Julius will enjoy the utility of 0.

1126, if the portfolio were designed to only involved

risky-assets portfolio. Given the fact that Julius possesses the characteristic of a risk
adverse investor, it would be feasible to pour all the funds into the pool of risky asset, by
leaking some of the allocation to risky-free asset, otherwise Julius might feel that his funds
is not being fully utilized and the broker is unable to maximize his return.
When risk and return is merely represented by numbers, it often turns out to be a
mistake that the portfolio will not incorporate the qualitative factors that might affect the
portfolio. Hence, it is also important for a fund manager to take into consideration on some
of the conditions of Julius and reassess the allocation of the portfolio. Other than the fact of
inheritance of RM 1 million from his father, we are unable to determine the amount of his
recurring income and the financial position of Julius. From the words of Julius, we may
know that he has invested in properties, direct stock and other mutual funds, yet we are
still clueless on the value and volume of these investments, if it is only a little amount of
money being invested in the past, a liquidity of RM 150 thousand might seem too much for
his personal spending. Once the RM 150 thousand is completely spent, it is unforeseeable
that Julius might need to cash out earlier to ease the liquidity position or his ability to
source for income. Since the concern was raised by Julius to reserve a 15% liquidity, he
might have prepared this portion of funds for some specific purpose, such as tertiary
education for his children and others. Notably, the investment on education can indirectly
pay him a more handsome return if his children were well-educated.
The rating from Monrningstar may give us some ideas in terms of performance history, risk
and return, incorporating fees and so on. The table below shows how the rating works:
Rating Method

Top 10%

Top 32.5% to Below Top 10%

Middle 35%

Bottom 32.5% to Above 10%

Bottom 10%
Ratings of Funds Selected

PBGF

PBFI
According to Morningstar Rating, the Public Bank Growth Fund (PBGF) has a rating of 3,
which is an average performance, while Public Bank Fixe Income Fund has achieved 4 out
of 5 in the ratings. This may implies that the funds performance are both above average,
but there is still a room of improvement for these 2 funds to catch up the front-runners in
the funds market.
In addition, the world is full of turbulence and the financial market experienced its
avalanche in 2008. After several years, the market has not fully recovered from the crisis,
and this may serve as a reminder to us that once the market slumped in the middle of the
time horizon, it may disobey Julius' initial will.

As Julius wish, the allocation of fund to 15% of risk-free assets, and 85% of risky assets
would result the following utility score, expected return and standard deviation.
Expected Return

(85% 13.46%+15% 3.01%)=11.89%

Standard Deviation 85% 14.82%=12.60%

Utility

11.89%-1/2 (2)(12.60)^2=10.30%

A utility score of 0.103 is obtained when the expected return and standard deviation are
11.89% and 12.60%. Table X has shown the utility score of 0.0996 when risk-free assets is
20% of the portfolio with the remainder being invested in risky-asset portfolio. By pulling
away more allocation from risky assets portfolio, Julius might feel less-satisfied as the
utility score decreases from 0.103 to 0.0996. The trend in Table X is able to illustrate the
effect of increasing the weight of risk free assets in the portfolio, that is the downward
trend of expected return and utility score accompanied by the rise of weight of risk free
assets. So, it would be a good move when the allocation to risk free asset is as little as
possible to feed the appetite of Julius. The choice of 90% of risky asset and 10% of risk-free
asset is the outstanding candidate for the portfolio since that Julius will keep part of the
RM 1 million as a liquid asset, and the remainder of the RM 1 million enjoys the in the
money creation process.
As a result, by incorporating all the factors into the determination of the weightage, Julius
should pursue the weightage of 10% of risk-free assets and 90% of risky asset portfolio.