Getting started using Ibbotson software: An unofficial tutorial MGT 544 Stanley Martinez, TA

Sequencing: 1. Encorr Analyzer 2. Inputs generator 3. Encorr Optimizer Encorr Attribution (not covered today) (Note: Encorr Allocator is a new feature to ver. 8.0)

1. Encorr Analyzer (Start here) File>New Folder  Select series Options include: 1. Raw Data 2. Derived Data 3. Case Files Raw Data> Ibbotson Database> Stocks, Bonds, Bills and Inflation Left click on a series to add it to selected series on the right Select each of the following 1. S&P 500 TR (Domestic large cap equities) 2. US Small Stk TR (Domestic small cap equities) 3. US IT Gvt TR (Domestic intermediate –3-10 year– Treasury notes) 4. US 1 Yr. Gvt TR (A cash surrogate w/ higher E(r))

1. Encorr Analyzer Other useful features A. Query: Helps you quickly look up a series 1. Select the entire Ibbotson Database folder 2. Type “Farm” to right of “Series Name” in the Time Series Query dialogue box 3. Click Search  At left will appear three data series containing returns for Farm Real Estate. 4. Select and Add Farm RE TR (Repeat this process searching for “EAFE” under the “World Capital Markets-- Equity” folder. Select and Add “MSCI EAFE TR”)

1. Encorr Analyzer Other useful features 2. Transform: Helps you convert A. Series from real to nominal B. From foreign currency to $US or another currency (Neither are necessary now, but these may play a role in “Going Global” due Feb 9)

1. Encorr Analyzer You should now have six data series. Hit OK>Date Settings Select Common Date Settings: This truncates the set to Annual  a file containing annual total returns for all six assets classes Save as: create a folder and save it somewhere i.e., “Tutorial.fld” You now have a series that can be used for generating optimization inputs >Create Inputs

2. Inputs Generators Expected Return Computation Method: Select “Arithmetic Mean” Expected Return: Use this to adust from historical inputs Ibbotson: Building blocks approach using bootstrapping method 1. Select “International Component” for MSCI-EAFE TR 2. Select “Building Block Equity” for “US Small Stock TR” 3. Select “Inputs Summary” folder: shows E(r), σ, ρ for each asset shows covariance matrix between each asset 4. Click on an icon that looks like this  to create an Optimization file

3. Encorr Optimizer From “Available Assets” add the following assets to “Selected Assets” S&P 500 TR U.S. Small Stk TR U.S. IT Govt TR U.S. 1 Yr TR MSCI EAFE TR From “Available Assets” add the following asset to “Liabilities” Farm R.E. TR

3. Encorr Optimizer Add Constraints from “Constraints” folder Minimum 10% US Int. Gov Maximum 25% each to EAFE and Small Stocks These are typical risk constraints impose by plan sponsors or endowment funds “Cost to Increase” and “Cost to Decrease = 0

3. Encorr Optimizer Report features A. Efficient frontier: see right Plots portfolio assets relative to liabilities in mean-variance space B. Portfolio mix given 13.28% expected annual standard deviation: see right By dragging on the standard deviation scale on the X axis, we can change the optimal portfolio mix for a given level of risk

3. Encorr Optimizer Report features C.Wealth percentiles (Trumpets) Given the stated portfolio mix and a lognormal return distribution, what is the portfolio’s return distribution over time? D. Return percentiles (Tulips) What is the distribution of the portfolio’s expected return through time given the policy mix?

3. Encorr Optimizer Report features E.Frontier area: How do changes in the efficient portfolio weights change with a portfolio’s target standard deviation of returns? There are many more tools. These are just a few to get you started.