Part B/(ii) - what the best way to justify that bad past performance would reduce the ability to take more risk? (don’t really see direct relationship) Part C/ liquidity - do we always need to provide a % figure regarding liquidity? don’t we usually specify the level of liquidity needs? i.e. low, average, high? thanks in adv…
Part B/(ii) - negative performance willi reduce portfolio size relative spending needs - the most important factor in determining ability to take risk Part C/ liquidity – Good question CFAI and Schweser didn’t really provide a universal guideline as to what portfolio weight should be in liquid assets. I wish there was a default percentage to throw out there… I’m not really sure. I will say this: I don’t recall any questions on the past exams about liquidity unless there was some impediment future CF. In that case, liquidity is easy to determine.
thanks. but should not be the most important factor. on B/(ii) only a very weak link to me, coz the book states when recent poor performance with above long-term average spending rate will reduce the ablity to take risk (on a short term basis tho)
I have a question regarding this question. “CU expects a similar dollar level of endowment support, indexed to inflation in its costs, in future years”, but then in the return calculation, 2.5% inflation is not included. Why? - sticky
Past bad performance indicates that endowment might not have been able to preserve capital on inflation adjusted basis. There is also some reason CFAI mentions that i dont remember now
comp_sci_kid Wrote: ------------------------------------------------------- > Past bad performance indicates that endowment > might not have been able to preserve capital on > inflation adjusted basis. There is also some > reason CFAI mentions that i dont remember now then why not including 2.5% inflation in the return calc, together with the 3.5% growth? (please check with the question) - sticky
sticky Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > Past bad performance indicates that endowment > > might not have been able to preserve capital on > > inflation adjusted basis. There is also some > > reason CFAI mentions that i dont remember now > > then why not including 2.5% inflation in the > return calc, together with the 3.5% growth? > (please check with the question) > > - sticky if i remember they do, they cinlude infl growth and fees
Does endowment need to meet minimum spending requirement to main its tax exempt status? Or It’s simply just tax-free?
pretty sure it must meet that minimum
I don’t think endowments are subject to a federal tax spending rule, as foundations are.
yep, no mandatory spending rules for endowments, only foundations have minimum spending requirements (i.e., 5% for independent private foundation) Endowmnets, however, have spending rules to make sure that spending don’t fluctuate much from year to year.
the key of endowment spending rule is that it enables endowmen to take on more risk
do we have to know that third weird spending rule? I just don’t understand it…
comp_sci_kid Wrote: ------------------------------------------------------- > sticky Wrote: > -------------------------------------------------- > > then why not including 2.5% inflation in the > > return calc, together with the 3.5% growth? > > (please check with the question) > > > > - sticky > > if i remember they do, they cinlude infl growth > and fees NO. Please check the solution. The return calc only includes 4% spending, 3.25% inflation rate of university, and 0.65% management fee. The inflation rate of 2.5% is NOT included. Any idea? - sticky
Inflation rate of UNV includes inflation
3rd & Long Wrote: ------------------------------------------------------- > do we have to know that third weird spending rule? > I just don’t understand it… i posted this couple weeks before on how third spending rule could be simplified to make it more intuitive --------------------------------------------------------- this is CFAI way Spending(t) = Smoothing rate * [Spending(t-1) * (1 + Inflation(t-1)] + (1 - Smoothing rate) * [Spending rate * Beginning market value(t-1)] since [Spending rate * Beginning market value(t-1)] = [Spending rate * Ending market value(t-2)] = Spending(t-1) we can simplify the above formula: Spending(t) = Spending(t-1) * [Smoothing rate * (1 + Inflation(t-1)] + (1 - Smoothing rate)] essentially, this year spending becomes last year spending multipled by the sum of smoothing rate adjusted for inflation and 1 - smoothing rate
the calculation used 3.25% as inflation rate, which is the rate for university’s operating expenses.