Lauren Buffett is a consultant for several college endowment funds. She has accumulated performance figures from a number of university endowments, as well as information about the typical stocks/bonds/cash mixtures common in the endowment universe. A firm believer in the broad policy approach, she makes recommendations about allocations across asset classes rather than which managers to choose or which stocks to pick. 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 spreadsheet titled PROJECT.xlsx. The spreadsheet also includes returns on three additional asset classes: Real Estate (REITs), International Stocks (EAFE), and Precious Metals (PM). In addition, it provides the monthly returns on the value-weighted market portfolio (VWRET), the S&P 500 Index (SPRET), and the one-month U.S. Treasury bills (TBILL). Due to declining student enrollment, City College has been relying more and more heavily on its endowment to meet budgets 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 endowments historical performance. She found out about Ms. Buffett from a friend who serves on the board of a well-known public university. The public university had hired Buffett in 2010 to review its investment policy and found her advice very helpful. Herrera decided to seek for Buffetts advice on whether City College should consider a change in its long-standing investment policy. In particular, Herrera was concerned about the economic outlook for small colleges like City College. She anticipated stronger needs to rely on the endowment fund in the coming years. She also felt that a return of 1% per month represented a floor below which the portfolio return should not drop. She wanted Lauren Buffett to suggest an efficient asset allocation to achieve this goal. Based on her conversation with Herrera, Buffett has drawn up a list of issues that need to 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 is possible.

1. Assume that the monthly asset allocation remained the same over the 1995-2012 period. How well did the City Colleges portfolio (with its current asset allocation) perform over the 19952012 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 same period.

2. Plot the portfolio frontier given the five risky assets the college is investing in. (You may want to use the solver module in Excel.)

3. Is the portfolio of risky assets currently chosen by the colleges fund manager an efficient portfolio? If not, calculate the weights for the five risky assets required to construct the efficient risky portfolio that would deliver the same expected return as the current portfolio (for this part, assume there is no risk-free investment undertaken by the fund).

4. Calculate the weights required to achieve the optimal (tangency) risky portfolio, given the possibility of investing in risk-free T-bills. What is the expected return and the standard deviation of the tangency portfolio?

5. Continue to assume that you can invest in the risk-free asset. Calculate the investment weights required to construct the efficient portfolio with an expected return equal to the existing portfolios expected return (note: this portfolio should include the risk- free asset). Additionally, calculate the 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 1.00% per month. What is the standard deviation of return on this portfolio?

7. Herrera is also interested in knowing if the college should diversify its portfolio holdings to include real estate (represented by Equity REITs), international stocks (proxied by the EAFE index representing a portfolio of stocks from Europe, Asia, and the Far East), and precious metals (PM) 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 with the eight risky assets (i.e., the five risky assets that make up the current portfolio plus real estate, international stocks, and precious metals). Calculate the efficient portfolio allocations required to achieve the floor return of 1.00% per month (mandated by the college) with this expanded universe of assets. What is the standard deviation of such a portfolio?

8. Now calculate the efficient portfolio allocations required to achieve the floor rate of return of 1.00% 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 25% in any asset class and that no short-sales are allowed. What is the standard deviation of such a portfolio?