Premium Essay

Hmc Case

In: Business and Management

Submitted By etoile03emma
Words 602
Pages 3
HMC Case Study (1) “Over the long term, the portfolio had soundly outperformed both a 60% stock/40% bond portfolio as well as the TUCS median, and this outperformance improved over time.” The average outperformances versus the 60/40 and TUCS over the last 30 years are 2.8% and 2.9%. (2) For HMC to construct the stress test, I think the concept of “modern portfolio theory (CAPM),” “return on asset classes” and “portfolio returns” are required.
Equation: E(R)= ∑p(s)R(s) σ2= ∑p(s)[R(s)-E(r)]2 E[rc] = rf + y[E[rp]– rf ] σp2 = wD2σD2+wE2σE2+2wDwECov(rD,rE) U= E[rc]-0.5Aσc2 (3) a. Exhibit 17 displays their inputs
b. In the process of generating appropriate assumptions, the HMC staff examined both the long- and short- term historical records of each asset class in terms of risk, return, and correlation. They also talked with a number of consultants and investment management firms that specialized in this type of analysis to gain their input. Finally, they adjusted the assumptions somewhat to correspond to current market conditions and tried to ensure that the inter-asset comparisons made intuitive sense.
c. E[rc] = rf + y[E[rp]– rf ] σp2 = wD2σD2+wE2σE2+2wDwECov(rD,rE) U= E[rc]-0.5Aσc2 y* = (E[rp]– rf )/(Aσp2)
d. Constrained optimization is the process of optimizing an objective function with respect to some variables in the presence of constraints on those variables. HMC introduced this concept as a primary method through which they approach the process of maximization of their risk/return utility function. By constraining the optimal portfolio analysis, there would be an effect of overriding the HMC’s risk and return assumptions. One of the greatest drawbacks is the introducing several nontraditional asset which lead to enhance the level risk and also may restrict liquidity.

(4) According to the text, before…...

Similar Documents

Premium Essay

Hmc Case Study

...Case study: Harvard Management Company (HBS 9-201-129) The primary scope of the present document is to provide a critical analysis of the most relevant issue related with the endowment fund of the HMC. First the advantages and disadvantages related to the optimal portfolio. The second part aimed at conducting an analysis on the method utilized by HMC in the process of determining the capital market assumption. Furthermore, it will discuss the Harvard’s decision to strongly emphasize in real returns. The focus point in the third part is to highlight the method of generation of an efficiency frontier and the advantage and drawbacks of the constraining portfolio weights. And finally, the most significant part we will discuss the beneficial and hammering consequences of considering TIPS as an additional asset class in Harvard’s policy portfolio. 1. the advantages and limitations of optimal portfolio allocations: Led primarily by the need to balance between the requirements posed by the nature of its sector, and its above the ground ambitions for success, Harvard Management Co. introduced the concept of the Optimal Portfolio Allocation as a primary method through which they approach the process of maximization of their risk/return utility function. One of the advantages of this process is the high extent to which this asset allocation alternative meets the nature and needs of this institution. Another essential advantage derives from the fact that through the systematic......

Words: 1048 - Pages: 5

Premium Essay

Marketing

...named Marriott International Incorporated (MII), which would comprise of MC’s lodging, food and facilities management businesses, as well as the management of its life-care facilities. The existing company would be renamed Host Marriott Corporation (HMC) and it would retain MC’s real estate holdings as well as its concessions on tollroads and in airports. Under the plan, MII and HMC would have separate management teams and HMC would retain nearly all of MC’s long-term debt of nearly $3 billion. Because HMC would be valued more on the basis of the chance of appreciation in its property holdings than on expected income, the company would be under less pressure from investors to sell off hotels at distressed prices. As they are separate entities, MII’s losses (if any) will not impact MII’s positive earnings. Unburdened by debt, MII would have the ability to raise additional capital to finance growth, perhaps to participate in the consolidation of the hotel industry by purchasing the assets of competitors in financial difficulty. The stock holders will be given equal value stocks in HMC, and while they would benefit from Project Chariot, the situation was quite different for bondholders. Although MC management was confident that HMC would have the financial strength to make all payments of interest and principal on long-term obligations when due, the separation of the two companies would affect the security of MC debt holders. This is currently the biggest concern for MC as......

