I am interviewing for an investment consulting firm and have been asked to prepare for case study. Case is inv consulting for a foundation. I have been given the current portfolio and stochastic modelling results and asked to present on strategy.
What can you make out of Std Dev, VaR, probability etc. without having any benchmark or comparable portfolio.
Thanks in advance
Sure you have a benchmark. What is the asset allocation of the hypothetical portfolio? Go make a similar allocation benchmark from public indices and calculate the metrics for those. For instance, let’s simplistically say the institution has a 60/40 allocation to stocks and bonds, all domestic. Do a weighted average of 60% S&P500 / 40% Barclays Aggregate and calculate the Std. Dev. and VaR, etc. of those. I assume your case study gives you info like it was 3-year, 5-year metrics, etc. Then compare your portfolio to those.
As in the real world, analysts and investment leaders must make stuff up on the fly. There often is no template or “right answer.” They are testing your creativity as to how you’ll attack the problem.
Do the above then post back. Happy to answer questions if you supply more details, within reason.
@Destroyer_of_Worlds thanks for your reply. what I am provided with is a hypothetical portfolio which has 70% stocks (domestic and global), 25% (cash and FI) and 5% RE.
Stochastic results provide E®, std dev, probability of achieving target which is inflation plus 5% etc.
I can see that the portfolio will struggle to achieve the objective without other risky asset classes (alternatives)
Why should the portfolio necessarily struggle? Inflation is 2.3% + 5% hurdle = 7.3%.
It depends on the mix of domestic/international and the cash/bond mix. What are those percentages? What was the expected return given in the hypo?
Why do you conclude alternatives are necessary? Depending on what kind of alternatives we are talking about, they haven’t done great compared to stocks in recent years. Sure, there’s always someone invested in the Renaissance Fund or some PE fund that’s killing it, but mostly, institutional investors in alternatives generally expect to earn returns consistent with the 1/10 or 2/20 results from some combination of components in the HFRI Indices. Which again, pretty much all had their lunch eaten by passive domestic equity beta for at least a decade, if not longer, at this point.
Exp return is 6.8%. domestic/global mix is 50:50, cash is 5%, FI 20%
with 7+ year horizon, the fund will struggle if you take manager fees into account plus the chances of inflation going up with all the stimulus being pumped in the economy.
Must inflation necessarily increase? If so, what will the source of the inflation be?
How will alternatives solve this problem? Can the foundation reduce costs/commitments, such that their target return may be lowered?