Getting started using Ibbotson software:

An unofficial tutorial

MGT 544

Stanley Martinez, TA

01.19.01

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 1970-96 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

Standard Deviation (Risk)

Expected Surplus

0.0 24.02.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 22.0

7.0

17.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

S&P 500 TR

U.S. Small Stk TR

U.S. IT Gvt TR

U.S. 1 Yr Gvt TR

MSCI EAFE TR

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

Position 50

U.S. Small Stk TR (38.7%)

U.S. IT Gvt TR (33.3%)

MSCI EAFE TR (28.0%)

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?

Time

Wealth (USD)Position 50

Wealth Percentiles

Jan2001

Jan2021

Dec2005

Dec2010

Dec2015

1

30

1

10

95th Percentile Expected Value 5th Percentile

Time

Compound Annual ReturnPosition 50

Return Percentiles

Jan2002

Jan2021

Dec2005

Dec2010

Dec2015

-10.0%

40.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

95th Percentile Expected Value 5th Percentile

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.

Position

WeightsUntitled

Frontier Area Graph

0.0%

100.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

0 10 20 30 40 50 60 70 80 90 100

S&P 500 TR U.S. Small Stk TR U.S. IT Gvt TR U.S. 1 Yr Gvt TR MSCI EAFE TR