Question 4

The portfolio has many constraints that it has been using many objectives that portfolio has to achieve in order to manage the portfolio. Since, there are many assets classes that would not be able to meet with the expectations of the portfolio. Since, it is also assumed that increased risk of assets would also increase the return. But, it is not possible in this case, because, the asset classes that requires more return would bear more risk, but it would not meet with the expectations of the portfolio. The scenario become opposite the risk and return due to the recent financial crisis in the market that has increased the risk of the investment, but as relative to the risk it has no increased the return.

Question 5

Indeed if we analyze the efficient frontier then it can be determined that the risk at 8.5% would provide the return of 1.5%. See Graphs for efficient frontier. Since, the efficient frontier describes that at what point the company would be able to reduce the risk and increase the risk’. However, the changes in the portion of assets allocation would enhance the return and reduce the risk. So, a proper changes in the portion of the assets allocation revers the risk and increase the return of the portfolio as whole. However, if we take a look at the return sensitivity that gives view how risk is above the return indicating that portfolio is not generating sufficient return as compared to the risk it has borne. Similarly, it can be determined that equity market has more return as compared to the other asset classes. Since, the fixed income return is least generating income assets, but it has more expected return than others as well.

Question 6

The external managers are more efficient than the internal managers. Because, the increased complexities in the market can only be understood by the professional person working in that environment. Since, the finance is field in which two things matter a lot, one proper assumption, and second historical trends and knowledge of the drivers that drove the market upward and downward as well. However, the increased risk in the market emphasized the company to shift its portfolio management to the external managers rather than the internal. Furthermore, the internal managers in the past has left the company and opened their own hedge fund companies and ask Harvard to manage their funds. Since, the fees of the external managers are high, but portfolio would also perform well. Furthermore, the guts feelings are important in the market that external managers do have due to their vast experience, and vast expertise.

Table 1 Assets Return & Risk with Assets Allocation

  Real Return (%) Risk (%) Portion of Assets in Portfolio
Domestic Market 5.75% 15.50% 11%
Foreign Equity 6.25% 16.00% 11%
Emerging Markets 7.00% 19.00% 11%
Private Equity 6.75% 20.00% 13%
Absolute Return 5.00% 11.00% 16%
High-yield 4.75% 14.00% 2%
Commodities 4.50% 21.00% 14%
Natural Resources 5.00% 10.00% 0%
Real Estate 6.00% 15.00% 9%

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