The Sunlight Health Foundation (Sunlight) is a company-sponsored Canadian foundation with the sole mission of supporting the Fairview Clinic. Over the past five years, Sunlight has contributed 75-80 percent of the Clinics 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, Sunlight estimates that its spending budget for the Clinic will be $11 million. Sunlights management expenses average 0.40 percent of assets. In addition to the ongoing spending budget, Sunlight is funding a new facility for the Clinic, which will require a final outlay of $6 million within six months. Sunlight was founded five years ago by Fusion Pharmaceuticals with a gift consisting of Fusion company stock and a 100 percent ownership interest in a privately-held computer consulting business. Fusion has contributed $2 million annually to Sunlight since the initial gift. However, Fusion has faced increasing capital expenditures and recently announced that it will be unable to make additional contributions to Sunlight. 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 Sunlights Board of Trustees: The Board has diversified the portfolio over time so that Fusion 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 Sunlights Board and management. Excluding the computer consulting business, Sunlights 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 Sunlights 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 Sunlights 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. Jeff Lawson and Linda Wells, executives of Sunlight, have recently been appointed Trustees of Sunlight, with responsibility for guiding and managing Sunlights investing activities. Shortly after their appointment, the Sunlight Health Foundation has made the $6 million new facility payment for the clinic. Jeff Lawson and Linda Wells are considering the most appropriate asset allocation and investment selection for the Sunlight portfolio, given Sunlights investment objectives and constraints. Your group has been hired to conduct research, make recommendation and submit a written report to Jeff and Amy for the Sunlight portfolio. In the report, your group needs to address the following issues:

1.Discuss the risk objective for Sunlight Health Foundation, pay attention to its willingness and abilities to take risk when carrying out investment activities.

2. Discuss the return objectives of investment for Sunlight Health Foundation. Calculate and justify the rate of return that is required to achieve such objectives.