Partners Healthcare is considering the introduction of real assets into the organization’s portfolio. The analysis will demonstrate the effects of having one risky asset and one risk-free asset in a portfolio. Our analysis will also show that the introduction of real assets can decrease the risk of the hospital’s portfolio. Each hospital in the healthcare system can determine the appropriate portfolio mix based on their desired expected level of return and risk they are willing to accept.
I. Mixes of STP & LTP
Suppose different hospitals within the Partners system chose different mixes of the “risk-free” STP (short term pool) and ...view middle of the document...
Just as with the portfolio with the STP and LTP investments, the portfolios with the STP and US Equities investments also have one risk-free asset (i.e. STP) and one risky asset (i.e. US Equities) and the expected return and risk are also linearly related to the weight in the risky asset. The highest Sharpe ratio from these risk-return opportunities available is also where 90% of the portfolio is comprised of STP and 10% of US Equities.
II. Optimal Portfolio Combinations
On Exhibit 5, plot the curve for the risks and expected returns of the optimal portfolio combinations in the 4 asset caste detailed in Exhibit 6, namely: US Equities, Foreign Equities, Bonds, and REITs. Do the same for the 4 asset case shown in Exhibit 7: US, Foreign, Bonds, and Commodities. Do the same for the 5 asset case detailed in Exhibit 8: US, Foreign, Bonds, REITs, and Commodities. How much does each of the “real assets” improve the potential opportunities for the hospitals investing in the LTP? What are the important factors that determine the degree of improvement?
See Exhibit 2a for the curve for Exhibit 5, Exhibit 2b for the curve for Exhibit 6, Exhibit 2c for the curve for Exhibit 7, and Exhibit 2d for the curve for Exhibit 8. Exhibit 2a provides the baseline LTP which shows the highest Sharpe ratio that can be achieved without the introduction of a “real assets” is 1.01. The allocation of 23.4% in US Equities, 40.4% in Foreign Equities, and 36.2% in Bonds would result in an expected return of 10% and a volatility of 9.94%.
Exhibit 2b shows the introduction one real asset, REITs. From reviewing the curve and the Sharpe ratios for the portfolios presented, with the introduction of REITs the Sharpe ratio can be improved to 1.03; this portfolio would be made up of 16.9% in US Equities, 36.9% in Foreign Equity, 28% in Bonds, and 18.3% in REITs. The expected return of this portfolio stays the same at 10%, but the volatility is decreased to 9.69%. So volatility is improved by 0.25% with the introduction of REITs.
Exhibit 2c shows the introduction of the other “real-asset”, commodities. From reviewing the curve and the Sharpe ratios for the portfolios presented, with the introduction of commodities the Sharpe ratio can be improved to 1.16; this portfolio would be made up of 19% in US Equities, 29.7% in Foreign Equity, 28% in Bonds, and 23.2% in commodities. The expected return of this portfolio stays the same at 10%, but the volatility is decreased to 8.65%. So volatility is improved by 1.29% with the introduction of commodities.
Exhibit 2d shows the introduction of both “real-assets” REITs and commodities. From reviewing the curve and the Sharpe ratios for the portfolios presented, with the introduction of both real assets the Sharpe ratio can be improved to...