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CFA Level I · CFA Level I Exam · Portfolio Management: An Overview

A university endowment aims to support the institution's operating budget indefinitely and to preserve the real value of its assets. Which of the following return objectives is most appropriate for the endowment?

The most appropriate objective is a return equal to the spending rate plus expected inflation. An endowment has an infinite horizon, so it must fund ongoing distributions while maintaining the real, purchasing-power value of its capital for future beneficiaries.

  1. AA return equal to the spending rate plus expected inflationCorrect
  2. BA return equal to the risk-free rate over the next year
  3. CA return sufficient to match a fixed liability due in ten years

Explanation

An endowment with an indefinite horizon must fund its spending and keep purchasing power, so the required return is roughly the spending rate plus inflation (plus costs). The ten-year fixed liability matching in C describes a liability-driven investor with a finite horizon.

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