Look at the case Harvard Management Company (2001) Harvard Management Company (hence forth HMC) was founded in 1974 to provide management for Harvard's endowment, pension assets, working capital, and trusts HMC currently employes 185 people As of June 2009, the endowment managed by HMC totaled approximately $25 billion This case is interesting because it is a good example of how the mean variance analysis is actually applied in the real world https hbsp harvard edu import 763351 Here, I will focus on a small set of all the issues discussed in the case Thus for this question you only have to read section The Optimal Portfolio Allocation Study on page 7 and top of page 8 (Note you don't have to read any more sections in order to be able to answer these questions (However, when you have time, I recommend you to read the whole case if you are interested in getting a more real sense about the problems that portfolio managers face in practice) (a)In the second paragraph of the section The Optimal Portfolio Allocation Study there is a discussion on how the HMC staff obtains the inputs necessary to construct the minimum variance frontier (the inputs are the expected returns, the standard deviations and the cor relations between the assets) Does the HMC staff only look at past data to obtain these inputs Very briefly, what do they do Does this make sense to you (b)In the third and fourth paragraphs of the section The Optimal Portfolio Allocation Study there is a discussion about one of the most problematic issues that occur when you use a portfolio optimizer to find the best portfolio allocation using real world data Briefly explain what this problem is and how does the HMC staff deal with it Does the way they dealt with this issue makes sense to you (c)Look at exhibit 17 in the case Suppose cash is a risk free asset (i e assume that the standard deviation of the returns on cash is zero instead of 1 as shown in exhibit 17 N B in case you are (correctly) wondering why the return on cash is positive, I should say that cash here is held on a bank account and that's why it earns a positive (but small) interest rate) If HMC could only invest in cash (the risk free asset) and in one other risky asset class (the list of asset classes is also provided in exhibit 17), which asset class would you advise them to invest in Why (Hint 1 in the mean variance analysis discussed in class, why did we say that everybody should select the Mean Variance Efficient Portfolio as their portfolio of risky assets Apply exactly the same idea here Hint 2 Sharpe ratio)

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Look at the case Harvard Management Company (2001). Harvard Management Company (hence- forth HMC) was founded in 1974 to provide management for Harvard's endowment, pension

Look at the case "Harvard Management Company (2001)". Harvard Management Company (hence- forth HMC) was founded in 1974 to provide management for Harvard's endowment, pension assets, working capital, and trusts. HMC currently employes 185 people. As of June 2009, the endowment managed by HMC totaled approximately $25 billion. This case is interesting because it is a good example of how the mean variance analysis is actually applied in the real world.

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Here, I will focus on a small set of all the issues discussed in the case. Thus for this question you only have to read section "The Optimal Portfolio Allocation Study" on page 7 and top of page 8. (Note: you don't have to read any more sections in order to be able to answer these questions (However, when you have time, I recommend you to read the whole case if you are interested in getting a more real sense about the problems that portfolio managers face in practice)

(a)In the second paragraph of the section "The Optimal Portfolio Allocation Study" there is a discussion on how the HMC staff obtains the inputs necessary to construct the minimum variance frontier (the inputs are the expected returns, the standard deviations and the cor- relations between the assets). Does the HMC staff only look at past data to obtain these inputs? Very briefly, what do they do? Does this make sense to you?
(b)In the third and fourth paragraphs of the section "The Optimal Portfolio Allocation Study" there is a discussion about one of the most problematic issues that occur when you use a portfolio optimizer to find the best portfolio allocation using real world data. Briefly explain what this problem is and how does the HMC staff deal with it. Does the way they dealt with this issue makes sense to you?
(c)Look at exhibit 17 in the case. Suppose cash is a risk free asset (i.e. assume that the standard deviation of the returns on cash is zero instead of 1% as shown in exhibit 17. N.B.: in case you are (correctly) wondering why the return on cash is positive, I should say that cash here is held on a bank account and that's why it earns a positive (but small) interest rate).
If HMC could only invest in cash (the risk-free asset) and in one other risky asset class (the list of asset classes is also provided in exhibit 17), which asset class would you advise them to invest in? Why?
(Hint 1: in the mean-variance analysis discussed in class, why did we say that everybody should select the Mean Variance Efficient Portfolio as their portfolio of risky assets? Apply exactly the same idea here. Hint 2: Sharpe ratio)