Susan Griffin: Formulation of a Long-Term Investment Strategy Harvard Case Solution & Analysis

Susan Griffin: Formulation of a Long-Term Investment Strategy Case Study Solution

Expected Return of Portfolio

Interpretation

Expected rate of return is the weighted average mean of return of each security in a portfolio.

Formula

Expected Return of Portfolio = Rp

Rp = w1R1 + w2Rq + ...+ wnRn

Standard deviation of Portfolio

Interpretation

It determines the risk of a portfolio investment. Higher standard deviation of a portfolio shows higher risk of return of a portfolio.

Formula

Standard deviation of portfolio =p

Standard deviation of portfolio with 3 securities can be calculated by the following formula;

Variance of a Portfolio

Interpretation

It also measures the risk attached to a portfolio investment.

Formula

Variance of portfolio = Square of Standard Deviation of Portfolio

Sharp Ratio

Interpretation

Low Sharpe ratio of a portfolio shows higher risk attached to it.

Formula

Sharp Ratio = Rp – Rf /p

Rp = Expected Return of Portfolio

Rf = Risk free rate of return = 2.54% (rate of return on US Treasury Bills)

p = Standard deviation of portfolio

Note: The computations of these measures are given in the Exhibits at the end, and the final results of the computations are given in the Table 1 below:

Table 1: Analysis of Alternatives

Portfolio Alternative Expected Return of Portfolio % Sharp Ratio Variance Standard Deviation
Base 7.85 9.676 8.72 0.55%
Alternative 1 7.34 18.91 7.63 0.25%
Alternative 2 8 6.0664 11.94 0.9%
Alternative 3 8.005 6.0104 11.99 0.9%
Alternative 4 7.12 6.9918 10.32 0.65%

Recommendations

With the deep analysis of the ratios calculated above, Alternative 1 is recommended as its variance and standard deviation is lowest among the alternatives showing lowest risk of return among alternatives. Along with it, it has the highest Sharpe Ratio which implies that the volatility of its returns is lowest among the alternatives. Although its return ranks 4th among the alternatives but due to its major number of favourable ratios Alternative 1 is suggested to Susan Griffin.

Conclusion

Griffin, after the sale of Griffin Incorporated, would require a considerable investment income to meet her regular expenses and to support her family. After a deep analysis of various investment options, the financial needs of Griffin and the risk and return of various portfolio alternatives, as a financial adviser, various recommendations has been given to Griffin to choose from various Benchmark Portfolio alternatives.

 

Exhibits

Exhibit A: Standard Deviation of Portfolios

Computation for Portfolio standard deviation

BASE
Investment option Weight (w)  Standard Deviation (k) w^2 k^2
CASH A 10% 0.40% 0.01 0.000016
US STOCKS B 40% 15.70% 0.16 0.024649
US BONDS C 50% 4.80% 0.25 0.002304
Standard deviation BASE 0.5488%

Alternative 1
Investment option Weight (w)  Standard Deviation (k) w^2 k^2
CASH A 10% 2.30%                                                         0.01 0.000529
US STOCKS B 30% 11.30%                                                         0.09 0.012769
US BONDS C 60% 6.20%                                                         0.36 0.003844
standard deviation Alternative 1 0.00253834

Alternative 2
Investment option Weight (w)  Standard Deviation (k) w^2 k^2
CASH A 10% 0.40%                                                         0.01 0.000016
US STOCKS B 40% 15.70%                                                         0.16 0.024649
US BONDS C 20% 4.80%                                                         0.04 0.002304
FOREIGN STOCKS D 20% 17.70%                                                         0.04 0.031329
FOREIGN BONDS E 10% 11.20%                                                         0.01 0.012544
standard deviation Alternative 2 0.9%

 Alternative 3
Investment option Weight (w)  Standard Deviation (k) w^2 k^2
CASH A 10% 0.40% 0.01 0.000016
US STOCKS B 40% 15.70% 0.16 0.024649
US BONDS C 15% 4.80% 0.0225 0.002304
FOREIGN STOCKS D 20% 17.70% 0.04 0.031329
FOREIGN BONDS E 10% 11.20% 0.01 0.012544
HIGH YEILD BONDS F 5% 5.80% 0.0025 0.003364
Standard Deviation Alternative 3 0.9093%

Alternative 4
Investment option Weight (w)  Standard Deviation (k) w^2 k^2
CASH A 10% 0.40% 0.01 0.000016
US STOCKS B 35% 15.70% 0.1225 0.024649
US BONDS C 15% 4.80% 0.0225 0.002304
FOREIGN STOCKS D 15% 17.70% 0.0225 0.031329
FOREIGN BONDS E 10% 11.20% 0.01 0.012544
HIGH YEILD BONDS F 5% 5.80% 0.0025 0.003364
Standard Deviation Alternative 4 0.6551%

 Exhibit B: Expected Returns of Portfolio

Computation For Expected Return
Base
investment option Weight (w) Return Expected Return
CASH 10% 2.30% 0.23%
US STOCKS 40% 11.30% 4.52%
US BONDS 50% 6.20% 3.10%
TOTAL     7.85%
Alternative 1
investment option Weight (w) Return Expected Return
CASH 10% 2.30% 0.2300%
US STOCKS 30% 11.30% 3.3900%
US BONDS 60% 6.20% 3.7200%
TOTAL     7.34%
Alternative 2
investment option Weight (w) Return Expected Return
CASH 10% 2.30% 0.2300%
US STOCKS 40% 11.30% 4.5200%
US BONDS 20% 6.20% 1.2400%
FOREIGN STOCKS 20% 6.40% 1.2800%
FOREIGN BONDS 10% 7.30% 0.7300%
TOTAL     8.00%
Alternative 3
investment option Weight (w) Return Expected Return
CASH 10% 2.30% 0.2300%
US STOCKS 40% 11.30% 4.5200%
US BONDS 15% 6.20% 0.9300%
FOREIGN STOCKS 20% 6.40% 1.2800%
FOREIGN BONDS 10% 7.30% 0.7300%
HIGH YEILD BONDS 5% 6.30% 0.3150%
TOTAL     8.0050%
Alternative 4
investment option Weight (w) Return Expected Return
CASH 10% 2.30% 0.2300%
US STOCKS 35% 11.30% 3.9550%
US BONDS 15% 6.20% 0.9300%
FOREIGN STOCKS 15% 6.40% 0.9600%
FOREIGN BONDS 10% 7.30% 0.7300%
HIGH YEILD BONDS 5% 6.30% 0.3150%
TOTAL     7.12%

Exhibit C: Variance of Portfolios

Computation For Variance
Portfolio Standard Deviation Variance
Base 0.5488% 0.0030%
Alternative 1 0.2538% 0.0006%
Alternative 2 0.9000% 0.0081%
Alternative 3 0.9093% 0.0083%
Alternative 4 0.6551% 0.0043%


Exhibit D: Sharpe Ratio of Portfolios

Computation For Sharpe Ratio
Portfolio Expected Return of Portfolio Risk Free Rate of Return Standard Deviation of Portfolio Sharp Ratio
Base 7.85% 2.54% 0.5488% 9.6760
Alternative 1 7.34% 2.54% 0.2538% 18.9100
Alternative 2 8.00% 2.54% 0.9000% 6.0664
Alternative 3 8.0050% 2.54% 0.9093% 6.0104
Alternative 4 7.12% 2.54% 0.6551% 6.9918

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