Risk Tolerance Qbank

CFA Level III
#1

This is from Schwester QBank:

Cayse Medical Foundation (CMF), a private foundation, subsidizes research into an array of medical conditions. An external donor funds its operating expenses. Manny University Endowment (MUE) is a $500 million fund that contributes $30 million per year to the university’s operating budget, or about half the university’s budget, which grows by at least the inflation rate. Which fund has a higher risk tolerance?

A) CMF because CMF’s spending rate is low and the foundation does not need to grow its assets. B) MUE because CMF has greater liquidity constraints. C) CMF because CMF has a longer time horizon.

I thought that B would be the right answer, but not for the reasons specified in the answer choice. CMF relies on a donor contributions, which would jeopardize it’s ability to support opperating expenses and subsidies (hence lower risk tolerance). On the other hand, the university relies on the contributions from the endownment, making it more likely that MUE needs to have a higher risk tolerance in order to meet 6% contribution (30mil/500mil)+inflaiton. B showed up as not correct. Can anyone provide a justification for why one of the other answers A&C is the correct choice? Thanks

#2

What’s the currect answer?

I think B.

Because:

  • CMF is a foundation which has regulatory spending rate imposed by govt. (typically 5%)

  • Hence CMF’s liquidity requirement is 5% of the assets.

  • Endowment does not have any liquidity requirement. Plus if it incurs losses, it has option to cut back on $30 million contribution to CMF.

#3

as i mentioned in my original post, the answer is not B.

The endowment does have liquidity requirements though. Read the question carefully: CMF is the foundation. The endowment has ongoing liquidity needs in order to cover half the budget for the university.

#4

C is not the answer I guess because both have indefinite time horizon.

I can not come up with a justification now…

Does schweser give any reasoning?

#5

presence of external donor who funds foundation’s expenses = higher risk tolerance for CMF.

#6

the answer is along the lines what cpk wrote