Plot the curve for risk and expected returns

Reference no: EM132352622 , Length: word count:700

Case Motivation - PARTNERS HEALTHCARE

Learning objectives -

Understand how diversification works in an asset allocation setting with a small number (3 to 5) of risky securities.
Understand how to extend the relatively simple case of 3-5 assets to n risky assets.
Understand the importance of correlation (risk reduction) in order to improve a portfolio's risk/return profile.
Understand when a risk-free investment is included in the opportunity set, a single combination of risky investments will be optimal for all investors.
Develop a deeper appreciation for the use of excel in identifying the optimal portfolio.

Case Synopsis - Partners Healthcare provides you with an intuitive and geometric introduction (or hopefully recap) to mean variance analysis, and the opportunity to see how optimal portfolio analysis based upon mean variance theory can be employed to help allocate portfolio capital across risky asset classes. The focus of this case is on developing an understanding of the geometry and statistics behind portfolio optimisation, as well as an appreciation of its application and limitations.

The underlying problem is to identify: how much, if at all, should relatively non-traditional but diversifying asset classes like real estate, commodities, and other "real assets" be used in an investment portfolio to enhance an institution's risk/return profile.

Potential questions to be addressed in report submission -

How can we extend the case of 2 risky assets to n risky assets when quantifying both risk and return?

Suppose different hospitals within the Partners System choose different mixes of the "risk-free" STP and the baseline LTP. Calculate and then plot the returns and risks of the various potential portfolios that can be formed by allocating funds between STP and baseline LTP. What shape does a line drawn through these portfolios takes? Why? In contrast, what would the risk-return opportunities available to the hospitals be if they could invest only in STP and US equities?

Plot the curve for risk and expected returns of the optimal portfolio combinations involving the 4 asset classes (refer Exhibit 6), namely; US equities, Foreign equities, Bonds, and REITS. Do the same for the 4 asset classes (refer Exhibit 7), namely; US equities, Foreign equities, Bonds and Commodities. Do the same for the 5 asset classes (refer Exhibit 8), namely; US equities, Foreign equities, Bonds, REITS, and Commodities. How much does each of the real assets improve the potential opportunities for the hospitals investing in LTP? What are the important factors that determine the degree of improvement?

How does the introduction of real assets alter the risk and composition of their most attractive portfolio?

Suggested report structure -

Introduction:

Who is Ocean Carriers and what do they do?
What is the problem? What is the case about?
What is your plan of analysis - how will the rest of the case report flow from here?

Analysis

The decision: need to make a decision on whether or not to purchase this new ship considering it is only for a three year charter.

Consider: reputation of the charterer
Supply of ships worldwide
Demand for ships worldwide

Conclude that supply appears to be increasing more than demand and that prices on charters in the future might be lower as a result.

Capital Budgeting Decision Analysis:

Cost of the new ship
Estimate cash flows, state all assumptions
Estimate NPV and make a decision - show all your calculations, This could be in an appendix if needed.

Conclusion and discussion

What should Linn do - do not accept, Negative NPV. What are some other options - suggest changes to company policies etc.

Need 700 words and use Harvard Reference. Number of ref: above 3.

Attachment:- Finance Case Study Assignment Files.rar

Reference no: EM132352622

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