The Harvard Management Company and Inflation Protected Bonds Essay examples

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Pages: 8

The Harvard Management Company and Inflation Protected Bonds

Executive Summary

The Harvard Management Company (HMC) was established in 1974 with the goals providing world-class investment management focused solely on generating strong results to support the educational and research objectives of Harvard University. The company’s goals are to correctly measure Harvard University’s financial requirements and to provide investment opportunities that will accurately meet or exceed them with the lowest amount of risk assumed by the institution.

In order to best meet these investment needs the Harvard Management Company must continually revise the Harvard Policy Portfolio, which denotes how assets will be allocated across all
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This is because HMC’s numbers are tabulated from 20 years’ worth of data instead of the longer sample used other practices. This makes sense for Harvard’s management of their portfolio because it better reflects the investment climate in which they will be making decisions for their portfolio’s asset allocation. New asset classes and derivatives have been added to the investment atmosphere that greatly effect expected and real returns and they’re willing to shrink their data set in order to hopefully get a better snapshot of their current investing climate in order to optimize their return. If part of HMC’s constraints were to invest in cash (like money market instruments or short term CD’s) and only one other asset class, they would need to identify the portfolio where the line with the risk-free investments is tangent to the efficient frontier of risky investments. This tangent portfolio is also known as the efficient portfolio. To identify the most efficient portfolio of two assets, one would use the Sharpe Ratio. This ratio is derived by taking the excess return (real return – risk free rate) divided by the standard deviation of the asset class. The highest Sharpe Ratio shows what asset, when combined with risk free investments, will be the most efficient portfolio choices. Private equity has proven to have the highest Sharpe Ratio, and in