Case Detail

Case Summary

Schumpeter Finanzberatung GmbH: Evaluating Investment Risk

Case Number: 5-314-503, Year Published: 2015

HBS Number: KEL913

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Key Concepts

Financial Management, Investment Management, Risk Management, Statistical Methods, Capital Asset Pricing Model

Abstract

It is April 2014, and the small investment management firm Elke Schumpeter founded twelve years earlier in Frankfurt, Germany, is performing well. The fund, Schumpeter Finanzberatung GmbH (SF), has pursued a low-cost market timing (tactical asset allocation) strategy that targets a mix of 60% in the equity market index and 40% in German treasury bills (T-bills) but that also strategically changes the mix in an attempt to beat the passive benchmark. The fund has grown to just over €400 million and since 2006 has outperformed the passive benchmark by 98 basis points. At the suggestion of some investors, Schumpeter is now considering expanding her firm’s investment thesis to include investments in individual stocks. She has investigated two firms: ThyssenKrupp AG and Deoleo SA. Before making the decision to invest in individual stocks, Schumpeter needs to decide how to measure the risk of those investments. Students are asked to measure the risk of both individual investments (stocks) as well as the risk of SF’s overall portfolio. The case provides a way to explain the intuition behind the capital asset pricing model and to describe the distinction between idiosyncratic (diversifiable) risk and systematic (non-diversifiable) risk.

Learning Objectives

After reading and analyzing the case, students will be able to: identify the statistical distinction between idiosyncratic (diversifiable) risk and systematic (non-diversifiable) risk; analyze the effect of these risks on a portfolio’s overall risk; explain the intuition behind the CAPM’s implication that systematic risk is priced (and thus affects expected returns) and idiosyncratic risk is not priced (and thus does not affect expected returns); discuss the issues that arise in judging the performance of an investment strategy with historical data.

Number of Pages: 16

Extended Case Information

Teaching Areas: Finance

Teaching Note Available: Yes

Geographic: Frankfurt, Germany

Industry: Investment Management

Organization Name: Fictional

Decision Maker Position: Founder

Decision Maker Gender: Female

Year of Case: 2014