Pravda Asset Management

This case examines the importance of forecasting expected returns in asset allocation decisions. Although the case is targeted to MBA students in an investments or portfolio management course, it is also appropriate for an advanced undergraduate course. It is written from the perspective of a new employee at a small investment management firm that was surprised by the market crash of 2008 and subsequent market rebound in 2009. Students must analyze the ability of simple valuation ratios to forecast returns and will use a smoothed price-to-earnings ratio to forecast future returns. In addition, students must use their regression results to form a simple (two-asset) tactical asset-allocation strategy to better understand the importance of forecasting expected returns for asset-allocation decisions and how such forecasts could be used to form a simple tactical asset-allocation model.