Capital Allocation Lines Assignment | Homework For You
NOTE it will not allow me to upload excel or the pdf. I need to upload either one or other, i tried pasting in but its too much info even for one question.
Question 1. Capital Allocation Lines. Suppose that different hospitals within the Partners system choose different mixes of the STP and the baseline LTP.
Assume that the STP is a “risk-free asset” for the purposes of our analysis. The expected returns and risk of the STP and LTP are plotted on Exhibit 3 of the case.
Using the Exhibit 3 data in the spreadsheet “PartnersHealthcare.xls”
- Reproduce the scatter plot from Exhibit 3 of the case. (Note: You will need to convert the data in the spreadsheet into numbers before you can plot it. You will also need to add rows for the STP and the LTP. This information is on p. 3 of the case.)
- On your scatter plot, illustrate the combinations of risk and return that are available by combining the risk free asset (STP) with the baseline LTP. (Hint: A straightforward way to do this in Excel is to use the formula for the capital allocation line we derived in class and then to plug in the various standard deviations in Exhibit 3. You can add this to your scatter plot as a new data series (the standard deviations are the x’s and the values from the formula for the capital allocation line are the y’s).)
- Similarly, on your scatter plot, illustrate the combinations of risk and return that are available by combining the risk free asset (STP) with the US Equity portfolio.
- If you had to choose a portfolio from only one of these two capital allocation lines, which line would you prefer? Why?
Question 2. Investment Opportunity Sets. In Exhibits 5 – 8, the case provides us with data to trace out an investment opportunity set for different underlying groups of risky asset classes. Our goal is to assess how these sets change as we add additional asset classes to the mix.
- Use the data on the 12 portfolios in Exhibit 5a to produce a figure illustrating the combinations of expected returns and standard deviations that can be achieved by forming portfolios of U.S. Equities, Foreign Equities, and Bonds. Check your work by comparing your graph to the curve in Exhibit 5B of the case. (They should look the same.) Once you have this, parts (2), (3), and (5) can be done essentially by copying and pasting.
- Add to your figure a new data series using the array of optimal portfolios with four assets classes presented in Exhibit 6. Note that here the new asset class that is added to the mix is REITs.
- Add to your figure a new data series using the array of optimal portfolios with four assets classes presented in Exhibit 7. Note that here the new asset class that is added to the mix is commodities.
- Separately compare the sets you obtain in parts (2) and (3) to the baseline case in part (1). Which asset class produces a bigger change to your investment opportunity set when it is added to the baseline: REITS or commodities? Why is this the case? (Hint: A look at the correlation table in Exhibit 3 and a review of our discussion in class for the two risky asset case might put you on the right track.)
- Finally, add to your figure a new data series using the array of optimal portfolios with all five assets classes presented in Exhibit 8.
- From which of the four graphed opportunity sets would you prefer to choose an investment portfolio? Why does the set of risky asset classes underlying this graph produce the most favorable combinations of expected return and risk? (A sentence or two will suffice here.)
Bonus Question. Optimization. (For this part, no additional computations are required. A clear explanation with reference to the graphs you have already produced is sufficient.) Consider the opportunity set you picked in Question 2, part 6 (Call this Set A). Now re-consider the scenario in Question 1. Putting the riskfree STP back in the mix, would hospitals prefer to choose an investment portfolio from the capital allocation line you identified in part 4 of Question 1 or from a capital allocation line formed by mixing the STP with a portfolio from Set A? (Note that this could be any portfolio from Set A that you wish.) Briefly explain.Get Finance homework help today