As CIO of The Annette Hansen Charitable Foundation (TAHCF), a U.S.-based foundation supporting medical research, Maryann Dunn will present to the trustees a recommendation that they revise the foundations strategic asset allocation to include direct investment in real estate

The Foundations current portfolio and strategic asset allocation is allocated 50 percent common stocks/50 percent bonds. Twelve percent of the common stock allocation (six percent of the total portfolio) is invested in REITs.

The risk-free rate of interest is 3.5 percent.

The forecasted inflation rate is 3 percent.

TAHCFs overall investment objective is to preserve the real (inflation-adjusted) value of assets after spending. Its spending rate is 5 percent of 12-month average asset value.

TAHCFs cost of earning investment returns is 20 basis points per year.

Exhibit -1 shows Dunns expectations for the current and proposed asset allocations. Dunns expectations for direct investment are based on unsmoothed NCREIF historical data adjusted for her current economic outlook

Forecast Data

Dunn expects opposition to her proposal to come from a trustee, Bob Enicar. Enicar has stated at a prior board meeting: TAHCFs allocation to equity includes substantial investment in REITs. REITs typically provide risk diversification comparable to that of direct equity investments for a balanced portfolio of stocks and bonds while offering substantially more liquidity.

A. State and explain two financial justifications that Hansen could present for revising TAHCFs asset allocation to 45/45/10 stocks/bonds/U.S. direct real estate investment.

B. State and explain one disadvantage of the proposed revised strategic asset allocation.

C. Contrast unsmoothed and smoothedNCREIF indices and justify Hansens choice of the unsmoothed NCREIF Index in formulating expectations for direct real estate investment.

D. Draft a response to Enicars critique.

\begin{tabular}{lcr} Measure & 50/50 Stocks/Bonds & \begin{tabular}{r} 45/45/10 Stocks/Bonds/U.S. \\ Direct Real| Estate Investment \end{tabular} \\ \hline Expected return & 5.5% & 5.9% \\ Std. dev. of return & 11.8% & 10.8% \end{tabular}