Exhibit 16.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A portfolio manager is trying to establish a strategic asset allocation for two different clients, Bob Bowman and Tom Luck. Bob Bowman has a risk tolerance factor of 22 and Tom Luck has a risk tolerance factor of 6. The characteristics of the three model portfolios under consideration are provided in the table below. $\begin{array}{ccccc}
&\text { Asset Mix}&&\text { Expected}\
\text { Portfolio } & \text { Stock } & \text { Bond } & \text { Return } & \text { Variance } \
\hline \text { A } & 0.75 & 0.25 & 0.12 & 0.45 \
\text { B } & 0.4 & 0.6 & 0.08 & 0.16 \
\text { C } & 0.3 & 0.7 & 0.05 & 0.06
\end{array}$
-Refer to Exhibit 16.1. The expected utilities of Portfolios A, B and C for Bob Bowman are

Question

Quizplus · Accepted Answer

The expected utility is calculated using the formula: Expected Utility = Expected Return - 0.5 * Risk Tolerance * Variance. For Bob Bowman with a risk tolerance of 22, the calculations are: Portfolio A: 0.12 - 0.5 * 22 * 0.45 = 9.95, Portfolio B: 0.08 - 0.5 * 22 * 0.16 = 7.27, Portfolio C: 0.05 - 0.5 * 22 * 0.06 = 4.73.

Exhibit 16 -Refer to Exhibit 16