Pearson Capital Management

Abstract

Naveen Bhatia has just received $2.5 million from the sale of his employer’s firm and wants to invest it for his retirement. He meets with Brad Pearson, principal of a local money management firm, who describes his firm’s investment philosophy and offers empirical evidence supporting its efficacy. The philosophy is generally consistent with modern portfolio theory, encompassing such notions as diversification, beta risk, the market line, and alpha return. The case also alludes to several investment styles, as well as active versus passive investing. Evidence favoring Pearson Capital Management’s investment philosophy includes alpha returns on several portfolios over 30 years and various sub-periods. Mr. Bhatia’s challenge is to make sense of this information, to identify how Pearson Capital Management might add value compared to investing directly himself, and ultimately to decide how best to invest his $2.5 million.

The case can be used early in an investments course to introduce many of the topics considered throughout the term, and in a corporate finance course, or executive program, to talk about basic concepts of risk and return, diversification, and beta risk, as well as the intuition underlying the efficient market hypothesis and the capital asset pricing model. Most business students hope and expect to confront Mr. Bhatia’s problem one day themselves, so discussion tends to be lively.