Question
The Executive Director of a University Endowment estimates that the capital markets will provide a 10 percent expected return for an endowment portfolio taking above-average
The Executive Director of a University Endowment estimates that the capital markets will provide a 10 percent expected return for an endowment portfolio taking above-average risk, and an 8 percent expected return for an endowment portfolio taking average risk. The Endowment provides tuition scholarships for University students. The spending rate has been 5 percent, and the expected tuition inflation rate is 4 percent. Recently, university officials have pressured the endowment to increase the spending rate to 7 percent. The endowment has an average to below-average ability to accept risk and only an average willingness to take risk, but a university official claims that the risk tolerance should be raised because higher returns are needed. Discuss an appropriate return objective and risk tolerance for the Endowment.
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