Institutional Portfolio Management for a University Foundation

A large university foundation has determined its long-term investment objectives and has established an asset allocation strategy to support its mission of funding scholarships and research initiatives. The foundation aims for an annual return of 7%, while maintaining a risk profile that requires a standard deviation of returns not exceeding 10%. Additionally, the foundation must adhere to a spending policy that limits annual withdrawals to 4% of its endowment value.

Given the above parameters, discuss the implications of this asset allocation strategy in the context of portfolio management for the foundation. In your response, address how the foundation should approach the selection of asset classes, the importance of diversification, and considerations for liquidity. Additionally, analyze the potential impact of changing market conditions on the foundation's ability to meet its spending policy and return objectives.