Tiêu đề Level III V5 LM01 Essay Quiz Solutions.pdf ✅

Level III Portfolio Management for Institutional Investors Essay Quiz Solution Copyright © IFT. All rights reserved www.ift.world Page 1 Topic: Portfolio Management - Institutional The Leighton Foundation Case Scenario. Minutes: 12 Part A The primary investment objective of the Leighton Foundation is to generate real (net of fee) annual returns of at least 5% of average assets to keep its tax-exempt status. The expected annual volatility of returns should be 15% - 20%. This investment objective is consistent with Leighton’s mission to maintain the purchasing power of its assets. A secondary investment objective may include outperforming the policy benchmark with a specified tracking error budget as the Foundation considers changing its investment strategy and asset mix. Part B Given the expected returns provided by Pham, a portfolio of 40% public US equities, 40% US Treasury portfolio, 10% in investment-grade developed markets bonds, and 10% in cash, invested passively, is expected to provide a nominal expected return of 5.1% per year (= 0.4 × 8% + 0.4 × 3% + 0.1 × 5% + 0.1 × 2%). Given the expected inflation of 2% and management fees of 0.3%, this implies a 2.8% real rate of return, which falls short of the 5% spending rate and the stated objective of a 5% real rate of return. The Foundation will see its purchasing power deteriorate over time if it continues with its current asset mix. It will not maintain its spending requirement and will not be eligible for its tax-exempt status. Part C Asset mix III is the most appropriate given Leighton Foundation’s investment objectives. Justification: To achieve a 5% (net of fee) real rate of return, the Foundation will need to diversify its assets globally. 1. With $1 billion in AUM and likely access to a wider investment universe, it should allocate some assets to hedge funds and private equity. It also needs to engage in active management for additional returns. The volatilities of returns of all three asset mixes are within the 20% limit. Asset Mix II does not invest in alternatives with an expected real return lower than Asset Mix III. Therefore, Asset Mix III is more suitable than Asset Mix II. 2. Although Asset Mix I has an expected real return slightly higher than Asset Mix III, it is a significant change from the current allocation. It has 55% of its assets invested in alternatives. The size of the investment team is small, with no prior experience in managing hedge funds and private equity portfolios except for the new investment officer. Therefore, Asset Mix III seems more appropriate than Asset Mix I. Recommendation for implementing the new asset allocation