Optimal Asset Allocation for Endowment Fund

Very Hard Institutional Portfolio Mgmt Foundations And Endowments

A university endowment fund has a long-term investment horizon with a primary objective of preserving purchasing power while providing a stable stream of support to the university's annual budget. The endowment’s Investment Committee is evaluating its asset allocation strategy and is considering a shift from a traditional 60/40 equity and fixed income mix to a more diversified portfolio that includes alternative investments such as private equity and hedge funds.

The Investment Committee must balance the need for liquidity to meet annual spending requirements with the desire for higher returns that alternative investments may offer. Given the characteristics of the endowment’s obligations, the Committee is also mindful of potential illiquidity and the risks involved with alternative assets.

Which of the following asset allocation strategies would be most appropriate for the endowment fund, considering its objectives, the nature of the obligations, and the investment horizon?

Adopt a 70/30 allocation to equities and alternatives, allowing for higher expected returns despite increased risk and decreased liquidity.

Maintain the traditional 60/40 allocation but incorporate a small allocation of 10% to cash equivalents to enhance liquidity.

Implement a 50/20/30 allocation to equities, fixed income, and alternatives respectively, providing enough flexibility and liquidity for annual obligations while seeking growth.

Hint

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