Partners Healthcare Case Solution

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Partners Healthcare

Executive Summary

Partners Healthcare is considering the introduction of real assets into the organization’s portfolio. The analysis will demonstrate the effects of having one risky asset and one risk-free asset in a portfolio. Our analysis will also show that the introduction of real assets can decrease the risk of the hospital’s portfolio. Each hospital in the healthcare system can determine the appropriate portfolio mix based on their desired expected level of return and risk they are willing to accept.

I. Mixes of STP & LTP
Suppose different hospitals within the Partners system chose different mixes of the “risk-free” STP (short term pool) and the baseline LTP (long term pool), whose future expected returns and risks are shown in Exhibit 3. On Exhibit 3, plot the returns and risks of the various potential portfolios that can be formed by allocating funds between the STP and baseline LTP. What shape does a line drawn through these portfolios take? Why? In contrast, what would the risk-return opportunities available to the hospitals be if they could invest only in the STP and US Equities? Exhibit 1a plots the expected returns for the mix of portfolios with the “risk-free” STP and the baseline LTP. A straight line can be drawn through these portfolios as the expected return and standard deviation (i.e. volatility) increases with the greater weight allocation to the LTP. The straight line is observed due to these portfolios being comprised of a risk-free asset (i.e. STP) and a risky asset (i.e. LTP). Due to the composition, the expected return and risk are linearly related to the weight in the risky asset. It should be noted that the highest Sharpe ratio is from the portfolio that invests 90% in STP and 10% in LTP.
Exhibit 1b plots the risk-return opportunities if only STP and US Equities are invested in. This chart…...

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