CAIA - 03 - The Endowment Model Flashcards Preview

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Flashcards in CAIA - 03 - The Endowment Model Deck (31)
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1
Q

An ___ is a donated pool of capital that is intended to be invested to maintain the real value of its assets in perpetuity and to provide an annual income to support a purpose specified by the donor of the capital.

A

An endowment is a donated pool of capital that is intended to be invested to maintain the real value of its assets in perpetuity and to provide an annual income to support a purpose specified by the donor of the capital.

2
Q

The nominal value of an initial donation that is to be maintained is referred to as the ___.

A

The nominal value of an initial donation that is to be maintained is referred to as the corpus.

3
Q

A ___ is a non-profit organization that either funds its own charitable causes or donates funds to other organizations.

A

A foundation is a non-profit organization that either funds its own charitable causes or donates funds to other organizations.

4
Q

Foundations differ from endowments in the following ways:

  1. They are ___-making institutions, whereas endowment funds are established to provide funds for a specific purpose.
  2. They tend to have ___lives
  3. They are subject to ______requirements
  4. They are (more/less) likely to receive funding from ongoing donations
A

Foundations differ from endowments in the following ways:

  1. They are grant-making institutions, whereas endowment funds are established to provide funds for a specific purpose.
  2. They tend to have finite lives
  3. They are subject to minimum spending requirements
  4. They are less likely to receive funding from ongoing donations
5
Q

There are several types of foundations:

  1. O___
  2. C___
  3. C___
  4. I___
A

There are several types of foundations:

1. Operating

2. Community

3. Corporate

4. Independent

6
Q

___ foundations are most like endowments, in that the income generated is used to fund the foundation’s operations.

A

Operating foundations are most like endowments, in that the income generated is used to fund the foundation’s operations.

7
Q

___ foundations are located in a specific geographic region and distribute gifts and investment returns to other local charities.

A

Community foundations are located in a specific geographic region and distribute gifts and investment returns to other local charities.

8
Q

___ foundations tend to donate to local charities in the region in which the company has the most employees or customers.

A

Corporate foundations tend to donate to local charities in the region in which the company has the most employees or customers.

9
Q

___ foundations are funded by an individual or a family often with a single gift in the form of stock, and typically no subsequent gifts.

A

Independent foundations are funded by an individual or a family often with a single gift in the form of stock, and typically no subsequent gifts.

10
Q

Independent foundations present two challenges:

  1. Wealth is often concentrated in a ___ ___
  2. They do not typically receive ___ ___ .
A

Independent foundations present two challenges:

  1. Wealth is often concentrated in a single stock
  2. They do not typically receive additional donations.
11
Q

The goal of an endowment manager should be to maintain ___ equity.

A

The goal of an endowment manager should be to maintain intergenerational equity.

12
Q

Intergenerational equity may be expressed as a ___% chance of maintaining the real value of the endowment in perpetuity.

A

Intergenerational equity may be expressed as a 50% chance of maintaining the real value of the endowment in perpetuity.

13
Q

If the chance of the endowment surviving in perpetuity is low, it means that the endowment’s spending rate is (high/low).

A

If the chance of the endowment surviving in perpetuity is low, it means that the endowment’s spending rate is high.

14
Q

Endowments (do/do not) have flexibility in their spending rates. This contrasts with U.S. foundations that are required to spend at least ___% per year on operating expenses and charitable activities.

A

Endowments do have flexibility in their spending rates. This contrasts with U.S. foundations that are required to spend at least 5% per year on operating expenses and charitable activities.

15
Q

To be able to operate in perpetuity and meet payout ratios, endowments and foundations need to reach a ___ ___.

A

To be able to operate in perpetuity and meet payout ratios, endowments and foundations need to reach a return target.

16
Q

Foundations that want to preserve the real value of their assets will have an ___ target return: ___ plus a minimum of ___ %

A

Foundations that want to preserve the real value of their assets will have an aggressive target return: inflation plus a minimum of 5%

17
Q

The higher education price index (HEPI) is typically ___ than CPI

A

The higher education price index (HEPI) is typically higher than CPI

18
Q

The ___ model is an investment approach that aims to generate high returns through aggressive asset allocations, particularly to alternative investments.

A

The endowment model is an investment approach that aims to generate high returns through aggressive asset allocations, particularly to alternative investments.

19
Q

David Swensen does not invest in investment-grade or high-yield bonds due to the ___-___ conflict of corporate managers working for stockholders and possibly making decisions that would be detrimental to bondholders.

