Endowment

CFA Level III Portfolio Management
#1

This is taken from a CFAI mock:

[question removed by moderator] Question: Did he come up with this range by adding: 4% (contribution) + 2.5% (expense growth) + 1% (inflation)****I’m trying to make it simple so I’m not using geometric return … I thought 4% is 25% of annual operating budget, then 4%/25% = 16% should be the budget or what? - To meet the endowment’s spending needs for this year, the liquidity need is in the range of 4.5% –5% of the year-end portfolio value. Question: is this range = 2.5% + 1 + 0.65% or what? I got confused by the wording 25% of annual operating budget … Thanks,

#2

4%(endowment spending) + 0.65% (inv. Expenses) + 2.5% (inflation) = 7.15% (arithmetic)

1.04*1.0065*1.025 = 1.0729% (geometric)

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liquidity = 4% (spending) + 0.65% = 4.65% (arithmetic)

4.68% geometric

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The inflation of 1% in the economy is a “bogus” red herring … and if you used it anywhere - points will be deducted.

#3

Great! thank you cpk123

What do you think " 25% of annual operating budget" means?** Does it mean that the remaining 75% shall have to come from other sources (not contribution)?**