Words: 2127 - Pages: 9

Premium Essay

Summary of Harvard Management Company (2010)

...Summary of Harvard Management Company (2010) By: Satrio Abi and Yanuar Budi Baskoro * Harvard Management Company Introduction: Harvard Management Company is a company which built by Harvard University itself. That means HMC is a wholly owned subsidiary of Harvard University. The company built for managing the financial matter and development of the university. Because the company is wholly owned by Harvard University, the Directors of HMC is directly choosen by President and Fellow of Harvard College. The function of HMC is for managing University’s financing especially endowment. Endowment become the important income for HMC. The main job of HMC is to earn money for the endowment. The management do some investment to get the endowment funds. They have the unique ways to do the investment which is using the Hybrid Theory. This case is focusing on the endowment. * Endowment: Why endowment become so important? Because the endowment fund is used for developing the university. The fund is for establishing new research program, creating more scholarship for student and buy some new art and collection. The fund also for increasing financial aid, reducing tuition fee for students and improve facilities for learning such as hiring new profesional academic intiatives or creating new laboratorium for research. The total value of endowment for 1990 until 2009 is increased continuosly. The total value in 1990 is $4.7 billion, in 1995 is $7 billion, in 2000 is $18.3......

Words: 602 - Pages: 3

Premium Essay

Harvard Management Company Case Study

...university. As stated in the case, “the general objective was to preserve the real value (adjusted for Harvard’s expense growth) of the endowment and its income distribution in perpetuity”. In recent years, the payout ratio (Endowment spending as a % of total Endowment value) has had a target range of 4.5% to 5.0%. In the case’s example, the average growth rate of Harvard’s expenses is 3% above CPI inflation rate and annual gifts to the endowment average about 1.5%. Hence, with a payout ratio target of 4.75%, we would get an Expected Return of 6.25%: 4.75% + 3% - 1.5% = 6.25% Q2. The Policy Portfolio is the “neutral” guide of long-term asset allocation set by the HMC board and it serves as a benchmark of actual performance and as a metric against which compensation of portfolio managers is measured. The aim of the Policy Portfolio is to provide targets for different asset categories as a percentage of the total portfolio, in order to achieve a long-term expected return with the least risk possible. The policy portfolio is reviewed every year and it is modified as a result of changes in market conditions, needs for long-term expected returns, and risk aversion. Jack Meyer’s vision was to keep the actual asset mix “fairly” close to the Policy Portfolio. Fairly close means that the Policy Portfolio included a minimum and a maximum percentage range for each asset class within which portfolio managers could invest, without a previous authorization of the HMC board. If......

Words: 2351 - Pages: 10

Premium Essay

Harvard Management Company

...Harvard Management Company (HMC) has successfully managed Harvard University’s endowment over the last decades. The active management has added billions of dollars in value; nevertheless, CEO Jane Mendillo wants to evaluate the allocation of the portfolio before the next board meeting, looking at liquidity, risk profile, and type of management. HMC’s main objective is to preserve the real value of the endowment and its income distribution in perpetuity. In order to do this, they require annual real returns around 5.5%. The endowment has grown tremendously over the past 30 years; however at the same time, so has the endowment spending. The key question in this case is whether HMC has an appropriate method for investing and developing the endowment, considering their objectives and the University needs. Liquidity and risk is essential to HMC, and by increasing internal management of the endowment, liquidity will increase and risk might decrease. HMC should also consider reducing their dependence on U.S.-based assets. Harvard’s reliance on the endowment is increasing; between 1980 and 2009, Harvard’s endowment spending, as a percentage of the total budget, increased from 15% to 38%. Mendillo is concerned that HMC is largely exposed to illiquid assets (2009: 60% requires more than one year to liquidate), while these assets no longer offer meaningful excess returns. This might indicate that HMC should shift some investment focus, in order to include more liquid assets; also,......

