How could the analysis and recommendation be improved?JAKE Investment Management, LLC: Investment and Spending Policy ReviewClient: Braeburn UniversityDate: January, $2018$Summary of Situation Braeburn University retains an endowment of $$800$ million, invested $100$ percent in equities. The endowment provides a $3\mathrm{.}5$ percent payout $($based on $3-$year average market value$)$ to the school, whose annual expense budget is $$500$ million.Objective:Identify optimal investment allocation and spending policy.Key goal may be to grow endowment sufficient to generate income equal to $10$ percent of annual expenses.Fund will grow in nominal returns.Expenses will grow with inflation.Investment policy should also minimize:Volatility of income.Risk of missing target asset level.ObservationsThe size of the endowment, while large in dollar terms, is small compared to the size of the school; $3\mathrm{.}5$ percent of the endowment represents not much more than $5$ percent of the school's annual budget.Large universities exhibit endowments ranging up to $$20+$ billion.Once the endowment grows to $$1\mathrm{.}4$ billion, the $3\mathrm{.}5$ percent withdrawal will represent $10$ percent of annual expenses in current dollars.The current $3\mathrm{.}5$ percent spending policy is conservative.Lower spending rate will support higher endowment growth.University spending rates commonly range up to $5\mathrm{.}5$ percent.A $5$ percent spending policy would represent $8$ percent of current expenses.The full equity allocation with a value bias may be designed for long$-$term appreciation, but may be unnecessarily undiversified. The chart below, based on three$-$year cumulative returns between $1973$ and $2016,$ illustrates that $3-$year returns for a $100$ percent equity portfolio vary from $40$ percent to $+154$ percent, even when it is diversified among large$-$cap U$.$S$.$ stocks $(60\%),$ small$-$cap U$.$S$.$ stocks $(20\%),$ and non$-$U$.$S$.$ stocks $(20\%).$Graph displaying a fluctuating curve for $3-$year cumulative return for $100\%$ equity allocation from $1970$ to $2016.$As an alternative, spending policy could be structured with a minimum spending need, with surplus funds available for flexible initiatives, thereby reducing volatility of endowment funding for ongoing expenses.Recommended Asset AllocationGoal: Grow endowment to meet $10$ percent of annual expenses over $10-$year period.Inflation has averaged $3\mathrm{.}8$ percent between $1970$ and $2016.$The commonly used $60/40$ equity$/$bond benchmark has averaged $10\mathrm{.}6$ percent.To meet goal, if expenses grow at $3\mathrm{.}8$ percent and endowment value grows at $10\mathrm{.}6$ percent $($real return of $6\mathrm{.}8$ percent$),$ university will need:$20$ years if retain $3\mathrm{.}5$ percent distribution rule$\mathrm{.}15$ years if adopt $5$ percent distribution rule$\mathrm{.}10$ years if retain $3\mathrm{.}5$ percent distribution rule but postpone all withdrawals for $10$ years.Graph displaying $2$ ascending curves for $10\%$ of expenses $($solid$)$ and $3\mathrm{.}5\%$ withdrawal $($dashed$)$ from $1$ to $20$ years from now.Risk: Limit risk of losing more than $10$ percent of endowment over $3-$year period.Asset Allocation Optimization Guidelines JAKE Investment Management has defined a multistep asset allocation optimization process, including the following:Diversify among multiple asset classes.Set maximum weight of $25$ percent in any one class.Maximize return.Minimize risk of significant negative returns.