Harvard Management Company
Basic:
1. Why does Harvard spend so many resources managing its endowment? Why not simply invest in Treasury Bonds and be done?
2. Why this emphasis on real returns as opposed to nominal returns?
3.How does HMC form its capital market assumptions? Why don’t they use past statistics to project the future? What do HMC’s capital market assumptions imply about the forward looking domestic equity premium? How does it compare to the historical equity premium?
4.If cash has zero standard deviation and correlation with the other assets and an expected return of 3.5%, what kind of asset is it? Is it really risk-free?
5.Take the HMC management’s views of expected returns, standard deviation, and covariance of real returns as correct. Also, assume that cash is riskless (i.e. zero variance and covariance). If the board allows HMC to invest in only one asset class, which asset classes would you advise HMC to discard right away? Why?
6.If the board allows HMC to invest in assumed riskless cash and one other asset class, which asset class would you advise them to invest in? Why? Advanced:
1. Suppose the board allows HMC to invest only in domestic equities and domestic bonds, arguing that they are “safe choices” in the sense that these assets are well-known to investors and they have deep, liquid markets. What combination of domestic bonds and equities would you pick?
2. Would you advise them to add commodities to the bond and equity mix? Why or why not? How would you advise HMC to combine assumed riskless cash with a portfolio of domestic equities, bonds, and possibly commodities?
3. How do regular Treasury bonds work? How does inflation impact the coupons of a T-bond? How do TIPS work? Will TIPS always outperform regular Treasuries?
4. What effect do you think an increase in real yields has on the price of TIPS? What about expected inflation? Are these effects different for a regular Treasury bond?
5. How can you form a portfolio that has exposure to expected
1. Why does Harvard spend so many resources managing its endowment? Why not simply invest in Treasury Bonds and be done?
2. Why this emphasis on real returns as opposed to nominal returns?
3.How does HMC form its capital market assumptions? Why don’t they use past statistics to project the future? What do HMC’s capital market assumptions imply about the forward looking domestic equity premium? How does it compare to the historical equity premium?
4.If cash has zero standard deviation and correlation with the other assets and an expected return of 3.5%, what kind of asset is it? Is it really risk-free?
5.Take the HMC management’s views of expected returns, standard deviation, and covariance of real returns as correct. Also, assume that cash is riskless (i.e. zero variance and covariance). If the board allows HMC to invest in only one asset class, which asset classes would you advise HMC to discard right away? Why?
6.If the board allows HMC to invest in assumed riskless cash and one other asset class, which asset class would you advise them to invest in? Why? Advanced:
1. Suppose the board allows HMC to invest only in domestic equities and domestic bonds, arguing that they are “safe choices” in the sense that these assets are well-known to investors and they have deep, liquid markets. What combination of domestic bonds and equities would you pick?
2. Would you advise them to add commodities to the bond and equity mix? Why or why not? How would you advise HMC to combine assumed riskless cash with a portfolio of domestic equities, bonds, and possibly commodities?
3. How do regular Treasury bonds work? How does inflation impact the coupons of a T-bond? How do TIPS work? Will TIPS always outperform regular Treasuries?
4. What effect do you think an increase in real yields has on the price of TIPS? What about expected inflation? Are these effects different for a regular Treasury bond?
5. How can you form a portfolio that has exposure to expected