City College is a community college with a $100 million endowment. Since its establishment, it has had a fixed investment policy of 55% stocks (spread 10/15/30 amongst small, medium and large cap stock portfolios), 35% bond index fund (VBMFX) and 10% Equity REITs over the years 2004 2020.

Since the role of the endowment in meeting budget needs has increased dramatically in the past few years, City College decided to review its past performance and future contributions to the institution. The school hired your company to assess its current performance and to recommend an optimal portfolio mix. In particular, the school feels strongly that 0.8% per month represented a floor below which the portfolio expected return should not drop and wants 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. How well did the City College portfolio (with its current asset allocation) perform over the 20042020 period? Provide performance statistics including the Sharpe ratio of the portfolio. Also, provide the committee members with performance statistics for some benchmark portfolios over the same period. (You might notice that this allocation requires constant rebalancing: we assume that the rebalancing is done at the end of every month.)

2. 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).