Hmu Case

1). Last 30 years the Harvard Endowment outperformed the 60/40 stock/bond split by 2.8% and 2.9% over the TUCS Median.

2). Exhibit 15 basically plots out all the potential returns for individual asset classes based on the assumptions in changes to different economic/political climates. The returns on asset classes is most likely calculated using a weighted average of the expected returns of the individual investments that makeup each asset class. This data then can be used to map a mean-variance frontier depending on the different economic conditions. Then the capital asset line can be created, based on the costs and benefits of hedging/insurance positions, to estimate the relative portfolio return to the policy portfolio.

3). A. Exhibit 17 is the inputs

B. They used both short-term and long-term historical data of each asset class. They also consulted with a number of consultants and investment management firms to gain their input which they used to adjust assumptions.

C. Correlations, and inter-asset comparisons along with assumptions to exchange-rate risk and political risk were used to weight expected returns of different asset classes. Some of the major equations include the mean-variance frontier, the efficient frontier, weighted average returns and standard deviation.

D. Constraining the optimizer would better estimate the expected returns generated by the portfolio because many of the assumptions implemented can skew portfolio construction to be too non-traditional. It also can optimize a portfolio with asset allocations that are too different than the portfolio policy.  

4). The HMC portfolio asset class has continuously decreased the amount invested in equities and more in alternative investments with bonds staying constant.

5). Commodities’ expected return is 4.5% with a standard deviation of 21% vs 6.35% return and 16%  standard deviation for foreign equities. The commodities expected return is lower with a higher standard deviation which means it is not as attractive of a single investment. The current portfolio policy shows 11% foreign equities and 14% commodities this could be due to a variety of reasons. A few examples include the managers understanding and favoring foreign businesses more or commodities trading being riskier and less predictive and usually implements derivatives.