State of South Carolina Harvard Case Solution & Analysis

State of South Carolina Case Solution

Client Objective and Constraints for the South Carolina State Pension Fund:

The main objective behind the change in the investment policy of the state pension funds was to diversification into the equity securities to increase the return on investment without increasing the risk to a substantial level.
However, the state is banned in the South Caroline from the late 1800 due the fraudulent transactions in the local railroad stocks. Due to the bans the State Carolina’s pension funds’ performance was stable but the returns were so low that the unfunded liability increased by 120% over the past nine years from $1.5 billion to $3.4 billion.
The only two options that could have been taken by the treasurer were to increase the contributions to the fund made by the taxpayers of the South Caroline or to invest in the securities that have the higher returns.
However the State Legislature approved the bill to permit the state to invest in the equities but it took a significant time which caused the delays which were becoming increasingly costly to the State Pension Funds as the unfunded liabilities were increasing significantly.

Benefits of Adding Equity to the Existing Bond-Only Portfolio:

Adding the equity in the Bond-only portfolio will reduce the risk of the overall risk of the portfolio. The rise in the interest rate can cause the drop in the prices of bonds due to which the state can face a huge loss. The introduction of equity in the portfolio can balance the portfolio which can protect the funds from the large drop in the value.
The balance of both type of funds bond and equity can cancel out the effect of each of them performing bad/ Stock prices might rise with the increase in the interest rate and drive down the bond values and if the bonds might gain or hold steady when the stocks are not performing well.
In the long run it is seen that the equities over perform the bonds over the long-term investment horizons. The introduction of equities in the portfolio can the help the State of Carolina in reducing the loss like it occurred in the April 1996 when the $13.4 million portfolio booked the loss of $400 million.

Performance of Corporate Bonds:

The corporate bonds are the debt security issued by the corporation and sold to the investors. Corporate bonds are usually considered to have the higher risk than the government bonds because if it the interest rates are almost always higher.
The mean for the corporate bonds annual return over the last eight decades is 5.82% which if compared to the treasury government bonds is higher which has the return of 5.57% over the same period of time. The performance compared to the treasury bills is also higher which gives the return of 4.03% over the same period of time. However, the return of the common stock is far more than the corporate bonds with the mean of 12.96% over the same period.
The standard deviation of the corporate bonds measures the dispersion of a set of set of data from the mean. The more spread apart the data, the higher the deviation. It measures the volatility in the investment annual rate of return. It is also known as the historical volatility and is used as a gauge for the amount of expected volatility.The State of South Carolina Case Solution

The standard deviation of the corporate bonds is 9.09 which if compared to the T-bills are higher which has the standard deviation of 3.51 but is lower than the treasury bonds of 9.21. However the standard deviation of common stock is very high compared to the corporate bonds with the standard deviation of 20.32. The Sharpe ratio for the corporate bonds is 42%..............

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