FBE555_2006Fall_BlueStar - Executive Summary Prepared for...

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Executive SummaryPrepared for GAITS FoundationBluestar InvestmentsMatt CarrierAbel MontanezPaul IntrarakhaAndrew CooperJordan WiensErin LaNovember 14, 2006
Asset Allocation RecommendationOver 90% of a portfolio’s return is attributable to the asset allocation decision.1The GAITS Foundation currently has an asset allocation of:Cash35%Bonds23%US Stocks38%European Stocks4%Total100%The $36.5 billion dollar portfolio has an expected annual return of 5.59% withexpected annual volatility of 8.24%, according to the 2006 Asset AllocationStudy2.Bluestar Investments conducted an asset allocation analysis todetermine whether or not the Foundation’s current allocation was optimal.Theasset allocation modeling process consisted of the following steps:1.Capital Markets Assumption – projection of risk, return and correlationof asset classes.2.Asset Side Simulations – determine the appropriate asset classes andacceptable ranges of asset classes.3.Mean Variance Optimization – optimization of objectives and risk returntradeoffs to create efficient portfolios.Bluestar performed mean variance optimizations with different asset class mixes.Based on our analysis we believe that further diversification into the followingasset classes should be examined, as opportunities in return enhancement andrisk reduction exist:Emerging Markets Equity and CommodititesBluestar further recommends that the merits of the EAFE stock be evaluated as asubstitute for the current Europe asset allocation, in order to gain wider exposureto the international markets.The EAFE asset has country weights in Europe,Asia, and the Far East.The most often used benchmark for internationaldeveloped markets is the Morgan Stanley Capital International Europe, Asia, andFar East Index (MSCI EAFE).The returns correlation of the EAFE Index with theU.S. Equity market is not perfect, and therefore provides diversification benefit bypotentially lowering the volatility of the overall portfolio.1According to a study by Brinson, Singer and Beebower, Financial Analysts Journal, 1991:“Determinants of Portfolio Performance II: An Update”2Wilshire Associates 2006 Asset Allocation Study
The efficiency of this market is also lower thanthat of the U.S. market, due to lack of completecoverage by security analysts as a result of thecountry and culture barriers.Therefore, theopportunities for managers to add value throughactive management are much greater.RECOMMENDATIONSOptimization 1Should Emerging Markets be added to the allocation mix?T-Bill35%19%Stocks38%25%LT Treas23%24%EAFE4%20%EMF--12%Return5.61%6.40%Risk8.17%10.24%Sharpe Ratio0.320.33Current MixPortfolio A(Emg Mkts)The mean variance optimization shows that Emerging Markets should be addedto the GAITS Foundation portfolio.The addition of Emerging Markets increasesthe portfolio’s return from 5.61% to 6.40%, and volatility from 8.17% to 10.24%.

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Term
Spring
Professor
Swartz
Tags
Standard Deviation, Variance, Modern portfolio theory, sharpe ratio

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