Partners Healthcare Case Aanlysis Essay

Partners Healthcare had established several financial resources pools, such as the short-term pool (s.t.p.) and the LTP, so that they butt end quit opposite needs of the several hospitals in the network. In much detail, the STP was positioned with very high-quality, short-term fixed-income financial instruments. The average maturity of these instruments is about sensation to two years. STP is always treated as the peril-free partially of the hospitals holdings. On the other hand, the LTP is thought as the angry part of holdings. It consists of contrastive forms of equity and a smaller fixed-income part.In order to diversify the stakes of the LTP, the Partners enthronisation Committee introduced a new type of additions, corporeal assets, into the original LTP during the noncurrent years. Both of the assets performance turned to be excellent during 2004. As a result, the Investment Committee was considering expanding the real-asset segment of the LTP. Michael Manning, th e deputy treasurer of Partners Healthcare System, was asked to barrack the size and the composition for the real-asset portfolio contributed to the $2.4 billion bulky-term pool (LTP) in the Partners. Facts and digestDue to the fact that different Partners Healthcare hospitals might have different accep bow risk levels for their investment portfolio then the most reasonable closure would be to invest both in risk-free STP and regretful LTP. By choosing different change integrityes all(prenominal) hospital could achieve their acceptable risk level.Since the STP has a nearly fixed rate of interpret considered to be risk free for distributively hospitals own portfolio, the magnetic variation from LTP would ultimately determine the risk and buy the farm level of individual portfolio. victimisation long-term historical data, Manning and his staff calculated average annual diminishs, volatilities, and correlations for each of the asset classes (exhibit 3). Since real assets be long to LTP, in that respect is no direct uphold on the STP returns from investing in this category. Given the current mix of Domestic Equities (55%), Foreign Equities (30%) and LT Bonds (15%) and our judge return for each category (exhibit 3), the expected return of the LTP is calculated from the following formula e.g. E(Rp)= 0.55(0.1294)+0.30(0.1242)+0.15(0.054) = 10.8%In order to interpret the optimum portfolio allocation, the group needs to find the portfolio structured with lowest risk under a assumption return. This can be achieved by applying Mean-Variance supposition and Markowitz model find the economical frontier, which yields the most optimal portfolio under given returns. It can be expressed in mathematical terms and resolved by quadratic programming. Appendix AIn this case, the Partners Treasury department has computed all the portfolios for minimum level of risk with different types of assets, more specifically, adding reliable Estate Investment Trusts (R EITs), Commodities or both, from an undefined approach. Since the results are identical as calculated from Mean-Variance Theory, they should be the optimal portfolios for each target level of return. therefrom a graph with efficient frontier, which represents the optimal portfolios with different assets, is becomeed based on Exhibit 5 to 8 for comparison. Appendix B Technically, whatever portfolio on the efficient frontier is an optimized portfolio and is indifferent from each other in terms of risk/return trade off.From the Risk VS Return graph, we can see that for any given return, the portfolio with both REITs and commodities would yield the lowest risk. Also, the portfolio with only commodities would outperform the portfolio with only REITs. For instance, if we invest in both REITs and Commodities, in order to obtain a return of 10%, the new symmetry of the LTP will be portfolio 4 with somewhat US Equity 14.3%, Foreign Equity 27.5%, Bonds 22.2%, REITs 13.8%, and Commodities 22.3%. It produces the lowest risk of 8.49%, equivalence to original portfolio of 9.94%, REITs only portfolio of 9.69% and Commodities only portfolio of 8.49%. This is the basic concept of diversification, which means that the more assets with less correlation are introduced to the portfolio the less risky the portfolio will be for any achievable rate of return. 1For the overall portfolio, each hospital can allocate between the STP and the LTP. In fact, they can always construct the most efficient portfolio for their acceptable risk level with combination of LTP, which holds the risky assets, and STP, which holds the risk-free asset according to The One-Fund Theorem. 2 For example, if the shareholders want a total return of X, with a 3.2% return of STP and a 10% return of LTP, the proportion of STP and LTP can be obtained through X= w(0.032) + (1-w)(0.10)And it is guaranteed to be the optimal portfolio.Even though Mean-Variance theory can allocate the most optimal portfolio, there are several flaws with its assumptions. First of all, it assumes that assets returns are normally distributed. However, oft times, its observed that asset returns are more like to be fat-tailed distribution, 3 instead of having thin tails like normal distribution. Second of all, it assumes there is a constant correlation between different assets.However, under certain conditions, for example, severe financial crisis like 2008, all assets tend to be positively correlated with decreasing rate of return. Depending on the total time stage used for historical data, it can place an impact on the long term correlation. Aside from the assumptions, the time period of data can as well affect each variable. In this case, the client uses data started from 1970 for the new asset classes, which might not be as representative as development long term historical data from 1926 as they did with the US equities and US long-term bonds. This can have some impacts on the returns, standard deviation s, and correlations depending on the movement of assets from 1926 to 1970. RecommendationBy comparing the data in the table of Exhibit 5a with the numerical results shown in Exhibit 6 and Exhibit 7, as well as the efficient frontier constructed, we can derive the evidence that with the same expected returns, the most optimal portfolio is to add both REITs and commodities. In other words, we can control the risk of LTP by expanding the portion of real assets. If only one asset is allowed to be added to the real asset category, its more efficient to add the commodities than the REITs based on the position of the efficient frontier. Therefore, with a combination of risk free STP and the improved LTP, each individual hospital is able to construct the most optimized portfolio under any given risk level.