FIN 340 - Project

Fin 340: Introduction to Investments

Partners Healthcare’s write-up suggestion:

- Case write-up can be in one of the two formats below. You should show your calculation.

- Single Word file with all graphs and calculation (do show your calculation).

- One Word file with report and one Excel file with calculation. From the Word file refer me to calculation in the Excel file, for example “Worksheet “Exhibit 5”, cell “N32””.

- Please email your files to me.

The case questions are in black. My suggestions are in blue.

Only question 1 is a short essay question. The other questions are calculations or graph; thus to clearly show your calculation and numerical answers is enough. Words should be minimal. Have your write-up in a Word document. You can refer me to your calculations in a separate Excel file or show your calculation directly in the write-up.

1) Briefly describe the situation and the task of Michael Manning.

- One or two short paragraphs should be enough.

2) Compare REITs and Commodities based on risks, returns and Sharpe ratios. Assume STP (return of 3.2%) is the risk-free asset.

- Calculate Sharpe ratios of REITs and Commodities and let me know what one has a better Sharpe ratio? Again you can refer me to your Excel file (for example, worksheet1 cell A1) or show your calculation in the write-up.

3) Recreate the efficient frontier of three assets in Exhibit 5b (i.e. to use risk and return of 12 portfolios in Exhibit 5a); and add the efficient frontier for four assets in Exhibit 6 (i.e. to use 12 portfolios in Exhibit 6) and the efficient frontier for four assets in Exhibit 7 (i.e. to use 12 portfolios in Exhibit 7). Note, we want three frontiers in one graph.

- There is no calculation needed for question 3 and there is no need to run Solver. The optimal (efficient) portfolios (their return and standard deviation) already are given to us in exhibit 5a, 6 and 7. Question #3 asks to use these numbers (from exhibit 5a, 6 and 7) to draw three efficient frontiers in ONE graph.

- In Harvard website, if you click on ‘supplemental material’, there is an Excel file with the numbers so that you do not have to type in.

- How REITs and Commodities improve the efficient frontier? Does the degree of improvement relates to the Sharpe ratios in question 2?

- This is a visual question (no calculation needed). Do look at the graph with three frontiers. Starting from the original three-asset frontier, we add either REITs or Commodities, what asset improves the frontier more?

What factor determines the degree of improvement?

- Hint: see chapter 6 (the slides related to diversification and benefit of diversification).

4) Now we will focus on the two efficient frontiers: one of three assets in Exhibit 5 and one of five assets in Exhibit 8. We know (from our chapter 6), the optimal portfolios are the tangency portfolios given the risk-free asset is STP (return of 3.2%). For simplicity, let find the optimal portfolio of three assets as the portfolio that have the highest Sharpe ratio out of the 12 portfolios in Exhibit 5. Let call this optimal portfolio O3-asset. Similarly, find the optimal portfolio of five assets, portfolio O5-asset, based on Exhibit 8.

- Calculate the Sharpe ratios of the 12 portfolios in Exhibit 5. Show what portfolio is the optimal (i.e. O3-asset).

- Calculate the Sharpe ratios of the 12 portfolios in Exhibit 8. Show what portfolio is the optimal (i.e. O5-asset).

- Draw a graph with the two efficient frontiers and show the two optimal portfolios.

- Report (in an easy-to-compare format) the risks, returns, Sharpe ratios, and weight of each of five assets for portfolios O3-asset and O5-asset.

- Please put the numbers in this suggested table. Feel free to use your own template.

	E(r)	Stdev	Sharpe ratio	Weight	Check sum of weights
				US Equity	Foreign Equity	Bonds	REITs	Commodities
O3-asset
O5-asset

- Of course, for O3-asset, weights of REITs and Commodities are zero.

5) Choose a number between 4% and 16% (round number only) and use this number as the target return for one hospital. You will create two compete portfolios to achieve your chosen target return: one allocating money using STP and O3-asset, and the other using STP and O5-asset.

- Report (in an easy-to-compare format) the risks, returns, and weight of each of six assets (now including STP) for the two complete portfolios. How much improvement (either in term of risk reduction or return increase) do REITs and Commodities bring?

The question asks about asset allocations. Do review:

- Chapter 5 – allocating money between a risk free and a risky asset – and chapter 6 (the part related to asset allocation). - The handout exercises for ch5 and ch6 (in Titanium). - Slides ‘Chapter 5 – solutions to end-chapter’ and ‘Chapter 6 – solutions to end-chapter’.

- Please put the numbers in this suggested table. Feel free to use your own template.

	E(r)	Stdev	Sharpe ratio	Weight	Check sum of weights
				STP	US Equity	Foreign Equity	Bonds	REITs	Commodities
Complete portfolio of STP and O3-asset
Complete portfolio of STP and O5-asset

- Of course, the expected returns of the two complete portfolios are the same. What is improvement in standard deviation when we use O5-asset instead of O3-asset?

6) Choose a number between 1% and 20% (round number only) and use this number as the maximum risk level (standard deviation) that one hospital can take. You will create two compete portfolios that have the chosen risk level: one allocating money using STP and O3-asset, and the other using STP and O5-asset.

Report (in an easy-to-compare format) the risks, returns, and weight of each of six assets for the two complete portfolios. How much improvement (either in term of risk reduction or return increase) do REITs and Commodities bring?

- The suggested table is similar to that of Q5.

- Of course, now the stdev of the two complete portfolios are the same. What is improvement in expected return when we use O5-asset instead of O3-asset?