Considerations for Asset Allocation Change in Foundations

Hard Institutional Portfolio Mgmt Foundations And Endowments

ABC Foundation, a major philanthropic institution, manages an endowment of $500 million. The foundation focuses on making grants that foster education, environment, and health and assumes a long-term investment horizon. ABC Foundation’s investment committee is evaluating its current asset allocation strategy. They currently aim for a 70% allocation to equities, 20% to fixed income, and 10% to alternative investments, with an expected return of 8% and a standard deviation of 12%.

The foundation is exploring the implications of changing its allocation to increase investments in alternative assets to 20% while decreasing equity exposure to 60% and maintaining fixed-income investments at 20%. This new allocation is expected to yield a higher expected return of 9% with a standard deviation of 15%.

Considering the Charity's risk tolerance and withdrawal requirements, which of the following options would represent a key consideration regarding the proposed asset allocation change?

Increasing the allocation to alternative investments may introduce illiquidity risk, impacting the foundation's ability to meet short-term grant obligations.

A higher expected return in the new allocation compensates for the increase in volatility without affecting the foundation's mission.

Decreasing equity exposure will result in a lower overall risk profile, benefiting the long-term sustainability of the endowment.

Hint

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