Case Detail

Case Summary

Selecting Mutual Funds for Retirement Accounts (B)

Case Number: 5-118-006(B), Year Published: 2018

HBS Number: KE1061

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Authors: Phillip Braun

Key Concepts

Decision Making, Financial Instruments, Financial Management, Financial Planning, Investment Management, Mutual Funds

Abstract

Alice Monroe was an admissions officer at the Kellogg School of Management at Northwestern University. It was early January 2017 and Alice had enrolled in Northwestern's 403(b) retirement plan two months earlier. After spending a considerable amount of time examining the mutual funds available through the university's retirement plan, Alice had picked two to invest in: a large-cap equity growth fund and a mid-cap equity fund. (See the related case "Selecting Mutual Funds for Retirement Accounts (A).") Her initial allocations were 50% of her investment dollars in each fund.

Upon further reflection, however, she realized these initial allocations were somewhat simplistic. She recalled, from an investments class she had taken at college, the topic of modern portfolio theory, which held that by adding more funds to her portfolio she might be able to achieve greater diversification and thereby reduce the overall risk of her portfolio and/or achieve a higher expected return. Alice now was considering adding an intermediate-term bond fund and a real estate fund to her retirement account.

She hoped to use modern portfolio theory to prove that these new funds would indeed help her diversify her portfolio. If they did, she would also reassess her portfolio weights to determine the optimal allocation.

Learning Objectives

Visualize diversification by observing changes in the minimum-variance frontier; measure the effect of diversification on the risk-return trade-off between a risk-free asset and the tangent portfolio on the minimum-variance frontier by plotting and comparing capital allocation lines created using different investment sets and by comparing the slopes of capital allocation lines between different scenarios; calculate optimal portfolios using modern portfolio theory.

Number of Pages: 16

Extended Case Information

Teaching Areas: Finance

Teaching Note Available: Yes

Geographic: United States

Industry: Mutual funds

Organization Name: Northwestern University

Decision Maker Position: Admissions officer

Decision Maker Gender: Female