Words: 711 - Pages: 3

Free Essay

Hereggui

...------------------------------------------------- Marriott Case Analysis This print version free essay Marriott Case Analysis. Category: Business Autor: reviewessays 03 December 2010 Words: 2449 | Pages: 10 Marriott Corporation and Project Chariot The Marriott Corporation (MC), had seen a long, successful reign in the hospitality industry until the late 1980s. An economic downturn and the 1990 real estate crash resulted in MC owning newly developed hotel properties with no potential buyers in sight and a mound of debt. During the late 1980s, MC had promised in their annual reports to sell off some of their hotel properties and reduce their burden of debt. However, the company made little progress toward fulfilling that promise. During 1992, MC realized that financial results were only slightly up from the previous year and their ability to raise funds in the capital market was severely limited. MC was left with little choice, as they had to consider some major changes within the company if they wished to remain a successful business. Thus, J.W. Marriott, Jr., Chairman of the board and president of MC, turned to Stephen Bollenbach, the new chief financial officer, for ideas and guidance. Bollenbach, who had a reputation for creating innovative financial structures in the hotel industry, proposed a radical restructuring for MC. Bollenbach’s proposal included breaking MC into two separate entities. The new company would retain the service businesses of MC and have......

Words: 2551 - Pages: 11

Premium Essay

Marriott

...shareholders and the bondholders. After Project Chariot is implemented, MII will be of low debt level and HMC will be with high debt. The original bondholders will be tied to risky real estate assets with uncertain appreciation and expected income. Shareholders will gain and bondholders will lose, since splitting the company in two will give shareholders the business upside and bondholders the real-estate downside. 2. In the lecture, we saw a number of different conflicts of interest. Which of these is this project most similar to? The risk that Project Chariot was involved in included “wealth transfer” and “risk shifting”. Under “wealth transfer” risk, the overall wealth of the company would be transferred to the equity holders from the bondholders. The restructure would leave the bondholders with downgraded securities, which diluted the value of the existing bond. Under “risk shifting” risk, equity holders would own a call option on the combined value of HMC and MII. Equity investors will benefit from higher volatility of the business while debt holders will face larger risk, especially in the situation of HMC where financial leverage was high and interest coverage was low. The management team would have the incentive to undertake more risky projects and harm the bondholders even more. 3. Now, consider two different conceptions of managers’ fiduciary duty (see page 7-8 of the case). The narrow view (the “shareholder view”) is that managers are responsible for......

Words: 895 - Pages: 4

Free Essay

Case Study Employee Benefits for Medical Center

...Executive Summary I. Introduction The purpose of this case study is to evaluate the effectiveness of the changes in employee benefits as a result of the merger. II. Situation As of 17 January 1997 our HMO, the Geisinger Health System (GHS) merged with the former Penn State Milton S. Hershey Medical Center (HMC). Since then we have moved forward as Penn State Geisinger Health Systems. The merger brought together two long-standing giants in Pennsylvania health care. Both organizations were not-for-profits, shared a common institutional history, and were brought together to combine their strengths in an increasingly competitive managed health care environment. Penn State’s Hershey Medical Center (HMC) founded in 1963 and included Penn State’s College of Medicine, the University Hospital, and Children’s Hospital. HMC bring with it over 6,000 employees and handled 20,800 inpatients and 356,000 out patients during fiscal year 1995-1996. (Reeves 1999 p. 44). HMC added to our own Geisinger Health System, which served more than 2 million people in Pennsylvania and southern New York. The University hospital system joined our regional health system, which incorporated Geisinger Medical Center, Geisinger Wyoming Valley Medical Center, Maryworth treatment center, the Geisinger Clinic, and the Geisinger Health Plan our 200,000 member HMO. (Reeves 1999 p. 44). Under the previous Penn State University system HMC employees were the beneficiaries of excellent pay and......

Words: 2177 - Pages: 9

Premium Essay

Harvard Management Company Case Study

...university. As stated in the case, “the general objective was to preserve the real value (adjusted for Harvard’s expense growth) of the endowment and its income distribution in perpetuity”. In recent years, the payout ratio (Endowment spending as a % of total Endowment value) has had a target range of 4.5% to 5.0%. In the case’s example, the average growth rate of Harvard’s expenses is 3% above CPI inflation rate and annual gifts to the endowment average about 1.5%. Hence, with a payout ratio target of 4.75%, we would get an Expected Return of 6.25%: 4.75% + 3% - 1.5% = 6.25% Q2. The Policy Portfolio is the “neutral” guide of long-term asset allocation set by the HMC board and it serves as a benchmark of actual performance and as a metric against which compensation of portfolio managers is measured. The aim of the Policy Portfolio is to provide targets for different asset categories as a percentage of the total portfolio, in order to achieve a long-term expected return with the least risk possible. The policy portfolio is reviewed every year and it is modified as a result of changes in market conditions, needs for long-term expected returns, and risk aversion. Jack Meyer’s vision was to keep the actual asset mix “fairly” close to the Policy Portfolio. Fairly close means that the Policy Portfolio included a minimum and a maximum percentage range for each asset class within which portfolio managers could invest, without a previous authorization of the HMC board. If......

