Partners Healthcare Case

Summary of the case: The underlying problem is in this case is one of the most important asset allocation problem that institutional investors like endowments and pension funds are grappling with today: how much, if at all, should relatively nontraditional but diversifying asset classes like real estate, commodities, and other "real assets" be used in an investment portfolio to improve the institution's risk/return profile. In particular, Michael Manning, the deputy treasurer of Partners Healthcare System, is asked to analyze the role that different "real assets" could play in Partners' $2.4 billion long-term pool (LTP) of financial assets and to recommend both a size and a composition for the real-asset portfolio segment within that LTP.

1. Suppose different hospitals within Partner's system choose different mixes of the "risk-free" STP and baseline LTP, whose future expected returns and risks are shown in Exhibit 3.

1. On Exhibit 3, plot the returns and risks of the various potential portfolios that can be formed by allocating funds between the STP and baseline LTP. What shape does a line drawn through these portfolios take? Why?
2. In contrast, what would the risk-return opportunities available to the hospitals be if they could invest only in STP and US Equities?

Exhibit 6 Array of Optimal Portfolios with Four Asset Classes: U.S., Foreign, Bonds, and REITS Asset Allocation Portfolio Expected Ret. Stdev US Equity Foreign Equity Bonds REITS 1 7.00% 8.93% 0.000 0.102 0.678 0.220 1234567890-2 7.50% 8.66% 0.000 0.170 0.605 0.225 8.00% 8.57% 0.000 0.239 0.532 0.229 8.50% 8.66% 0.004 0.303 0.460 0.232 9.00% 8.89% 0.059 0.325 0.400 0.216 9.50% 9.24% 0.114 0.347 0.340 0.199 10.00% 9.69% 0.169 0.369 0.280 0.183 10.50% 10.23% 0.224 0.391 0.219 0.166 11.00% 10.85% 0.278 0.412 0.159 0.150 11.50% 11.52% 0.333 0.434 0.099 0.133 11 12.00% 12.25% 0.388 0.456 0.039 0.117 12.50% 13.04% 0.465 0.481 0.000 0.054