a) Technological changes have decreased the cost and increased the speed of information dissemination in security markets. Why might one suspect that firms following the "traditional" approach to investment management would find it increasingly difficult to identify and acquire underpriced securities in this environment? (9 marks)
b) You have the following advice from two different advisors.
Advisor 1: "Longterm-asset allocation should be determined using an efficient frontier. Returns risks and correlations can be determined for each asset class from historical data. After calculating the efficient frontier for various locations, you should select the asset mix on the efficient frontier that best meets your fund's risk tolerance."
Advisor 2: "History gives no guide to the future. For example/everybody agrees that bond risk has increased above historical levels as a result of financial deregulation. A far better approach to the long-term asset allocation is to use your best judgment about expected returns on the various asset classes based on current. You should rely on your experience to determine the best asset mix and avoid being influenced by computer printouts. "
Advisor 1: Rebuttal: "Current market conditions are not likely to persist into the future and are not appropriate for long-term asset allocation decisions. Moreover, your use of judgment and experience can be influenced by biases and emotions and is not as rigorous a method as my efficient frontier approach."
Required: Evaluate the strength and weaknesses of each of the two approaches presented above. Recommend and justify an alternative process for asset allocation that draws from the strength of each approach and corrects their weaknesses.