MONASH

BUSINESS
SCHOOL

Case motivation
PARTNERS HEALTHCARE

BFX3999 Finance and Society

LEARNING OBJECTIVES

 Understand how diversification works in an asset allocation setting

with a small number (3 to 5) of risky securities.

 Understand how to extend the relatively simple case of 3-5 assets to

n risky assets.

 Understand the importance of correlation (risk reduction) in order to

improve a portfolio’s risk/return profile.

 Understand when a risk-free investment is included in the opportunity

set, a single combination of risky investments will be optimal for all
investors.

 Develop a deeper appreciation for the use of excel in identifying the

optimal portfolio.

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CASE SYNOPSIS

Partners Healthcare provides you with an intuitive and geometric

introduction (or hopefully recap) to mean variance analysis, and the
opportunity to see how optimal portfolio analysis based upon mean
variance theory can be employed to help allocate portfolio capital
across risky asset classes. The focus of this case is on developing an
understanding of the geometry and statistics behind portfolio
optimisation, as well as an appreciation of its application and
limitations.

The underlying problem is to identify: how much, if at all, should

relatively non-traditional but diversifying asset classes like real estate,
commodities, and other “real assets” be used in an investment
portfolio to enhance an institution’s risk/return profile.

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QUESTIONS TO BE ADDRESSED IN REPORT SUBMISSIONS

 How does the correlation between two stocks affect the risk and
return of portfolios that combine them?

 Suppose different hospitals within the Partners System choose

different mixes of the “risk-free” STP and the baseline LTP.
Calculate and then plot the returns and risks of the various potential
portfolios that can be formed by allocating funds between STP and
baseline LTP. What shape does a line drawn through these
portfolios takes? Why? In contrast, what would the risk-return
opportunities available to the hospitals be if they could invest only in
STP and US equities?

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QUESTIONS TO BE ADDRESSED IN REPORT SUBMISSIONS (cont.)

 Plot the curve for risks and expected returns of the optimal portfolio
combinations involving the 4 asset classes (refer Exhibit 6), namely;
US equities, Foreign equities, Bonds, and REITS. Do the same for
the 4 asset classes (refer Exhibit 7), namely; US equities, Foreign
equities, Bonds and Commodities. Do the same for the 5 asset
classes (refer Exhibit 8), namely; US equities, Foreign equities,
Bonds, REITS, and Commodities. How much does each of the real
assets improve the potential opportunities for the hospitals investing
in LTP? What are the important factors that determine the degree of
improvement?

 Consider the hospital that wishes to achieve the 6% total expected

return on the portfolio. How does the introduction of real assets alter
the risk and composition of their most attractive portfolio?

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SUBMISSION (CASE: PARTNERS HEALTHCARE)

 You may discuss in groups but document and submit individually:

o Penalties will apply if we spot collusion

 You must:
o Document the assumptions you have made (if any) that are not in the case
o Show calculations and results as an appendix (not always required)
Depending on your formatting, about 2-3 pages and not more than 3 pages in
1.5 spacing, 12 point font.
Note: the 3-page limit does not include references and appendices.

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SAMPLE TEMPLATE

Key points facts and problems:

1. What are the problems and the key issues that arise

2. Address the given discussion points or questions

3. Conclusions and recommendations if any

Do Not use a Q and A answer format: make this a business type briefing

And avoid simply restating what is already in the case

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