Could someone please explain the relationship between the inflation and risk tolerance of Endowment? Initially, I though the expected inflation affects the return objective only. However, it affects the risk tolerance from 2011 AM Mock Exam (Question 3). Thanks.
Higher inflation requires higher returns topreserve purchasing power od assets. And most often higher returs come with higher risk. Endowmnets and foundations are able to take that risk thus in order to compensate for increased inflation they need to take on more that risk.