City College is a community college with a $100 million endowment. Since its establishment, it has had a fixed investment policy of 60% stocks (10% small/Lo30, 20% medium/Med40 and 30% large cap stock/Hi30 portfolios), 30% bond index fund (VBMFX) and 10% Equity REITs over the years 2005 2021. Since the role of the endowment in meeting budget needs has increased dramatically in the past few years, City College has decided to review its past performance and future contributions to the institution. The school learned that another local university had hired a financial advisory company to review its investment policy. City College decided to the same. The school hired your company to assess its current performance and to recommend an optimal portfolio mix. In particular, the school felt strongly that a return of 0.8% per month represented a floor below which the portfolio return should not drop and want you to suggest an efficient asset allocation to achieve this goal. Your manager has decided to assign the task to your team. You are required to address the following questions. For simplicity, we assume that short sales are allowed (unless explicitly ruled out) and borrowing at the risk-free rate is possible. 1. Assume the same asset allocation during each month of the holding period. How well did the City College portfolio (with its current asset allocation) perform over the 200252021 period? Provide performance statistics of the portfolio mix. Also, provide the committee members with performance statistics for some benchmark portfolios over the same period. 2. Plot the portfolio frontier given the five risky assets the college is investing in (you may use the solver module in Excel for this purpose and allow for short sales when developing the frontier). 3. Is the portfolio of risky assets currently chosen by the colleges fund manager an efficient portfolio? If not, please explain and calculate the investment proportions (in the five risky assets chosen by the fund) required to construct an efficient risky portfolio, which would deliver the same expected return as the current choice of risky portfolio (for this part, assume there is no risk-free investment undertaken by the fund).

2 4. Calculate the investment proportions required to achieve the optimal (tangency) risky portfolio, given the possibility of investing in risk-free T-bills (you may use Excels solver module). What is the expected return and standard deviation of the tangency portfolio? 5. Continue to assume that you can invest in the risk-free asset. Calculate the investment proportions required to construct an efficient portfolio with an expected return equal to the existing portfolios expected return (note: this portfolio should include the risk- free asset). Also calculate the expected standard deviation of returns on this portfolio. 6. Continue to assume that you can invest in the risk-free asset. Suggest an efficient portfolio allocation to achieve the college's objective of a 'floor' rate of return equal to 0.8% per month. What is the expected standard deviation of the portfolio? 7. The endowment committee is also interested in knowing if the college should diversify its portfolio holdings to include emerging market stocks (i.e., the iShares MSCI Emerging Markets ETF fund), and precious metals (i.e. the U.S. Global Investors Gold and Precious Metals Fund) in its portfolio. Make a case for or against the inclusion of these alternative assets in the college's overall portfolio. Justify your decision by depicting the portfolio frontier in the presence of the seven risky assets (i.e., the five risky assets that make up the current portfolio plus emerging market stocks and precious metals). Calculate the efficient portfolio allocations required to achieve the floor rate of return of 0.8% per month (mandated by the college) with this expanded universe of assets. What is the expected standard deviation of such a portfolio? 8. Now calculate the efficient portfolio allocations required to achieve the floor rate of return of 0.8% per month (mandated by the college) with the expanded universe of assets while also assuming that the college is not allowed to invest more than 40% in any asset class and that no short-sales are allowed. What is the expected standard deviation of such a portfolio? 9. Present a forceful argument for using your services. Make a few succinct points that might help sway a board member skeptical of asset allocation methods (the member believes that individual stock selection is more important than asset allocation).