2016 am mock q 46. I’m a little confused why conclusion 2 cannot also be considered correct.
Situation is an endowment that funds 75% of a college’s admin budget.
Does the magnitude of importance of the endowment’s distribution in the budget decrease risk tolerance? Thanks.
Contributions?
I just got done writing up lecture notes on endowments.
Yes, it affects their risk tolerance.
Ya I think I remember this. Seems like there could be two right answers. Maybe the other option was “the best option”.
Yeah I got burned on this too. Didn’t think it was a great question, honestly.
Generally speaking, if an operating budget is highly dependent on an endowment, then the endowment will have lower risk tolerance. That’s because if the endowment fails to provide capital, then the institution (that depends on the endowment) won’t have enough money to operate.
It is one of those questions where judgement is tested. As far as I know, Level III is a test of both knowledge and judgement.
Fortunately, it doesn’t test spelling.
I think this partially had to do with the fact that the endowments distribution went to 75% of funding the administration budget, and not necessairly the whole operation.
All I can resonably come up with on that front.
Seems reasonable.
The question also states that donations are sufficient to cover shortfalls, which means that the foundations risk tolerance is not reduced despite the importance of its task.