The current asset allocation for the endowment fund of the Fantasy University is as follows:

Asset Classes Cash Bond Equity

Weight 9% 69% 22%

The endowment fund is a perpetual fund that provides scholarships, research grants and other research support to the university. The current asset allocation is problematic. You are the newly employed portfolio manager of this fund. Recently, the university has decided to review the asset allocation of the endowment fund to see if alternative investment opportunities can be explored and non-traditional assets can be included into the portfolio.

Can you talk about the Investment Objectives and Constraints of the Fund.

Investment Objectives and Constraints of the Fund:

1. Return target:

a. As high as possible while all the other investment objectives and constraints are met.

b. Return should not be lower than 8% per annum.

2. Risk target:

a. Standard deviation of the returns should not be higher than 12% per annum.

b. The fund should not have large exposure to extreme losses

3. Liquidity target:

a. At least 70% of the funds should be invested in liquid assets

b. The fund should hold at least 5% of cash.

4. Other constraints:

a. At least 50% of the funds should be invested in traditional assets, i.e. bonds, equity and cash.

b. Short-selling is not permitted but the fund can invest in investment vehicles that short sell, for example, hedge funds.

The potential alternative investment asset classes that the fund can invest are listed below:

a) Direct Property

b) Listed Property

c) Hedge Fund

d) Commodity

You are expected to construct a portfolio that contains at least two alternative investment asset classes in the list above while meeting all the investment objectives and constraints.

Details of the current asset allocation of the fund including the current asset class assumptions are contained in the Old Asset Allocation spreadsheet of the Excel file Project Data. The spreadsheet shows how the current asset allocation was formed and is an example of how to use Solver. However, the current asset allocation of the fund is problematic and not consistent with the funds investment objectives and constraints. You should aim to improve the asset class assumptions, asset class selection and asset allocation of the fund while exploring alternative investment opportunities.

Excel data form the link:

https://drive.google.com/open?id=1KzST1HLfJdT6-HgClFhCFgfc2XtUbgpk