Considering endowment Objective to maintain the real value of its assets, if the endowment suffers a loss in a particular period, how to decide between -
reducing the risk of its portfolio
adopt rolling spending rule (if not there earlier)
this is ques is related to 2011 CFAI AM exam
Rolling spending rule smoothes the market value thus allowing them to take more risk/return
Basically they don’t get as screwed if they have a bad year
reducing risk of portfolio = NEVER…that will reduce your chances of meeting future obligations
text specially states that low vol/low returns does not mean lower risk for meeting objectives
thank you guys.
text specially states that low vol/low returns does not mean lower risk for meeting objectives
does this applies only to Endowments ?
Doesn’t the text also say :
in the short term, if performance was weak and the spending rate > LT target,then we would reduce risk tolerance
wil3 - please read the question and the accompanying text carefully… esp. about PRIMARY GOAL.
Primary Goal - not reduce the real portfolio over time.
Which would now reduce the primary goal - reducing spending need WOULD!
refer to cfai text page 428 under risk objectives for endowments
thank you mcap11. I read that…got it cleared/
cpk123 - I am not sure what you are referring to. I NEVER asked whether reducing spending will reduce the primary goal or not. Please see my question above carefully.
wil3 - the question is asking for “primary goal” maintenance.
Reducing Spending would not meet that need. It is in the “WORDING” is what I am trying to point out to you.
cpk123- as I mentioned to you earlier, I am not asking about the exam question, my question was to know the difference between 1) and 2) approches (1st post), for which I have got the answer. I am NOT at all talking about reducing spending.