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5 FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY © 2024 Envestnet. All rights reserved. Asset Class Portfolio Update STEP 3: Propagation of the 50/50 Portfolio to Other Portfolio Specifications In our asset allocation portfolio construction process, we allow for 13 domestic equity "tiers" 3 or granularities at which the user can construct asset allocation portfolios. Furthermore, in our asset class portfolios we allow for the addition of up to nine diversifying asset classes 4 . Finally, there usually are no fewer than three equity/ fixed-income splits (risk levels) of interest. Thus, the total number of available portfolio specifications comes out to about 19,968. 5 This number can be slightly lower or even higher, depending on the number of equity/fixed- income splits of interest, but even under very restrictive portfolio choice assumptions, the number of available portfolio combinations that we offer is very large. In addition, we believe the asset class portfolios should satisfy the following common sense properties across various domestic equity tiers, diversifying asset class combinations and equity/fixed-income splits: • Domestic equity exposures should match up when moving across domestic equity tiers. • Diversifying asset and fixed-income asset class exposures should not change when moving across domestic equity tiers. • A particular equity/fixed-income split should be maintained when moving across domestic equity tiers and/or across diversifying asset class combinations. • Asset class exposures should change gradually when moving across equity/fixed-income splits. Clearly, it would be impossible to develop and maintain self-consistent optimization constraints that would deliver portfolios with these properties for the multitude of portfolio combinations that we offer. To avoid having to develop and maintain a large number of portfolio constraints and still be able to take advantage of the bootstrap bias-corrected mean-variance frontier, we proceed as follows: • Obtain a 50/50 bootstrap-corrected portfolio from Step 2 at the most granular domestic equity level with all diversifying asset classes present. • Designate each asset class as either equity or fixed income. This task is fairly straightforward for all asset classes present in our portfolios, except for Commodities. However, we rely on research by Idzorek (2006) to classify Commodities as an equity-like asset class, who notes that commodities behave like equities in high- inflation scenarios, but more bond-like in low-inflation scenarios. • Propagate the 50/50 portfolio across the desired equity/fixed-income splits by maintaining the relative allocations of the equity and fixed-income portions of the 50/50 portfolio. • If a certain diversifying asset class (either equity or fixed-income diversifying asset class) is not selected, its allocation from the 50/50 portfolio gets rolled up into the domestic equity or fixed-income allocations, respectively. The exception to this is Emerging Markets, whose allocation gets rolled into International Developed Equity, if it is present, and Domestic Equity if International Developed Equity is not present. III. Asset Class Portfolio Construction: Results III.A. PMC Standard Portfolios As noted in previous sections, our Asset Class Portfolio (ACP) construction methodology allows us to construct portfolios at various domestic equity tiers and a multitude of diversifying asset class combinations. PMC Standard Portfolios represent three particular portfolios from this list and are referred to as "PMC Diversified", 3 The available domestic equity granularity levels: All Cap, LCC+SCC, LC V/G + SCC, LCC + SC V/G, LC V/G + SC V/G, LC V/G + MC V/G + SC V/G, LCC + MCC + SCC, LC V/G + MCC + SCC, LCC + MC V/G + SCC, LCC + MCC + SC V/G, LC V/G + MC V/G + SCC, LCC + MC V/G + SC V/G, LC V/G + MCC + SC V/G. Thus, there are a total of 13 of these domestic equity levels. 4 Diversifying asset classes: REITs, International Developed Equity, Emerging Markets, Commodity, High Yield Bond, International Bond, Bank Loans, Emerging Markets Bonds, and TIPS, which gives us 9 diversifying asset classes. 5 Multiply the number of domestic equity tiers (13) by the number of possible combinations of diversifying asset classes (2 to the power of nine, which equals 6,656). Finally, multiply this product by the number of equity/fixed income splits (here 5).

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