Hbs Case Analysis

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Harvard Management Company (2001) Questions 1. Is HMC’s recent payout policy consistent with the goal of preserving the real (adjusted for Harvard’s expense growth) value of the endowment and its distribution into perpetuity? 2. Could payout be raised to meet recent budget pressures without changing the risk-return profile of the portfolio? 3. What value has the HMC’s policy portfolio asset allocations (compared to TUCS median) added to the endowment from the period 1992-2000? 4. What value has active portfolio management (deviating from the policy portfolio indexes and weights) added to the endowment from the period 1992-2000? 5. Does this justify their controversial compensation plans? Does HMC’s compensation plan reward value-creation, discourage excessive risk taking, and increase retention. 6. How does Harvard’s new policy portfolio weights compare to historical weights and other university endowments? 7. Do these differences reduce or increase risk? 8. Are there asset classes that should be excluded or others that should be included? 9. Why might standard deviation NOT capture the risks of all asset classes? 10. Using the data from attachments 10-11 (provided below), compute the optimal portfolio allocations if the portfolio mean return objective is 6.4% with some constraints (all weights sum to 100%, weights on cash >= -50% and weights on all other asset classes >=0) and the investor wishes to minimize standard deviation. What is the standard deviation and sharpe ratio of this portfolio? 11. Repeat for returns of 4.4-9.4% with increments of .5% (a total of 11 optimizations, e.g. 4.4, 4.9, 5.4… 9.4). 12. Comment on the produced graph of these portfolios. 13. Compute the expected return, standard deviation, and sharpe ratio of the Harvard policy portfolio and the broad university average from exhibit 10. 14. Show your recommended

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