So this is Question 4 2008
It says for the return requirement
“Earn an average annual return of 8.7 percent plus management fees of .7 percent”
The guideline answer calculates the return as 9.4% vs 9.5 % for geometric (1.087)(1.07).
I cant find any instance in the text calculating that requirement as additive and not geometric, yet in the exam it is additive.
why does it matter you ask?
Because in the calc for the return of the corner portfolios (10.3 and 9.1 %)
using the normal R1(w) + R2(1-W) formula - using 9.4% W=.25 using 9.5% W=.33.
Major difference in calcs of everything, sharpes, Stdevs, weights of assets in portfolios, etc…
Think the CFAI woudl take it either way? Its only one way on the exam and it says “…return of 8.7 percent plus management…” in the return statement