESTOR (per Institutional IPS chapter). We also always do the Multiplicative approach, and they give us
With Additive - you end up with 0.25, 0.75 as the weights and an even 10% as Std Deviation (which is the max allowed).
With Multiplicative - you get 0.3, 0.7 as weights and 10.3% as the Std. Deviation. [Not sure if this would have been accepted, and there is nothing in the question to suggest that Additive was the way to go].
- Thurlow Corporation is a U.S.-based manufacturer of skis and snowboards that began operations in 1995. In order to attract skilled labor, Thurlow offers employees attractive benefits which include a defined benefit pension plan and annual wage increases above the rate of inflation. An asset only (AO) approach to strategic asset allocation is currently used for the investment management of the pension plan. Tino Beveridge is a consultant to the board of trustees of Thurlow’s pension plan. The board asks Beveridge to recommend a strategic asset allocation for the pension plan given the following investment policy objectives:
- Return requirement: Earn an average annual return of 8.7 percent plus management and administration fees of 0.7 percent.
- Risk objective: A maximum standard deviation of portfolio returns of 10.0 percent.