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Asset Classes

10.00%. Private Equity. 9.00%. Hedge Funds. 8.00%. Real Estate. 7.00%. Expected Return. 6.00%. Intl Stocks. 5.00%. US Stocks. 4.00%. Bonds. 3.00%. 0.00%. 5.00%. 10.00%. 15.00%. 20.00%. 25.00%. 30.00%. Expected Risk (standard deviation). Asset Classes.

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Asset Classes

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  1. 10.00% Private Equity 9.00% Hedge Funds 8.00% Real Estate 7.00% Expected Return 6.00% Intl Stocks 5.00% US Stocks 4.00% Bonds 3.00% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Expected Risk (standard deviation) Asset Classes Adapted from Will McLean’s 2/6/09 lecture http://users.iems.northwestern.edu/~armbruster/2009iems326/NUendowment.ppt

  2. Math • ri = expected return of asset class i • C(i,j) = matrix of covariances • xi = % allocation to asset class i • Expected return = xTr • Variance of return = xT C x

  3. Optimization maxx expected return s.t. standard deviation <= 10% maxx xTr s.t. xTCx <= (10%)2 1Tx = 1

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