Harvard Management Company 2010 Case Solution
Harvard Management Company has 13 portfolios invested from domestic to foreign market. However, the company has been going under many issues since the financial crisis in 2009. It has portfolio policy at which company has to achieve the target income from the investment made in different sectors including equity market, foreign market, emerging market, private market, natural resources, Real estate, and domestic bonds, Inflation-indexed and cash as well.However, the increasing financial complexities has emphasized company to let investment managed by the external managers, against which they would charge the fees on the investment. Since, the internal managers are also doing the same work, but the company has faced many complications regarding the portfolio management. Indeed, the market has high risk due to the financial crises,yet the Harvard management company has been successful at managing the risk through various tactics, and methods. However, its Expected return from the portfolio is 5.28%, and its portfolio volatility is 1.2%. Since, each asset class has its own risk and return,but the calculated return and volatility is for the whole portfolio.
There are thirteen assets classes that have their own return and risk as well. See Table , which gives the return of each asset class. Meanwhile, the portion of the assets in the overall portfolio is also given in the table. However, we can determine that equity assets has higher return and risk as compared to assets. But, it also has real return in real estate of around 6% followed by the Natural resources return as well. Indeed, the assets has less risk as compared to the equity assets but yet assets are generating almost equal return to the equity assets. This shows that real estate and natural resources, absolute return, high yield assets are more efficient portfolios then other asset classes in the company’s portfolios. On the other hand, the domestic bonds, foreign bonds, inflation indexed and cash assets are generating returns at intermediate level as compared to the other assets in the portfolio.
The highest alpha belongs to the Emerging market, Private equity, and real estate 2.5%, 2.4% and 2% respectively. However, the least alpha belongs to the fixed income assets around 0.1% to -0.5 that means that assets in these classes have not managed to meet with the expectations of the company from the portfolio. Since, the alpha shows that how much the portfolio has exceeded the expected return of the portfolio. However, the negative alpha indicates that a portfolio has return negative return means it has reduced in the value. Indeed, the equity market and real estate and natural resources has outperformed the market. See Graphs for efficient portfolios.
The portfolio has many constraints that it has been using in many objectives that the portfolio has to achieve in order to manage itself. Since, there are many assets classes that would not be able to meet with the expectations of the portfolio. Since, it is also assumed that increased risk of assets would also increase the return. But, it is not possible in this case, because, the asset classes that requires more return would bear more risk, it would not meet with the expectations of the portfolio. The scenario becomes opposite to the risk and return due to the recent financial crisis in the market that has increased the risk of the investment, but as relative to the risk it has not increased the return.
Indeed if we analyze the efficient frontier then it can be determined that the risk at 8.5% would provide the return of 1.5%. See Graphs for efficient frontier. Since, the efficient frontier describes that at what point the company would be able to reduce the risk and increase the risk. However, the changes in the portion of assets allocation would enhance the return and reduce the risk. So, a proper changes in the portion of the assets allocation reverts the risk and increase the return of the portfolio as whole. However, if we take a look at the return sensitivity that gives view as to how risk is above the return indicating that portfolio is not generating sufficient return as compared to the risk it has borne. Similarly, it can be determined that equity market has more return as compared to the other asset classes. Since, the fixed income return is least generating income assets, but it has more expected return than others as well.......................................
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