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FIN 650

Case 31

Hai-Thao Tran

Meharvan Singh

Nadine Alam

Ray Alam

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Summary of Facts

Sigma Sigma is a fraternity that charges membership fees and yearly

dues.

The purpose of the fees is to cover fraternity expenses

ees !aid exceeded expenses and there "as a need to invest the

excess

#xecutive committee did not have time or experience to manage large

accountsNancy $ait is elected to be the fraternity treasurer and she hired

Harriman Ross as the fraternity %nvestment irm

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Summary of Facts

The account performance did not perform "ell compared to the

industry

Nancy &ecided to Audit the firm's "or( and see if they are doing a

good )ob

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Investment Policy

* Excess membership fees

* 75% stocks

* 25% fixed income securities !" #rade

* $5% variation

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Investment Policy

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Does it appear that Harriman Ross and Associates is

following the investment policy established for the

fund?

Policy outline

- +ombination of common stoc(s, preferred stoc(s, corporate bonds,

and S government securities

- und should normally contain ratio of 75% common stocks to 25%

fixed income securities.

- NT#/ 0123 to -123 variation in above allocation percentages

permitted if the fund manager sees fit.

-+orporate bonds must have minimum S4! rating of 5A'.

- +ommon stoc(s must be of investment grade 6uality.

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* %nordinate sums of money ta(en out of common stoc(s and allocated tomoney mar(et funds

* Minimum amount that should be in common stoc(s/ 782 9 12:3 ; ? 1@8, more than ?23 invested in money-mar(etinstruments

* Stoc(s selected are generally of established companies and appear to be

5investment grade'.

* No information on the 6uality of debt

&' (he fund advisor did not follo) the investment policy established for

the fund*

Does it appear that Harriman Ross and Associates is

following the investment policy established for the

fund?

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+uarterly ,han#e in value of the

portfolio

(he -uarterly chan#e

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(hree +uarter ,han#e

(hree.-uarter chan#e from /ecember 01 $34

to September 01 $347

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6ensens portfolio evaluation

Quarter EndingS&P 500 Return

(Table 31.3)

T-Bond Return

(Table 31.4)Portfolio Beta Kr Ke Jensens !l"#a

1$%30%1&'( 5.5!" #.$#" #.%& 5.71% 1.29% -4.42%

3%31%1&') '#.&'(" #.#" #.%& 21.83% -7.07% -28.90%

(%30%1&') (.!)(" #.!" #.%& 5.07% 10.03% 4.96%

&%$&%1&') 5.&!$" '.%" 1.04 5.53% 4.15% -1.38%

Annuali*ed Return 3'.15* '.41* -$.4*

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8o) to include cash bonds and

money market instruments

9sin# ,apital :arket ;ine

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>ecommendation

* The current endo"ment fund advisor did not perform a high 6uality

)ob 4 violated investment policy statement

* Sigma Sigma Sigma raternity should replace Harriman Ross and

Associates

* Reconstruct the investment policy statement