Fin 340: Introduction to Investments

Questions for Partners Healthcare’s write-up:

1) Briefly describe the situation and the task of Michael Manning.

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2) Compare REITs and Commodities based on risks, returns and Sharpe ratios. Assume STP (return of 3.2%) is the risk-free asset.

3) Recreate the efficient frontier of three assets in Exhibit 5b (i.e. to use risk and return of 12 portfolios in Exhibit 5a); and add the efficient frontier for four assets in Exhibit 6 (i.e. to use 12 portfolios in Exhibit 6) and the efficient frontier for four assets in Exhibit 7 (i.e. to use 12 portfolios in Exhibit 7). You can use Excel and then print out or use grid papers.

– How REITs and Commodities improve the efficient frontier? Does the degree of improvement relates to the Sharpe ratios in question 2? What factor determines the degree of improvement?

4) Now we will focus on the two efficient frontiers: one of three assets in Exhibit 5 and one of five assets in Exhibit 8. We know (from our chapter 6), the optimal portfolios are the tangency portfolios given the risk-free asset is STP (return of 3.2%). For simplicity, let find the optimal portfolio of three assets as the portfolio that have the highest Sharpe ratio out of the 12 portfolios in Exhibit 5. Let call this optimal portfolio O3-asset. Similarly, find the optimal portfolio of five assets, portfolio O5-asset, based on Exhibit 8.

– Draw a graph with the two efficient frontiers and show the two optimal portfolios.

– Report (in an easy-to-compare format) the risks, returns, Sharpe ratios, and weight of each of five assets for portfolios O3-asset and O5-asset.

5) Choose a number between 4% and 16% (round number only) and use this number as the target return for one hospital. You will create two compete portfolios to achieve your chosen target return: one allocating money using STP and O3-asset, and the other using STP and O5-asset.

– Report (in an easy-to-compare format) the risks, returns, and weight of each of six assets (now including STP) for the two complete portfolios. How much improvement (either in term of risk reduction or return increase) do REITs and Commodities bring?

6) Choose a number between 1% and 20% (round number only) and use this number as the maximum risk level (standard deviation) that one hospital can take. You will create two compete portfolios that have the chosen risk level: one allocating money using STP and O3-asset, and the other using STP and O5-asset.

Report (in an easy-to-compare format) the risks, returns, and weight of each of six assets for the two complete portfolios. How much improvement (either in term of risk reduction or return increase) do REITs and Commodities bring?

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