Harvard Management Company
1 – The HMC aim is to keep the purchasing power of its endowment and achieve growth on the long run. The advantage of the optimal portfolio allocation is that it allows the investors to explore multiple portfolios (those lying on the efficient frontier) given their risk-return preferences. This may be an optimal solution for the average investor but imposes challenges for big institutional investors such as HMC. HMC long-term horizon allows the introduction of less liquid and riskier investments, namely Private Equity, Real Estate, among others. By the introduction of these alternative asset classes in higher weights (Exhibit 14, Portfolio 6) the efficient frontier will take a right upward shift. Although this optimization is correct, factors such as liquidity can flaw this optimality, as well as the incapability to generate long-term forecasts for these asset classes.
2 – a) HMC developed its Capital Markets assumptions from the Modern Portfolio Theory, focusing on a big extent on mean-variance and covariance matrices analysis, leading to the construction an efficient frontier (Exhibit 11). These numbers were obtained though historical analysis done by HMC and third-party analysts.
b) HMC has as one of its objectives to maintain the endowment’s long-term purchasing power. By focusing on real returns, it gives the concerned parties at Harvard a clear view over the purchasing power’s growth of the endowment.
c) From Exhibit 11 we can see that domestic and foreign equity yields the same real return, with a slightly higher standard deviation for the latter one. This would imply that they would be better off investing solely on domestic equities. However, under the 2.a assumptions, since they have a 0.6 correlation, foreign equities will be part of the optimal portfolio.
3 – By using the estimates of expected returns, standard deviations and covariances among the asset classes, I will create N weights for each asset summing up to 100% calculating the expected
2 – a) HMC developed its Capital Markets assumptions from the Modern Portfolio Theory, focusing on a big extent on mean-variance and covariance matrices analysis, leading to the construction an efficient frontier (Exhibit 11). These numbers were obtained though historical analysis done by HMC and third-party analysts.
b) HMC has as one of its objectives to maintain the endowment’s long-term purchasing power. By focusing on real returns, it gives the concerned parties at Harvard a clear view over the purchasing power’s growth of the endowment.
c) From Exhibit 11 we can see that domestic and foreign equity yields the same real return, with a slightly higher standard deviation for the latter one. This would imply that they would be better off investing solely on domestic equities. However, under the 2.a assumptions, since they have a 0.6 correlation, foreign equities will be part of the optimal portfolio.
3 – By using the estimates of expected returns, standard deviations and covariances among the asset classes, I will create N weights for each asset summing up to 100% calculating the expected