- · Emerging market equities have a 10% weight in the global market portfolio. However, given the firm’s familiarity with and the opportunities they perceive in emerging markets, the SPP has historically been over-weighted (25%) in this asset class.
- · 60% of company revenue is from sales in emerging markets, of which half is attributable to sales in Africa. The revenue growth rate for Sabonete’s African business is high but very volatile. The firm’s revenues and profitability are quite sensitive to emerging markets.
- · The firm has significant investments in African real estate. It recently acquired several large parcels of land in Africa for €200 million and is planning to make a major investment in new manufacturing facilities to boost margins.
Based on these factors and the information from Exhibit 1, Horvath presents the current asset allocation of the plan along with two other options for consideration (see Exhibit 2).
Statement 1Based on its Sharpe ratio, Option 1 is most consistent with Sabonete’s objectives.
Statement 2The 10% allocation to real estate is too high given the company’s recent real estate acquisitions in Africa.
Statement 3The 20% allocation to emerging market equity is too high given the sensitivity of the firm’s revenues to emerging markets.
Which of Radell’s statements regarding asset allocation Option 1 is most appropriate?
- Statement 1
- Statement 2
- Statement 3
B is incorrect. Sabonete’s land holdings outside of the pension fund are not considered a part of the extended balance sheet for the SPP and should not affect its asset allocation decisions.
