How is the policy portfolio of Harvard determined? What are the three major plus categories in the portfolio as of May 1999? Internally. by the HMC. The Board of the corp determined the Pol Port. but the mgmt. was permitted to do short-term determinations within certain restraints. HMC. considered 3 things when looking at plus categories: expected future rel returns. volatility of existent returns. and the correlativity of the existent return on each plus category w/ the existent return on all other plus categories. Of the current HMC portfolio. Domestic equities make up 32 % . Foreign equity histories for 15 % . & A ; Private Equity investings make up another 15 % . The following closest plus category is domestic bonds at 11 % . 2. How does HMC organize its capital market premises? Historical information & A ; advice from historical informations on existent returns. Conducts mean-variance analysis & A ; looks to put on the efficient frontier based on HMC’s hazard tolerance. 3. What do HMC’s capital market premises imply about the forward looking domestic equity premium? How does it compare to the historical equity premium?
Since HMC is sing take downing their allotment of domestic equities. and turning their TIPS allotment. it can be inferred that HMC is either going more risk averse. or they believe the hazard premium for domestic equities is excessively high & A ; that domestic equities will non populate up to their historical high rates of returns. 4. Take the HMC management’s positions of expected returns. standard divergence. and covariance of existent returns as correct. Besides. presume that hard currency is risk-free ( i. e. zero discrepancy and covariance ) . If the board allows HMC to put in merely one plus category. which plus categories would you rede HMC to fling right off? Why? HMC seeks at least 3-4 % merely to continue its current endowment size. but in order to back up disbursement growing. it seeks a existent return closer to 6 or 7 % .
If the board were to put in merely one plus category. and still wanted to run into this 6-7 % existent one-year return growing end. it would non desire to put in anything that had a historical return below 6-7 % . So. investings in emg mkts. trade goods. existent estate. foreign bonds & A ; hard currency could wholly be instantly discarded. 5. Suppose the board allows HMC to put in hard currency and one other plus category. which plus category would you rede them to put in? Why? I’d advise PE because it has the highest one-year existent return of 17. 9 % . but the std dev of 15. 2 % is the 3rd highest of their current plus categories. Even if existent returns for the undermentioned year were 1 std dev below their expected return. HMC would still convey in a positive return. Advanced:
1. Suppose the board allows HMC to put merely in domestic equities and domestic bonds. reasoning that they are “safe choices” in the sense that these assets are well-known to investors and they have deep. liquid markets? What combination of domestic bonds and equities would you pick? Rp=WdRd + WeRe 2. Would you rede them to add trade goods to the mix? If so. what would that plus mix expression like? If non. why? 3. How do regular Treasury bonds work? How does rising prices impact the vouchers of a T-bond? How make TIPS work? Will TIPS ever outperform regular Treasuries?
4. What consequence do you believe an addition in existent outputs has on the monetary value of TIPS? What about expected rising prices? Are these effects different for a regular Treasury bond? 5. How can you organize a portfolio that has exposure to expected rising prices hazard but non to existent involvement outputs hazard? 6. Should Tip be considered an extra plus category in Harvard’s Policy Portfolio? 7. What are the premises about the expected existent returns on TIPS. its volatility. and its correlativity with the other plus categories? 8. What do HMC’s capital market premises imply about the optimum allotment to TIPS in a mean-variance model? What are Harvard’s mark existent returns? Should Harvard put in TIPS?
