The Rainbow 7 Foundation (Rainbow) is a company-sponsored Canadian foundation with the sole mission of supporting the Chubb Clinic. Over the past five years, Rainbow has contributed 85-90 percent of the Clinic's operating budget. Health care costs have grown at 1 percent above the annual rate of inflation, and this trend is expected to continue. This year, Rainbow estimates that its spending budget for the Clinic will be $11 million. Rainbow's management expenses average 0.40 percent of assets. In addition to the ongoing spending budget, Rainbow is funding a new facility for the Clinic, which will require a final outlay of $6 million within six months. Rainbow was founded five years ago by Origin Pharmaceuticals (Origin) with a gift consisting of Origin company stock and a 100 percent ownership interest in a privately-held computer consulting business. Origin has contributed $2 million annually to Rainbow since the initial gift. However, Origin has faced increasing capital expenditures and recently announced that it will be unable to make additional contributions to Rainbow. 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 20 percent. The following information relates to Rainbow's Board of Trustees: The Board has diversified the portfolio over time so that Origin 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 Rainbow's Board and management. Excluding the computer consulting business, Rainbow's 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 Clinic to ensure that Rainbow's annual spending goals will be met. The Board is aware of the market risk/return tradeoff and is willing to accept the risk necessary to support Rainbow's 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 -12% in any one year is acceptable. Lucas Myer and Christina Burton, executives of Rainbow, have recently been appointed Trustees of Rainbow, with responsibility for guiding and managing Rainbow's investing activities. Shortly after their appointment, the Rainbow 7 Foundation has made the $6 million new facility payment for the clinic. Lucas Myer and Christina Burton are considering the most appropriate asset allocation and investment selection for the Rainbow portfolio, given Rainbow's investment objectives and constraints. Your group has been hired to conduct research, make recommendation and submit a written report to Lucas and Christina for the Rainbow portfolio. In the report, your group needs to address the following issues: 1. Discuss the general characteristics of the foundation structure in Canada that are relevant to Rainbow 7 Foundation. 2. Discuss the risk objective for Rainbow 7 Foundation, pay attention to its willingness and abilities to take risk when carrying out investment activities.