Reading 37: Institutional Case Study

Question 1

Cash Drag

Answer 1

Rebalancing with cash is more desirable with larger, not smaller, rebalancing transactions despite the associated cash drag because the transactions are likely to be more permanent.

Question 2

Liquidity

Answer 2

If the time to cash of an investment type is between one quarter and one year, its liquidity classification would most likely be semi-liquid. For one week to one quarter, it would be liquid, and for over one year, it would be illiquid.

Question 3

Calendar Rebalancing

Answer 3

Help to rebalance the portfolio within predetermined acceptable ranges in order to ensure a consistent level of strategic asset allocation. The portfolio rebalancing occurs on specific dates, not necessarily when risk exposures shift (automatic adjustment mechanisms would adjust for to keep stable level of risk)

Question 4

Private Equity

Answer 4

Capital calls are usually greater than capital distributions, which could lead to higher concentration of private equity in the portfolio. They are subject to lagged valuations because they are valued less frequently than public equity.

Question 5

Futures

Answer 5

Although the bid/offer spread and price impact are costs for using futures to rebalance, the cost to roll a futures contract is by far the largest cost.

Question 6

Price of the Illiquid Asset

Answer 6

Illiquid asset price = marketable asset price − put price. Marketable asset price is what the asset is predicted to trade at in the public market.

Question 7

Comprehensive Stress Testing

Answer 7

Stress both assets and liabilities at the same time to understand how they are impacted during stress conditions. For assets, the stress test can encompass assumed distributions for prices, correlations across assets, and liquidity characteristics. It can also consider liability shocks (e.g., increased expected endowment distributions during stress periods).