Partners Healthcare Case Aanlysis Essay

Partners health c ar had established several financial resources pools, much(prenominal) as the short- name pool (STP) and the LTP, so that they privy satisfy divers(prenominal) inescapably of the several infirmarys in the network. In much(prenominal) detail, the STP was authoriseed with very high-quality, short-term fixed-income financial instruments. The average maturity of these instruments is about nonpareil to two years. STP is forever and a day case-hardened as the ventureless(prenominal) part of the hospitals holdings. On the other hand, the LTP is thought as the find of exposurey part of holdings. It consists of contrastive forms of equity and a sm altogetherer fixed-income part.In roam to veer the dangers of the LTP, the Partners enthronisation Committee introduced a bare-assed type of assets, rattling assets, into the original LTP during the ultimo years. Both of the assets performance turned to be excellent during 2004. As a result, the Investment C ommittee was considering expanding the real-asset segment of the LTP. Michael Manning, the deputy treasurer of Partners Healthcare System, was asked to recommend the size and the constitution for the real-asset portfolio contributed to the $2.4 billion long-term pool (LTP) in the Partners. Facts and AnalysisDue to the fact that several(predicate) Partners Healthcare hospitals mightiness defy different bankable adventure aims for their investment portfolio consequently the most reasonable solution would be to invest both in risk-free STP and uncivilised LTP. By choosing different mixes apiece hospital could achieve their pleasing risk level.Since the STP has a or so fixed rate of return considered to be risk free for for each one hospitals own portfolio, the variation from LTP would eventually determine the risk and return level of individual portfolio. Using long-term diachronic data, Manning and his staff mensural average yearly returns, volatilities, and correlat ional statisticss for each of the asset classes (exhibit 3). Since real assets hold out to LTP, there is no direct shock absorber on the STP returns from investing in this category. Given the current mix of home(prenominal) Equities (55%), Foreign Equities (30%) and LT Bonds (15%) and our expected 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 narrate to find the best portfolio allocation, the group require to find the portfolio structured with final risk under a presumption return. This drive out be achieved by applying Mean-Variance Theory and Markowitz object lesson find the businesslike frontier, which yields the most optimal portfolio under given returns. It can be expressed in mathematical toll and solved by quadratic programming. Appendix AIn this case, the Partners Treasury plane section has computed all the portfolios for minimum level of risk with different types of assets, more specifically, adding Real domain Investment Trusts (REITs), 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. Therefore a graph with effectual frontier, which represents the optimal portfolios with different assets, is fabricateed based on read 5 to 8 for comparison. Appendix B Technically, each portfolio on the efficient frontier is an optimized portfolio and is oblivious from each other in terms of risk/return trade off.From the jeopardize VS Return graph, we can see that for either given return, the portfolio with both REITs and commodities would yield the lowest risk. Also, the portfolio with moreover if 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 proportion of the LTP will be portfolio 4 with approximately US fairness 14.3%, Foreign Equity 27.5%, Bonds 22.2%, REITs 13.8%, and Commodities 22.3%. It produces the lowest risk of 8.49%, study 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 whatever achievable rate of return. 1For the overall portfolio, each hospital can allocate mingled with 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 command a thoroughgoing 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 possibleness can allocate the most optimal portfolio, there are several flaws with its assumptions. head start of all, it assumes that assets returns are normally distributed. However, often clocks, its observed that asset returns are more like to be fat-tailed distribution, 3 instead of having little(a) tails like normal distribution. game of all, it assumes there is a constant correlation between different assets.However, under trusted conditions, for example, severe financial crisis like 2008, all assets tend to be positively jibe with decreasing rate of return. Depending on the total time period 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 as affect each variable. In this case, the leaf node uses data started from 1970 for the new asset classes, which might not be as instance as using lo ng 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 deviations, 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 deduct the conclusion 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 agency 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.