PARTE I You have been hired as Investment Consultant for the University Endowment (UE) who has a tax- exempt $30 Million Fund. Historically UE Board have been risk-averted and UE has been investing in fixed income securities only. Although, in the past years UE was able to generate income for its spending requirements, the UEs Fund needs to be repositioned to achieve, over a long-term period, a rate of return enough to grow over the inflation (2%) and its annual spending rate of 5%. Consequently, the recently appointed Board approved a new Investment Policy and Guidelines document. The new proposed asset allocation parameters are as follows: Asset Allocation Domestic Large Cap Equities Small Cap Equities International Equities Developed International Equities Emerging Fixed Income US Fixed Income High Yield Cash & Equivalents Benchmark S&P 500 Russell 2000 MSCI - EAFE MSCI - Emg BC Agg. BC High Yield 3-m T-Bill Lower Strategic Upper Limit Allocation Limit 15% 20% 25% 5% 10% 15% 10% 15% 20% 5% 10% 15% 20% 30% 50% 5% 10% 15% 2% 5% 100% The Board is asking you to produce a detailed analysis of the characteristics of the new portfolio to be constructed according to this Strategic Asset allocation. You have been able to gather the information contained in the following table. Table 1 Asset Categories Historical Rates of Return ANNUAL RETURNS Asset Category 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 US Large Cap US Small Cap Non-US Developed Non-US Emerging US Govt & Credit High Yield US Treasury Bill 5.77% -1.57% 11.17% 39.78% 6.97% 2.19% 4.74% -37.60% -33.79% -43.38% -53.18% 5.24% -26.39% 1.80% 28.43% 27.17% 31.78% 79.02% 5.93% 57.51% 0.16% 16.10% 26.85% 7.75% 19.20% 6.54% 15.19% 0.13% 1.50% -4.18% -12.14% -18.17% 7.84% 4.38% 0.08% 16.42% 16.35% 17.32% 18.63% 4.21% 15.58% 0.07% 33.11% 38.82% 22.78% -2.27% -2.02% 7.42% 0.05% 13.70% 4.90% -4.90% -1.80% 6.00% 3.50% 0.00% 1.40% -4.40% -0.08% -14.60% 0.50% -2.80% 0.00% 12.10% 21.30% 4.50% 11.20% 2.60% 17.10% 0.26% CONSTRUCCIN DE CARTERAS DE INVERSIN, ANLISIS Y MEDICIN DE RESULTADOS - SEGUNDO PROYECTO Pg. 2 Required: 1. For each asset category determine a. 10-year arithmetic mean historical annual rate of return b. 10-year geometrical mean historical annual rate of return c. Standard deviation of arithmetic mean historical annual rate of return d. Coefficient of variation (Std. Deviation/ Return) e. Beta by formula (x= x m rxm / m2) 2. Determine and construct using Excel formulas a. The covariance matrix b. The coefficient correlation matrix c. The Capital market Line (using the US Large Cap as a proxy for the market and US Treasury Bills for risk free rate) d. The Security Market Line 3. Determine de Expected Return and Standard deviation for the portfolio, according to the strategic asset allocation. Parte II 1. Las expectativas de rendimiento a largo plazo son las determinadas en la Parte II a) Determine lo que una persona podra acumular al cabo de 40 aos si aporta anualmente a su plan de retiro $3,000 distribuidos conforme a lo siguiente: (hint: obtenga el rendimiento promedio esperado) b) Determine cunto podra recibir anualmente, por 30 aos, si al retirarse invirtiera conforme a lo siguiente: (hint: obtenga el rendimiento promedio esperado) Distribucin - Acumulacin US Large Cap 25% US Small Cap 15% Non-US Developed 25% Non-US Emerging 20% US Govt & Credit 5% High Yield 10% US Treasury Bill 0% Distribucin - Retiro US Large Cap 15% US Small Cap 5% Non-US Developed 15% Non-US Emerging 10% US Govt & Credit 40% High Yield 10% US Treasury Bill 5%