Hmc Case

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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…...

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