A

David Swensen does not invest in investment-grade or high-yield bonds due to the principal-agent conflict of corporate managers working for stockholders and possibly making decisions that would be detrimental to bondholders.

20
Q

The investment outperformance of large endowments may be due to six advantages that large endowments possess.

  1. Aggressive ___ ___
  2. Effective investment ___ ___
  3. ___ -___ advantage
  4. Access to network of ___ ___
  5. Acceptance of ___ risk
  6. Sophisticated ___ ___ and ___ oversight
A

The investment outperformance of large endowments may be due to six advantages that large endowments possess.

  1. Aggressive asset allocation
  2. Effective investment manager selection
  3. First-mover advantage
  4. Access to network of talented alumni
  5. Acceptance of liquidity risk
  6. Sophisticated investment staff and board oversight
21
Q

Typically, (more/less) returns come from security selection and market timing (TAA) in an endowment vs. a pension.

A

Typically, more returns come from security selection and market timing (TAA) in an endowment vs. a pension

22
Q

Top endowment funds’ manager-selection and first-mover advantage can be attributed to their superior ___ ___. (i.e., good relationships with successful people)

A

Top endowment funds’ manager-selection and first-mover advantage can be attributed to their superior network effect. (i.e., good relationships with successful people)

23
Q

___-___investment consultants advise on issues such as asset allocation and manager selection, and advice/decisions are taken to the investment committee for a vote.

A

Non-discretionary investment consultants advise on issues such as asset allocation and manager selection, and advice/decisions are taken to the investment committee for a vote.

24
Q

___ ___ are external consultants with discretionary authority to make and implement specific decisions without the investment committee’s vote.

A

Outsourced CIOs are external consultants with discretionary authority to make and implement specific decisions without the investment committee’s vote.

25
Q

The benefits of OCIOs is as follows:

  1. Improved ___
  2. ___of ___in manager research
  3. More ___ ___
  4. More efficient ___-___
A

The benefits of OCIOs is as follows:

  1. Improved resources
  2. Economies of scale in manager research
  3. More cost effective
  4. More efficient decision-making
26
Q

Large endowments need to address specific risks:

  1. Interaction between ___ ___ , ___ , and the endowmen’t s long-term ___ ___
  2. ___ risk and challenges with ___
  3. Protecting against ___ risk
A

Large endowments need to address specific risks:

  1. Interaction between spending rates, inflation, and the endowmen’t s long-term asset value
  2. Liquidity risk and challenges with rebalancing
  3. Protecting against tail risk
27
Q

Studies show that, all else equal, funds with long lock-up periods tend to generate (higher/lower) returns.

A

Studies show that, all else equal, funds with long lock-up periods tend to generate higher returns.

28
Q

___ ___ investing uses a 3 tiered a approach to match liquidity to investors’ time horizons in asset allocation decisions.

  1. Tier 1 assets are ___ -___ , ___ assets
  2. Tier 2 assets are ___ , ___ assets
  3. Tier 3 assets are ___ , ___ assets.
A

Liquidity driven investing uses a 3 tiered a approach to match liquidity to investors’ time horizons in asset allocation decisions.

  1. Tier 1 assets are low-risk, liquid assets
  2. Tier 2 assets are risky, liquid assets
  3. Tier 3 assets are risky, illiquid assets.
29
Q

What are the 4 methods for hedging tail risk?

  1. Increase allocations to ___ and ___ -___ debt
  2. Use equity ___ ___
  3. Construct a portfolio of ___ options on currencies, commodities, and credit products and ___ options on volatility indices and high-quality bonds.
  4. Structure allocations within ___ ___ to reduce exposure to extreme events
A

What are the 4 methods for hedging tail risk?

  1. Increase allocations to cash and risk-free debt
  2. Use equity option hedges
  3. Construct a portfolio of put options on currencies, commodities, and credit products and call options on volatility indices and high-quality bonds.
  4. Structure allocations within asset classes to reduce exposure to extreme events
30
Q

The basket hedging approach is considerably (more/less) costly than equity option hedges.

A

The basket hedging approach is considerably less costly than equity option hedges.

31
Q

In contrast to exchange-traded hedges, hedges purchased in the over-the-counter market are exposed to ___ risk, which is generally extremely high during crises.

A

In contrast to exchange-traded hedges, hedges purchased in the over-the-counter market are exposed to counterparty risk, which is generally extremely high during crises.

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