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CFA Institute CFA-Level-III Exam - Topic 3 Question 6 Discussion

HAS THREE PARTS Wyatt Washington is the portfolio manager for Mark Beitia, a recent retiree. He is currently exploring a change in Beitia's strategic asset allocation. He gathers data on the expected returns, standard deviations, and correlations for five assets. Using these market expectations, he derives an efficient frontier. Washington uses the following information in his construction of the asset allocation:* Beitia's asset base = $5,000,000.* Annual after-tax spending amount = $150,000.* Estimate of future inflation = 3.5%.* Beitia will donate $750,000 to his alma mater in one year in one lump sum.* Risk-free rate = 4.0%.* Beitia's income tax rate = 25%.Washington forms four corner portfolios from his efficient frontier and calculates the following expected returns and standard deviations:
B) Assuming that Washington combines two corner portfolios to meet Beitia's desired return (calculated in Part A), calculate the weights of the appropriate corner portfolios that will be used (assume no borrowing or short-selling) and the resulting portfolio standard deviation.
A) Calculate the required before-tax return for Beitia's portfolio and Beitia's expected utility from holding each of the corner portfolios.
C) Assuming that Washington combines a corner portfolio with the risk-free asset to meet Beitia's desired return (calculated in Part A), calculate the weights of the appropriate corner portfolio and the risk-free asset that will be used (assume no borrowing) and the resulting portfolio standard deviation.

CFA Institute CFA-Level-III Exam - Topic 3 Question 6 Discussion

Actual exam question for CFA Institute's CFA-Level-III exam
Question #: 6
Topic #: 3
[All CFA-Level-III Questions]

HAS THREE PARTS Wyatt Washington is the portfolio manager for Mark Beitia, a recent retiree. He is currently exploring a change in Beitia's strategic asset allocation. He gathers data on the expected returns, standard deviations, and correlations for five assets. Using these market expectations, he derives an efficient frontier. Washington uses the following information in his construction of the asset allocation:

* Beitia's asset base = $5,000,000.

* Annual after-tax spending amount = $150,000.

* Estimate of future inflation = 3.5%.

* Beitia will donate $750,000 to his alma mater in one year in one lump sum.

* Risk-free rate = 4.0%.

* Beitia's income tax rate = 25%.

Washington forms four corner portfolios from his efficient frontier and calculates the following expected returns and standard deviations:

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Suggested Answer: B

by Alica at Jan 22, 2026, 04:44 PM

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Louann
2 days ago
I think the donation impacts the allocation significantly.
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Dorsey
7 days ago
I feel overwhelmed by the numbers.
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Merilyn
12 days ago
This question is tricky! Lots of variables to consider.
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Fernanda
2 months ago
Wait, can he really sustain $150K spending with that inflation?
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Cornell
2 months ago
Donating $750K next year? That's generous!
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Kanisha
2 months ago
I think the risk-free rate is too low for current markets.
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Naomi
2 months ago
3.5% inflation is a big deal for retirees.
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Kasandra
3 months ago
Beitia has a $5M asset base, that's solid!
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Rueben
3 months ago
This question seems like it's testing our ability to integrate various financial concepts. I'll make sure to review my understanding of efficient frontier and portfolio optimization.
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Eloisa
3 months ago
Haha, I bet Wyatt Washington is feeling the pressure! Managing a retiree's portfolio with all these moving parts must be quite a challenge.
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Dyan
3 months ago
Hmm, the risk-free rate and income tax rate are important factors to consider. I'd double-check my calculations to ensure I'm accounting for them correctly.
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Margarita
3 months ago
Wow, that's a lot of information to process! I'd make sure to carefully calculate Beitia's after-tax spending and the impact of the $750,000 donation on the portfolio.
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Lorrine
3 months ago
The question seems comprehensive, covering various aspects of portfolio management. I'd focus on understanding the efficient frontier and how to derive the optimal asset allocation.
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Barrett
4 months ago
I think we need to consider the inflation rate when determining the real returns. That might affect the overall asset allocation strategy for Beitia.
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Dominga
4 months ago
I feel a bit lost on how to integrate the risk-free rate with the expected returns. Did we cover how that impacts the efficient frontier?
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Brittni
5 months ago
This question seems similar to the one we did on portfolio construction with specific cash flow needs. I think we need to adjust the asset allocation based on Beitia's spending and donation.
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Vallie
5 months ago
I remember we practiced calculating the efficient frontier, but I'm not sure how to factor in the donation and spending needs in this scenario.
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Kaycee
5 months ago
Hmm, this is a tricky one. Lots of moving parts to keep track of. I'm going to need to take it step-by-step - first the efficient frontier, then factor in Beitia's constraints and goals. Might be helpful to sketch things out visually too. Gotta make sure I don't miss any key details.
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Wilda
5 months ago
I feel pretty confident about this one. Constructing the efficient frontier is straightforward, and with all the details on Beitia's situation, it should be pretty straightforward to determine the optimal portfolio. As long as I stay organized and double-check my work, I think I can nail this.
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Noemi
5 months ago
Whoa, this is a lot to keep track of. Asset allocation, efficient frontier, taxes, inflation, a big donation - my head is spinning just looking at this. I better make sure I have a clear plan of attack before I dive in, or I'm going to get lost.
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Cora
5 months ago
Okay, I think I've got a handle on the main components here. Wyatt needs to construct an efficient frontier based on the expected returns, standard deviations, and correlations of the five assets. Then he has to factor in Beitia's financial situation and goals to determine the optimal asset allocation. Shouldn't be too bad as long as I remember all the inputs.
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Annalee
6 months ago
This looks like a pretty complex problem with a lot of moving parts. I'll need to carefully read through all the details and make sure I understand the key information before I start trying to solve it.
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