Can somebody explain, how are those allocations calculated?
thanks
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%)
X=1,568,627.
1,568,627/2,000,000=78.4%
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.