Description
The documentation explaining about Partners Healthcare. It highlights the objectives of the case and also the various assumptions made. Finally it describes the analysis of the case. It then deescribes the various alternatives and does an analysis of these alternatives in order to identify the better one.
Analysis on PARTNERS HEALTHCARE
Security Analysis and Portfolio Management
Partners Healthcare
Objective: ? Mr. Manning had to determine whether addition of real assets into the LTP pool would help the hospital? ? To determine if there is a single fit all scheme that could be applied for all the investors and hospitals? Assumption: ? The environment and the economy continue to be the same as the one that was present in the time frame from which the historical data was taken. ? As the bond return is 5.4%, the minimum return that an investor will look at in a risky environment will be more than that. Here the assumption is that, the investors will look at getting a minimum of 11.65% return (since this is the return on baseline LTP investments). ? Given that the historical data is for a long time horizon (34 years), the assumption is that the data follows a normal distribution. Analysis: ? From tables 5 to 7, we see that when either commodity or REIT is purchased the standard deviation is lower for same returns than when the same are not purchased. Based on this, we believe that the company should invest into real assets. Also addition of real assets would further diversify the portfolio and the data from the exhibits confirm that these in fact reduce the overall risk. Hence we suggest that Partners Healthcare should invest into real assets. ? The next step is to determine which of RETI, commodities or a combination of both is a better investment option. ? From the case facts, we clearly know that REIT is a low risk low return option whereas commodity is a high risk high return option.
?
From the scatter plot for exhibit 3, it is seen that the standalone risk of commodities is greater than all the other options and the returns are lesser than all but REIT.
?
But from exhibit 3 we can observe that commodities are negatively or poorly correlated to the other options. From this, it is clear that when commodity is combined with US equity, bonds or REITs it will help to partly overcome the risk that the investor would face due to fluctuations in the returns of the other assets. Hence out of real assets and commodity, if only one option has to be chosen then commodity would be preferred.
? From the case, it is seen that with the current investment portfolio the returns are 11.65% with a standard deviation of 12.02%. LTP by nature is designed to provide high returns at high risk. Hence the new investment should have higher returns at same or lower risk as compared to the current investment returns. Given these conditions, we believe the company has 3 alternatives to choose from. The details of the same are indicated in the table below.
Table 1 – Details of Selected Portfolios Asset Allocation Bonds REITs 0.000 0.000 0.000 N/A N/A 0.010
Portfolio 11 (Exhibit 7) 12 (Exhibit 7) 11 (Exhibit 8)
Expected Returns 12.00% 12.50% 12.00%
Std Deviation 10.98% 12.44% 10.98%
US Equity 0.383 0.557 0.387
Foreign Equity 0.356 0.355 0.354
Commodities 0.261 0.088 0.250
Alternative 1: Portfolio 11 of Exhibit 7 and 8 From the table we can see that both the portfolios (portfolio 11 of exhibit 7 and 8) provide the same risk-returns combinations. Also by investing in 5 options, it provides an opportunity for further diversification and hence we conclude that portfolio 11 of exhibit 8 should be preferred over portfolio 11 of exhibit 7.
Alternative 2: Portfolio 12 of Exhibit 7 This is a high risk high return option available for investment.
Comparison of Alternatives: By comparing the returns and risk of the 2 alternatives, it can be seen that alternative 2 provides a better return than alternative 1 but with a higher risk. Also the main aim is to invest in a portfolio that provides a return that is greater than 11.65%. From the normal distribution of both the options it can be seen that investors have a higher probability of getting a higher return when they invest in Alternative 2 than when invested in Alternative 1.
Diagram 1 – Normal Distribution for Alternative 1
Diagram 2 – Normal Distribution for Alternative 2
The probabilities of getting a return higher than 11.65% are as per the table below.
Expected return 12.00% 12.50% probability of getting returns higher than 11.65% 60.53 70.82
Alternative 1 2
Std dev 10.98% 12.44%
z value 0.27 0.55
Conclusion: ? Partners Healthcare should invest in real assets considering the fact that investment in these reduce the risk as compared to the current investment portfolio.
? LTP is designed to be a high risk high return investment. Moreover the case states that the risk bearing ability of different hospitals is different. Now let us consider the options mentioned below. ? Alternative 1: Considering the distribution to be normal we can calculate that the probability of getting retunes higher than 11.65% is 60.53%. However the risk is lower in this case. Investors with lower risk appetite will prefer this investment portfolio. ? Alternative 2: Considering the distribution to be normal we can calculate that the probability of getting retunes higher than 11.65% is 70.82%. However the risk is higher. Investors keen on higher returns at the cost of higher risk will prefer this portfolio. Hence we suggest that it is not prudent to design a fit all portfolio.
doc_159307178.docx
The documentation explaining about Partners Healthcare. It highlights the objectives of the case and also the various assumptions made. Finally it describes the analysis of the case. It then deescribes the various alternatives and does an analysis of these alternatives in order to identify the better one.
