CFAI Vol 2, Page 42, Example 3

Can somebody explain, how are those allocations calculated?


1, I think you have no problem for 1st BPT investor.

2, For the 2nd investor, the Required return=2.1/2-1=5%

So Layer 2 may not be chosen, since its expected return = 4.6% < 5%. Its worst case is -3%. So it’s allocation between Layer 1 & 3.

1.8m=X*(1+1%) + (2m-X)*(1-50%)



As shown, it’s not based on MVO.

great, thank you tulkuu for the explanation.

I still don’t follow why 2nd investor can’t allocate anything to layer 2. If Layer 2 is excluded because aspirational return (5%) is greater than expected return of 4.6% (layer 2), shouldn’t layer 1 be excluded as well since its expected return is 1% ?

layer 1 is risk free.