Portfolio Theory Case (Professor David Moreno) PARTNERS HEALTHCARE CASE The goal of this case is to teach to students the relevance of non traditional assets (as real states or commodities) in a well-diversified portfolio. Moreover, students will be able to practice with the most important concepts from portfolio theory as efficient frontier, dominated portfolios, Sharpe ratio, among others. In addition, students are learning how portfolio theory can be useful not only for portfolio managers but for any company or firm with some funds to manage.
To do this case students must work in groups and, at the end, each group must give a printed copy of the answers to all these questions. Moreover, they should prepare a presentation in Power Point or Word answering these questions for their presentation on the classroom. Short Questions (You should answer these questions very shortly) 1. How do the hospitals obtain their profits? Why do the hospitals use or need the Long-Term Funds? Compute the annual returns obtained by the LTP between 1995 and 2004 and represent them on a graph.
In addition, what has the average return been during that time period? 2. According to the text the physician organizations or hospitals can invest their financial resources in several centrally-managed pools. What are these pools? How are they? 1 Portfolio Theory Case (Professor David Moreno) 3. The problem presented in the case is a typical problem of portfolio theory. Is it a security selection problem or an asset allocation problem? Explain the differences among them. 4. During the last years the Parthners Investment Comitte have introduced a new asset class, REITs and Commodity Index.
Explain these non traditional assets and if in your own opinion they should be interesting or not. Long Questions (in this case you will be considered a portfolio manager trying to explain or to answer to these question in a company or comitte, then use everything you need, computer, graphs, mathematics,…) 1. Suppose different hospitals within the Partners system choose different mixes of the “riskfree” STP and the baseline LTP, whose future expected returns and risks are shown in Exhibit 3.
On Exhibit 3, plot the returns and risks of the various potential portfolios that can be formed by allocating funds between the STP and baseline LTP. What shape does a line drawn through these portfolios take? Why? 2. On Exhibit 5, plot the curve for the risks and expected returns of the optimal portfolio combinations in the 4 asset case 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? 3. About the results in the previous point: What are the important factors that determine the degree of improvement when non traditional assets are introduced? 2 Portfolio Theory Case (Professor David Moreno) 4.
Consider the hospital that wishes to invest in the STP and the LTP such that the total expected return on the portfolio is 6%. How does the introduction of real assets alter the risk and composition of their most attractive portfolio? 5. Consider the hospital that is fully invested in the LTP with its current standard deviation and wishes to maintain this level of risk. How much does the introduction of real assets help them, if at all? If it was needed consider the possibility of taking short positions. 3