The Northwest Foundation (Northwest) is a privately-sponsored foundation in Canada with the only mission of supporting the Lido Health Centre. During the previous 8 years, Northwest had provided closed to 90 percent of the Health Centres operating budget. This year, Northwest estimates that its spending budget for the Health Centre will be $11 million. Northwests management expenses average 0.40 percent of assets. In addition to the ongoing spending budget, Northwest is funding a new facility for the Health Centre, which will require a final outlay of $6 million within six months. Health care costs have grown at 1 percent above the annual rate of inflation, and this trend is expected to continue. Northwest was founded five years ago by Sky Pharmaceuticals (Sky) with a gift consisting of Sky company stock and a 100 percent ownership interest in a privately-held computer consulting business. Sky has contributed $2 million annually to Northwest since the initial gift. However, Sky has faced increasing capital expenditures and recently announced that it will be unable to make additional contributions to Northwest. The computer consulting business is expected to generate $1.25 million of pre-tax income this year; pre-tax income will grow with little volatility at the annual inflation rate, which is expected to be 1.5 percent for the foreseeable future. The corporate tax rate is 18 percent. The following information relates to Northwests Board of Trustees: The Board has diversified the portfolio over time so that Sky common equity now comprises a small proportion of the overall portfolio. The Board has expressed a desire to sell the computer consulting business because it requires an excessive amount of oversight by Northwests Board and management. Excluding the computer consulting business, Northwests portfolio has a market value of $200 million. The Board is concerned about the uncertainty of the exact dollar amount of required spending during the year. Historically, the Board has designated a portion of the portfolio to serve as a reserve of approximately 15 percent of its spending budget for the Health Centre to ensure that Northwests annual spending goals will be met. 2 The Board is aware of the market risk/return tradeoff and is willing to accept the risk necessary to support Northwests long-term growth orientation. With respect to return on investable assets, the Trustees have agreed that a shortfall risk limit (defined as expected total return minus two standard deviations) of -14% in any one year is acceptable.

Discuss the risk objective for Northwest Foundation, specially taking consideration of its willingness and abilities to take risk when carrying out investment activities.