Harvard Management Company (Hmc)

2. (a) B and D are not minimum variance efficient portfolios. D is not efficient because

The efficient portfolios suggest not invest in any equity. Moreover, the expected return of the portfolio is increasing in the emerging market/private equity/commodities’ weight. As we mentioned above, the optimal asset allocation includes non-traditional position and this is why HMC imposed some constraints on the asset classes. According to Exhibit 12 and given that the required return should be around 4.5% - 7.5% per year to cover the endowment distribution need [historical endowment spending shown in Exhibit 1 (3.5% - 4.5%) + the inflation rate (1% - 3%) + real growth of the fund], HMC knows its investment optimal policy. Exhibit 13 gives more traditional weights by imposing some constraints on the optimizer, in order to make Harvard look alike its competitors (the others universities). Discuss the pros and cons of constraining portfolio weights. Adding constraints to the portfolio makes the model more realistic in one hand, because it suits better with the firm’s benchmark and the firm’s possibilities; but in the other hand, achieving the same return will imply more risk-taking as well. The efficient frontier moves to the right. Asset class may indeed have different transaction costs and, as long as the model does not take transaction costs into account, HMC has to constraint the model to minimize these costs. Another reason to constraint the model is the difference in the taxation of the money invested in different classes of assets. Finally, constraining the

The ability to understand and quantify risk, is of the utmost importance. This is something that can be used to define the precise ways that risk should have the ability to be managed, and the precise way that risk should be dealt with on a macro level. It is important to understand that risk management is an excellent medium in which risk could be mitigated. This is an important variable that must be understood in this case, as there are many potential risk areas that the firm must deal with. By taking on a macro integrated approach, the ability to understand with and better deal with risk will continue to be present.

Part A: Pick one sample portfolio given (see links below in forum, in Sakai Resources, and in Forum 1 PPT) and then choose one outcome within the sample to focus on. Provide specific examples of how the sample you chose does or does not reflect each item noted for that outcome in the Guide.

Ontario Teachers’ Pension Plan............................... 2 Background .............................................................. 2 Risk Assessment ....................................................... 2 Portfolio Selection Analysis ...................................... 3 Optimal Asset Allocation.......................................... 4 Recommendations.................................................... 4 References ................................................................ 5 Exhibit 1.................................................................... 6 Exhibit 2

HMC’s aims to provide relatively predictable cash flows from the endowment to the different schools within the university. As stated in the case, “the general objective was to preserve the real value (adjusted for Harvard’s expense growth) of the endowment and its income distribution in perpetuity”. In recent years, the payout ratio (Endowment spending as a % of total Endowment value) has had a target range of 4.5% to 5.0%.

To determine required returns, the total risk exposed to the investor’s portfolio must be evaluated. By looking at the investor’s portfolio, we can determine the specific risk unique to that portfolio. We also need to take into account of the market risk that all portfolios are exposed to. These two risks make up the total risk (Mad Fientist 2012).

with a duration of 4. You are approached to construct a portfolio of these bonds that has a

More risk of volatility of the market as more than one economy come into picture.

Target market: this fund targets all investors (direct and indirect investors) whose investment time horizon is five years or more. These investors should be looking for both capital growth and value, meaning they should be comfortable with high volatility. As such, the fund is managed in a manner that is stylistically indifferent by investing in both growth and value companies, without a predetermined growth or value bias.

In a summary of this report, I have introduced the basic information about this portfolio, which includes ten stocks and two bonds, then I have gone on to analyse the past performance of the existing portfolio, which includes the dividend yield, sectors and payout ratio. From this analysis I have found

3.investors construct portfolios via asset segregation, meaning that they tend to focus on an asset’s individual investment features versus its impact on the overall portfolio position

Methodology Markowitz (1952, 1956) pioneered the development of a quantitative method that takes the diversification benefits of portfolio allocation into account. Modern portfolio theory is the result of his work on portfolio optimization. Ideally, in a mean-variance optimization model, the complete investment opportunity set, i.e. all assets, should be considered simultaneously. However, in practice, most investors distinguish between different asset classes within their portfolio-allocation frameworks. This two-stage model is generally applied by institutional investors, resulting in a top-down allocation strategy.

Also these risks can lead to other risks in areas such as human resources, training and development and accounting and financing also. Therefore any affected risk can infect other areas of the organization and can cause an upheaval totally.

Total risk consists of Systematic and Unsystematic risk, whereby Systematic risk is defined as the variation in returns on securities as a result of macroeconomic elements in a business like political, economics, or social factors. Such fluctuations are related to changes in return of the entire market. Whereas, Unsystematic risk is the risk that arises due to the variation in returns of a company’s security resulting from microeconomic elements, i.e. factors existing in the organisation.