Words: 2351 - Pages: 10

Free Essay

Hynudai

...report maps out Hyundai Motor Corporation’s (HMC) internationalisation strategy from its creation in 1967 to the current period. This strategy can be chronologically divided into four phases according to HMC’s objectives and rationale for expansion at different stages of its existence. From the research carried out, it appears that HMC’s choices of specific internationalisation patterns at different stages essentially stemmed from: The dynamics of the relationship between HMC, the Hyundai business group and the South Korean economic and political environment; Political, social and nationalistic incentives deriving from the specificities of Chaebol management and later the influence of the Asian crisis on this management and decision taking processes; Korea’s initial factor dotation, i.e. the prevalence of certain factors over others which pushed the company to seek knowledge and resources abroad at a very early stage; The replication of Japanese strategies (Nissan, Mitsubishi, Toyota). - Due to the complexity of HMC’s environment, strategy over time cannot be illustrated using a single internationalisation framework. The report therefore discusses two different frameworks – namely Porter’s diamond and Dunning’s eclectic paradigm – to analyse the company’s strategy at different stages of its international development. 2 06/06/2013 Research project: Hyundai globalisation strategy Introduction Hyundai Motor Corporation (HMC) is a South Korean multi-national......

Words: 4207 - Pages: 17

Free Essay

Internationalisation of Hyundai Motor Company

...report is to use at most seven IB theoretical approaches to analyze the internationalization of Hyundai Motors Corporation (hereafter HMC). The analysis will seek to test the basic assumptions and concepts of the various theories, identify and question basic deviations of the theories from the internationalization of HMC and search for answers as to the reasons for the deviation. This report begins with a brief historical account of HMC’s evolution, internationalization and current position in the global automobile industry. A brief review of the internationalization theories which are used in this analysis is undertaken. A thorough analysis of various phases of HMC’s internationalization using the theories (where applicable) then follows. A conclusion is drawn whether HMC’s global operations fit or deviated from the assumptions that these theories posit. 2 COMPANY HISTORY AND LITERATURE REVIEW This chapter starts with a brief account of how HMC was formed, its historic timelines and its momentous journey from a knockdown assembler to becoming a hugely successful and influential multinational company in the automobile industry. The various theories of internationalization are then briefly reviewed to lay bare their basic assumptions and key concepts. 2.1 Brief History of Hyundai Motor Company The Hyundai Motor Company’s (hereafter HMC) global success has been one of ‘grass to grace’. It began as a Complete Knockdown (CKD) assembler in 1968 (Lansbury, Suh & ......

Words: 5158 - Pages: 21

Free Essay

Marriott Corporation, Case Study Solution

...HEC Lausanne Corporate Finance Case 3: Marriott Corporation (A) Spring Semester 1. Project Chariot is proposed by MC’s CFO, Stephen Bollenbach, to face the troubles that Marriott Corporation (MC) is currently facing. A glimpse of history is useful to understand the current situation. MC’s main business is to develop hotel properties, to sell them to outside investors and to conclude long-term contracts. In the 70’s MC began to finance its expansion by major borrowings under the impulsion of the new president J.W Marriott, Jr. that abandoned the conservative financing policy of its predecessor (and father). In 1981 the Economy Recovery Tax Act (ERTA) gave enormous incentives for companies to invest (tax write-offs were given for each $ invested in real estate). This pushed MC to develop even more its activities for instance in lodging services or in full service compact hotel. Even though ERTA was ended in 1986 MC continued its massive investments, which lead to a significant accumulation of debt. This was not an issue since the revenue growth was able to sustain the also growing interest payments. Until the drop of income in 1989, which froze capital expenditures. Unfortunately for MC, it was followed by the real estate collapse in 1990 that left MC with massive interest payments for properties that no one wanted to buy anymore given the current economic environment. This situation results in an extremely limited ability for MC to raise funds in the capital......

