Kloss Investments is an investment adviser whose clients are small institutional investors. Muskogh Charitable Foundation (the Foundation)
Question:
Kloss Investments is an investment adviser whose clients are small institutional investors.
Muskogh Charitable Foundation (the “Foundation”) is a client with $70 million of assets under management. The Foundation has a traditional asset allocation of 65% stocks/35%
bonds. Risk and return characteristics for the Foundation’s current portfolio are presented in Panel A of Exhibit 1.
Kloss’ CIO, Christine Singh, recommends to Muskogh’s investment committee that it should add a 10% allocation to hedge funds. The investment committee indicates to Singh that Muskogh’s primary considerations for the Foundation’s portfolio are that any hedge fund strategy allocation should:
a) limit volatility,
b) maximize risk-adjusted returns, and
c) limit downside risk.
Singh’s associate prepares expected risk and return characteristics for three portfolios that have allocations of 60% stocks, 30% bonds, and 10% hedge funds, where the 10%
hedge fund allocation follows either an equity market-neutral, global macro, or convertible arbitrage strategy. The risk and return characteristics of the three portfolios are presented in Panel B of Exhibit 1.
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