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?
The size of HMC’s portfolio
2. Why is HMC focusing on real returns?
3. HMC's estimates of expected returns, standard deviations and correlations di_er from the twenty-year historical estimates. Why might this be? Comment on the di_er- ence between the two sets of estimates, focusing on expected returns and standard deviations.
4. Let's assume from now on that HMC's estimates of expected returns, standard devia- tions and correlations are given in Exhibit 4. Looking at Exhibit 4, comment on the signs of the correlation estimates, focusing on correlations between domestic equity, private equity, domestic bonds, commodities, TIPS, and cash. Hint: Consider how the return on each asset class is a_ected by news on the following risk factors: real interest rates, ination, GNP growth.
5. Is cash a riskless asset for HMC's purposes?
6. What is a reasonable target expected return for HMC and why? 7. Using the Excel spreadsheet Harvard.xls,1 con_rm the portfolio optimization results in Exhibit 6. Report the optimal portfolio allocation (i.e., report the weight on each asset class in Policy Portfolio) for target expected real return equal to 6% and 7%. Please, provide the weights in percentages accurate to 2 decimal places (for example if the weight is close to 5.346869%, you should report 5.35%).2 8. 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? 9. Are there any additional advantages to TIPS relative to those implied by HMC's portfolio optimization analysis?
1To _nd the optimal portfolio weights, you need to use the "Solver" Excel function. 2Notice that Exhibit 6 reports only one decimal and so you should _nd the second decimal.
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