Case: Yale Investment Office

Real assets (27.8% share, 31.6% return):

• Pros:

o Historically considered to be safe

o Not as exposed to inflation

• Cons:

o Illiquid,

o Lower return due to many investors (heated market).

o Originally thought to secure against downturn in the American stock market, but the diversifying effect is decreasing due to the heating of the market.

• Buy or sell:

o Reduce a little. There are not many very profitable investment opportunities in the real estate market in the future as many investors have entered this market.

Domestic equity (11.6% share, 16.4% return) :

• Pros:

o Diversifying

o Liquid and heavy research market

o Highly skilled managers in this market

o Successful investment model. Easier to beat the market/ find good investment opportunities because the market is familiar and managers are very skilled

• Cons:

o Not optimal risk-return relationship as the Monte Carlo study wants to eliminate domestic equity

• Buy or sell:

o Buy: Increase liquidity

o Sell: Real estate is more correlated to the US stock market now, should not increase share in both real estate and domestic equity, should decrease one of them.

o Buy triumphs sell: Increase share of domestic equity and reduce share of real assets.

Foreign equity (14.6% share, 35% return):

• Pros:

o Diversification effects as it is only partly correlated with the US market

o Emerging markets: Even more diversifying effects as it has little correlation with the US market

o More attractive opportunities: Easier to find undervalued securities due to fewer investors (less demand for investments), can give higher return

o Attractive risk-return relationship

o Twice as high growth in emerging markets as in developed markets

o Changes in the market presents great opportunities for active and highly skilled managers to earn a high return

• Cons:

o More challenging to find qualified managers, does not have the same advanced analytical skills

o Risky: Poorer regulations,...