Analysis on PARTNERS HEALTHCARE
Security Analysis and Portfolio Management
Partners Healthcare
Objective: ? Mr. Manning had to determine whether addition of real assets into the LTP pool would help the hospital? ? To determine if there is a single fit all scheme that could be applied for all the investors and hospitals? Assumption: ? The environment and the economy continue to be the same as the one that was present in the time frame from which the historical data was taken. ? As the bond return is 5.4%, the minimum return that an investor will look at in a risky environment will be more than that. Here the assumption is that, the investors will look at getting a minimum of 11.65% return (since this is the return on baseline LTP investments). ? Given that the historical data is for a long time horizon (34 years), the assumption is that the data follows a normal distribution. Analysis: ? From tables 5 to 7, we see that when either commodity or REIT is purchased the standard deviation is lower for same returns than when the same are not purchased. Based on this, we believe that the company should invest into real assets. Also addition of real assets would further diversify the portfolio and the data from the exhibits confirm that these in fact reduce the overall risk. Hence we suggest that Partners Healthcare should invest into real assets. ? The next step is to determine which of RETI, commodities or a combination of both is a better investment option. ? From the case facts, we clearly know that REIT is a low risk low return option whereas commodity is a high risk high return option.
?
From the scatter plot for exhibit 3, it is seen that the standalone risk of commodities is greater than all the other options and the returns are lesser than all but REIT.
?
But from exhibit 3 we can observe that commodities are negatively or poorly correlated to the other options. From this, it is clear that when commodity is combined with US equity, bonds or REITs it will help to partly overcome the risk that the investor would face due to fluctuations in the returns of the other assets. Hence out of real assets and commodity, if only one option has to be chosen then commodity would be preferred.
? From the case, it is seen that with the current investment portfolio the returns are 11.65% with a standard deviation of 12.02%. LTP by nature is designed to provide high returns at high risk. Hence the new investment should have higher returns at same or lower risk as compared to the current investment returns. Given these conditions, we believe the company has 3 alternatives to choose from. The details of the same are indicated in the table below.
Table 1 – Details of Selected Portfolios Asset Allocation Bonds REITs 0.000 0.000 0.000 N/A N/A 0.010
Portfolio 11 (Exhibit 7) 12 (Exhibit 7) 11 (Exhibit 8)
Expected Returns 12.00% 12.50% 12.00%
Std Deviation 10.98% 12.44% 10.98%
US Equity 0.383 0.557 0.387
Foreign Equity 0.356 0.355 0.354
Commodities 0.261 0.088 0.250
Alternative 1: Portfolio 11 of Exhibit 7 and 8 From the table we can see that both the portfolios (portfolio 11 of exhibit 7 and 8) provide the same risk-returns combinations. Also by investing in 5 options, it provides an opportunity for further diversification and hence we conclude that portfolio 11 of exhibit 8 should be preferred over portfolio 11 of exhibit 7.
Alternative 2: Portfolio 12 of Exhibit 7 This is a high risk high return option available for investment.
Comparison of Alternatives: By comparing the returns and risk of the 2 alternatives, it can be seen that alternative 2 provides a better return than alternative 1 but with a higher risk. Also the main aim is to invest in a portfolio that provides a return that is greater than 11.65%. From the normal distribution of both the options it can be seen that investors have a higher probability of getting a higher return when they invest in Alternative 2 than when invested in Alternative 1.
Diagram 1 – Normal Distribution for Alternative 1
Diagram 2 – Normal Distribution for Alternative 2
The probabilities of getting a return higher than 11.65% are as per the table below.
Expected return 12.00% 12.50% probability of getting returns higher than 11.65% 60.53 70.82
Alternative 1 2
Std dev 10.98% 12.44%
z value 0.27 0.55
Conclusion: ? Partners Healthcare should invest in real assets considering the fact that investment in these reduce the risk as compared to the current investment portfolio.
? LTP is designed to be a high risk high return investment. Moreover the case states that the risk bearing ability of different hospitals is different. Now let us consider the options mentioned below. ? Alternative 1: Considering the distribution to be normal we can calculate that the probability of getting retunes higher than 11.65% is 60.53%. However the risk is lower in this case. Investors with lower risk appetite will prefer this investment portfolio. ? Alternative 2: Considering the distribution to be normal we can calculate that the probability of getting retunes higher than 11.65% is 70.82%. However the risk is higher. Investors keen on higher returns at the cost of higher risk will prefer this portfolio. Hence we suggest that it is not prudent to design a fit all portfolio.
doc_159307178.docx