A foundation holds an equally weighted portfolio of domestic equities, international equities, private equity, and inflation-protected bonds.
1. Critique a percentage-of-portfolio discipline that involves establishing a corridor of target percentage allocation +-5 percent for each asset class in the foundation’s portfolio.
2. Evaluate the implications of the following sets of facts on the stated corridor, given an all-else-equal assumption in each case:
A. The Foundation’s risk tolerance has decreased. Corridor for international equities.
B. Transaction costs in international equities are one-half those for private equity. Corridor for inflation-protected bonds.
C. The correlation of private equity with the rest of the portfolio is lower than the correlation of domestic equities with the rest of the portfolio. Corridor for private equity.
D. The volatility of domestic equities is higher than that of inflation-protected bonds. Corridor for domestic equities.