Case Studies in Portfolio Management

Correct Answer: Recommend a moderate reduction in the allocation to high-yield corporate bonds, reallocating the proceeds to investment-grade corporate bonds and government securities. Suggest maintaining the current allocation to REITs, as they provide important diversification benefits and the long-term outlook for the asset class remains favorable. Emphasize the importance of adhering to the portfolio's strategic asset allocation and rebalancing discipline to manage risk over the long term.

The best recommendation is to moderately reduce the allocation to high-yield corporate bonds and reallocate the proceeds to investment-grade corporate bonds and government securities. This approach addresses the underperformance issue while maintaining a balanced risk profile. Maintaining the current allocation to REITs is advisable, as they provide important diversification benefits, and the long-term outlook for the asset class remains favorable. Emphasizing the importance of adhering to the portfolio's strategic asset allocation and rebalancing discipline is crucial for managing risk over the long term. Significantly reducing exposure to both high-yield corporate bonds and REITs, as suggested in one of the other options, may be an overreaction to short-term market trends and could hinder the portfolio's ability to achieve its long-term objectives. Conversely, doubling down on the allocation to high-yield corporate bonds and REITs is a high-risk approach that contradicts the portfolio's moderate risk profile. While these asset classes may offer potential opportunities, a more tactical approach to asset allocation is not suitable for a large university endowment with a long-term investment horizon.

Correct Answer: Conduct a thorough review of the portfolio's asset allocation and individual security selections. Identify opportunities to rebalance the portfolio by reducing exposure to underperforming small-cap stocks and reallocating capital to more promising sectors and regions. Implement a currency hedging strategy to mitigate the impact of adverse currency movements on the portfolio's international holdings. Regularly monitor and adjust the portfolio to ensure alignment with the foundation's long-term objectives and risk tolerance.

The best course of action is to conduct a thorough review of the portfolio's asset allocation and individual security selections. By identifying opportunities to rebalance the portfolio and reducing exposure to underperforming small-cap stocks, the team can reallocate capital to more promising sectors and regions. Implementing a currency hedging strategy will help mitigate the impact of adverse currency movements on the portfolio's international holdings. Regular monitoring and adjustment of the portfolio will ensure alignment with the foundation's long-term objectives and risk tolerance. Maintaining the current portfolio composition and asset allocation is not advisable, as the portfolio has consistently underperformed its benchmark over the past three years. While short-term underperformance may occur, it is crucial to address the underlying issues and make necessary adjustments to improve the portfolio's risk-adjusted returns. Significantly reducing the portfolio's allocation to small-cap stocks and international equities may be an overreaction to the recent underperformance. While these asset classes have contributed to the underperformance, completely abandoning them may limit the portfolio's potential for long-term capital appreciation. A more balanced approach involving reallocation and risk management is preferable.

Correct Answer: Recommend a rebalancing of the portfolio to reduce the overweight position in the underperforming sector and reallocate funds to sectors with better growth prospects. Suggest a thorough review of the alternative investments to assess their suitability and potential for future returns, and consider replacing underperforming investments with more promising options. Emphasize the importance of a long-term investment approach and the potential for short-term market fluctuations.

The most appropriate action in this situation would be to recommend a rebalancing of the portfolio to reduce the overweight position in the underperforming sector and reallocate funds to sectors with better growth prospects. Additionally, a thorough review of the alternative investments should be conducted to assess their suitability and potential for future returns, replacing underperforming investments with more promising options as necessary. It is important to emphasize the importance of a long-term investment approach and the potential for short-term market fluctuations to the client. Maintaining the current portfolio allocation and advising the client to stay the course is not the best approach, as it fails to address the client's concerns and the portfolio's underperformance. While short-term market fluctuations are expected, the portfolio manager should take proactive steps to optimize the portfolio's risk-adjusted returns. Proposing a complete overhaul of the portfolio and investing in entirely new sectors and asset classes is an extreme measure that may not be warranted in this situation. Such a drastic change could potentially expose the client to unnecessary risks and transaction costs. Additionally, recommending a significant increase in speculative, high-risk investments is not appropriate given the client's concerns about the portfolio's performance and risk profile.