Investment and Alpine
Q * Expected returns of A and B are 12% and 16%. The betas of A and B are 0.7 and 1.4. T-bill rate is 5%. S&P 500 is expected to earn 13%. Std of A is 12% and that of B is 31% and that of S&P 500 is 18%. * If you currently hold a market index portfolio, would you choose to add either of these portfolios to your holdings? * If instead you could invest only in T-bills and one of these portfolios, which would you choose?
Q * Carl, a portfolio manager for the Alpine Trust Company, has been responsible since 2010 for the City of Alpine’s Employee Retirement Plan, a municipal pension fund. The plan board of trustees directed Karl 5 years ago to invest for total return over the long term. However, as trustees of this highly visible public fund, they cautioned him that volatile or erratic results could cause them embarrassment. Investment Performance | | Last 5 years | Last year | Time-weighted | 8.2% | 5.2% | Dollar-weighted (internal) | 7.7% | 4.8% | Assumed actuarial return | 6.0% | 6.0% | U.S. T-bills | 7.5% | 11.3% | Large sample of pension funds | 10.1% | 14.3% | Common stocks=Alpine Fund | 13.3% | 14.3% | Alpine portfolio beta coefficient | 0.90% | 0.89% | S&P 500 stock index | 13.8% | 21.1% | Fixed-income securities-Alpine Fund | 6.7% | 1.0% | Salomon Brothers’ bond index | 4.0% | -11.4% |
How to response to board comments? * Our 1-year results are terrible, and it’s what you’ve done for us lately that counts most. * Our total fund performance was clearly inferior compared to the large sample of other pension funds for the last 5 years. What else would this reflect except poor management judgment? * Our common stock performance was especially poor for the 5-year period. * Why bother to compare your returns to the return from T-bills and the actuarial assumption rate? What your competition could have earned for us or how we would have fared if invested in a
Q * Carl, a portfolio manager for the Alpine Trust Company, has been responsible since 2010 for the City of Alpine’s Employee Retirement Plan, a municipal pension fund. The plan board of trustees directed Karl 5 years ago to invest for total return over the long term. However, as trustees of this highly visible public fund, they cautioned him that volatile or erratic results could cause them embarrassment. Investment Performance | | Last 5 years | Last year | Time-weighted | 8.2% | 5.2% | Dollar-weighted (internal) | 7.7% | 4.8% | Assumed actuarial return | 6.0% | 6.0% | U.S. T-bills | 7.5% | 11.3% | Large sample of pension funds | 10.1% | 14.3% | Common stocks=Alpine Fund | 13.3% | 14.3% | Alpine portfolio beta coefficient | 0.90% | 0.89% | S&P 500 stock index | 13.8% | 21.1% | Fixed-income securities-Alpine Fund | 6.7% | 1.0% | Salomon Brothers’ bond index | 4.0% | -11.4% |
How to response to board comments? * Our 1-year results are terrible, and it’s what you’ve done for us lately that counts most. * Our total fund performance was clearly inferior compared to the large sample of other pension funds for the last 5 years. What else would this reflect except poor management judgment? * Our common stock performance was especially poor for the 5-year period. * Why bother to compare your returns to the return from T-bills and the actuarial assumption rate? What your competition could have earned for us or how we would have fared if invested in a