Words: 2709 - Pages: 11

Premium Essay

Harvard Management Company

...MANAGEMENT COMPANY Answer 1: The general objective of HMC was to try to preserve the real value of the endowment and its income distribution in perpetuity. In the last years the endowment spending was on average 4.6%, annual gifts averaged about 1.5%, and Harvard expenses continued to grow at a rate of 3% above CPI. If in the long run the endowment was able to earn a 6% to 6.5% average return over the CPI inflation rate the university could spend 4.5% to 5% of the endowment. The 6.25% is the average of the real minimum expected returns (6% and 6.5%) that HMC could earn to meet the annual spending. Answer 2: The Policy Portfolio is a long term asset mix that was designed to balance HMC’s aversion to risk against its needs for long-term endowment returns. It is the portfolio that Harvard should maintain under neutral conditions. It had a smaller weighting in US and foreign stocks and a larger weighting in cash and private investments than other managed funds of the time. It is based on long term return and risk assumptions to meet Harvard’s return goals, risk tolerance, and long term scenario. The Policy Portfolio specified neutral weighting for each asset class, but HMC could deviate from these weights by moving the asset class weight away from policy in anticipation of short-term moves. HMC was given a minimum and maximum range for each asset class within which they could move without prior consultation with the HMC Board. From our point of view, the Policy Portfolio is......

Words: 1690 - Pages: 7

Premium Essay

Dimensional Fund Advisor

...using the Mean Variance Optimization method (MVO) to find the set of portfolios that would provide the maximum expected return for a given level of risk and, conversely, the minimum risk for a given level of expected return (“the efficient frontier” of possible combinations of asset classes). To infer variance and covariance of each asset class and estimate all the necessary parameters for the CAPM, HMC examines historical data, asks the opinion of consultants and investment management firms and uses the current market conditions to adjust its assumptions. As the true values are unknown, it is easy to make mistakes that will impact the MVO, which has the disadvantage of being very sensitive to changes in its inputs (small changes cause significant output movement and can result in having an inefficient portfolio). As emphasized in Exhibit 11, we note that HMC, given approximately the same level of risk, has the same expectation for domestic and foreign real returns. This implies that the equity risk premium (E(ri)-rf ) for both asset classes is the same. It suggests that HMC has the same risk aversion when it comes to invest in a foreign asset or a domestic one, it expects the markets to evolve similarly. Due to its simplicity of utilization, The MVO method is very attractive for investor. Using a software as simple as Microsoft Excel and its Solver, the efficient portfolio allocation between classes can be computed in a few minutes. The logic behind the model is......

Words: 798 - Pages: 4

Free Essay

Ib Case

...Master TEW International Business cases - Van Hoof Q 186 uickprinter Koningstraat 13 2000 Antwerpen www.quickprinter.be 2.90 EUR International Business: Cases Case 1: Whirlpool Whirlpool’s Dramatic Turnaround through Internationalization Whirlpool exemplifies how internationalization can rejuvenate declining sales and optimize cost structures. Background Headquartered in Benton Harbor, Michigan, Whirlpool Corporation makes washers, dryers, refrigerators, dishwashers, freezers, and microwave ovens in 13 countries and sells them in 170 others, under brands names such as Whirlpool, Maytag, Magic Chef, Jenn Air, Amana, KitchenAid, Kenmore, Brastemp, and Bauknecht. In 2006, Whirlpool acquired competitor Maytag (horizontal integration) and its brands (Amana, Jenn Air, Magic Chef, and Maytag). Whirlpool generated over $19 billion in 2006 annual sales: 60 percent from North America, 25 percent from Europe, 15 percent from Latin America, and 2 percent from Asia. Operate with 60 manufacturing and technology centers worldwide and 80,000 employees. International Expansion Domestically: (1) The U.S. appliance market matured in the 1990s, and Whirlpool faced low profit margins, intense competition, and more demanding buyers, pressuring management to consider international markets. Internationally: (1) Trade barriers fell, consumer affluence grew, and capitalism flourished. (2) A “global” approach would yield economies of scale in manufacturing, assembly, appliance......

Words: 7306 - Pages: 30