Statement of Problem
Partners Healthcare had established several financial resources pools, such as the short-term pool (STP) and the LTP, so that they can satisfy different needs of the several hospitals in the network. In more detail, the STP was invested with very high-quality, short-term fixed-income financial instruments. The average maturity of these instruments is about one to two years. STP is always treated as the risk-free part of the hospitals’ holdings. On the other hand, the LTP is thought as the risky part of holdings. It consists of different forms of equity and a smaller fixed-income part.
In order to diversify the risks of the LTP, the Partners Investment Committee introduced a new type of assets, real assets, into the original LTP during the past years. Both of the assets’ performance turned to be excellent during 2004. As a result, the Investment Committee was considering expanding the real-asset segment of the LTP. Michael Manning, the deputy treasurer of Partners Healthcare System, was asked to recommend the size and the composition for the real-asset portfolio contributed to the $2.4 billion long-term pool (LTP) in the Partners. Facts and Analysis
Due to the fact that different Partners Healthcare hospitals might have different acceptable risk levels for their investment portfolio then the most reasonable solution would be to invest both in risk-free STP and risky LTP. By choosing different mixes each hospital could achieve their acceptable risk level.
Since the STP has a nearly fixed rate of return considered to be risk free for each hospital’s own portfolio, the variation from LTP would ultimately determine the risk and return level of individual portfolio. Using long-term historical data, Manning and his staff calculated average annual returns, volatilities, and correlations for each of the asset classes (exhibit 3). Since real assets belong to LTP, there is no direct impact on the STP returns from investing in this category....
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