FM423-Michaelmas Term 2010
Questions for the HMC case study
1. What is the size of HMC’s portfolio? How is the portfolio managed and what are the management costs? What is the role of the Policy Portfolio? 2. Why is HMC focusing on real returns? 3. HMC’s estimates of expected returns, standard deviations and correlations diﬀer from the twenty-year historical estimates. Why might this be? Comment on the diﬀerence between the two sets of estimates, focusing especially on expected returns and standard deviations. 4. Let’s assume from now on HMC’s estimates of expected returns, standard deviations and correlations. Comment on the estimates of expected returns and standard deviations. What is the MRP assumed by HMC? 5. Comment on the signs of the correlation estimates, focusing especially on correlations between domestic equity, private equity, domestic bonds, commodities, TIPS, and cash. Hint: Consider how the return on each asset class is aﬀected by news on the following risk factors: real interest rates, inﬂation, GNP growth. 6. Is cash a riskless asset for HMC’s purposes? 7. What is a reasonable target expected return for HMC and why? 8. Consider the Policy Portfolio in Exhibit 1. Compute the buck-to-bang ratio for each asset, taking cash as the riskless asset. Based on this analysis, what changes do you recommend to the Policy Portfolio? 9. Using the Excel spreadsheet Harvard.xls, conﬁrm the portfolio optimization results in Exhibit 6. 10. What is the possible rationale behind the proposed Policy Portfolio in Exhibit 8. In particular, why are the adjustments so gradual relative to the results in Exhibit 6? 11. Are there any additional advantages to TIPS relative to those implied by HMC’s portfolio optimization analysis?