Question
Lauren Buffett is a consultant for several college endowment funds. She has accumulated performancefiguresfromanumberofuniversityendowments,aswellasinformationaboutthe typical stocks/bonds/cash mixtures common in the endowment universe. A firm believer
Lauren Buffett is a consultant for several college endowment funds. She has accumulated performancefiguresfromanumberofuniversityendowments,aswellasinformationaboutthe typical stocks/bonds/cash mixtures common in the endowment universe. A firm believer in the broadpolicyapproach,shemakesrecommendationsaboutallocationsacrossassetclassesrather than which managers to choose or which stocks topick.
City College is a community college with a $100 million endowment. Since its establishment, it has had a fixed investment policy of 65% stocks (spread 30/20/15 amongst large, medium and small cap stock portfolio, labeled LRGSTK, MEDSTK and SMLSTK, respectively), 20% Corporate Bonds (CBOND), and 15% Government Bonds (GBOND) over the years 1995 - 2012. The monthly returns on these asset classes are listed in the Excel spreadsheettitledPROJECT.xlsx [link below].Thespreadsheetalsoincludesreturnsonthreeadditionalasset classes: Real Estate (REITs), International Stocks (EAFE), and Precious Metals (PM).Inaddition,itprovidesthemonthlyreturnsonthevalue-weightedmarketportfolio(VWRET),the S&P 500 Index (SPRET), and the one-month U.S. Treasury bills(TBILL).
Duetodecliningstudentenrollment,CityCollegehasbeenrelyingmoreandmoreheavily on its endowment to meet budget's need in the past several years. Sue Herrera, the chairperson of the endowment committee for the board of trustees of City College, decided to review the endowment'shistoricalperformance.ShefoundoutaboutMs.Buffettfromafriendwhoserves ontheboardofawell-knownpublicuniversity.Thepublicuniversityhad hiredBuffettin2010 to review its investment policy and found her advice veryhelpful.
Herrera decided to seek for Buffett's advice on whether City College should consider a change in its long-standing investment policy. In particular, Herrera was concerned about the economicoutlookforsmallcollegeslikeCityCollege.Sheanticipatedstrongerneedstorelyon theendowmentfundinthecomingyears.Shealsofeltthatareturnof1%permonthrepresented a"floor"belowwhichtheportfolioreturnshouldnotdrop.ShewantedLaurenBuffetttosuggest an efficient asset allocation to achieve this goal.
BasedonherconversationwithHerrera,Buffetthasdrawnupalistofissuesthatneedto be addressed. She has decided to hire your group for this task. You are invited to address the following questions. In your analysis, assume that short sales are allowed (except when explicitly ruled out) and borrowing at the risk-free rate ispossible.
Project link: https://docs.google.com/spreadsheets/d/1IHC6XqnK3S3XRfIwkg0HlBQPwo1-F2ZZsTt3bmkSI0U/edit?usp=sharing
1.Assume that the monthly asset allocation remained the same over the 1995-2012 period. HowwelldidtheCityCollege'sportfolio(withitscurrentassetallocation)performoverthe 1995-2012 period? Provide performance statistics (including the Sharpe ratio). Compare these statistics with those of the value-weighted market portfolio (VWRETD) and the S&P500 index over the sameperiod.
2.Plot the portfolio frontier given the five risky assets the college is investing in. (You may want to use the solver module inExcel.)
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