Harvard Management Company (Hmc)

1203 WordsMar 30, 20075 Pages
1) The Role and Structure of Endowment: As of June 2000, the endowment managed by HMC totaled approximately $18.2 billion. The annual spending from the endowment represented approximately 27% of the total budget of the university. In fiscal year 2000, total endowment spending by the schools was $556 million (or 4% of the value of the fund at the end of previous fiscal year). Each year the University 's operational governing body considers the overall financial situation of the University and decides the dividend amount to schools. • The Average Spending Ratio from the Endowment is 4.6% (low 3.3% and high 5.6%) • Desired Real Return for the Endowment is 6-6.5%. • Annual Gifts to endowment is 1.5 % of the fund. Asset Allocation Policy:…show more content…
Then, to generate the efficient frontier we have generated 29 different portfolios by constraining the mean in steps of .25%, as can be seen in Annex 1. The tangency portfolio was obtained by removing the constraint in the mean. Finally, the risk-free rate was considered 3.6% in accordance with the information from TIPS. 5) Now we constraint the entire asset classes by their lower and higher permitted values (according to Exhibit 13). We created 9 portfolios, as can be seen in Graph 1. It is important to mention that for the same level of return, the constrained efficient portfolio generated higher risk, as can be seen in the following chart: Also, the statistics of both tangency portfolios are shown in the following table: Portfolio Statistics Without constraints With constraints Mean 7.79% 7.00% Var 0.009787755 0.008862087 StdDev 9.89% 9.41% Sharpe Ratio 0.4239 0.3612 The advantages of constraining portfolios are:  It depends on the long-term targets of the institution,  It takes into account not only market risk but also the other risks like liquidity risk, political risk, credit risk and operational risks. On the other hand, the disadvantages are  The risk increases because the portfolio is less flexible.  It is more difficult to react to market changes in the short term, which could increase the opportunity cost or vulnerability to rapid and severe
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