This is taken from a CFAI mock:
HU has asked Greenhill to manage the university’s endowment. The endowment’s spending rule dictates that it make an annual contribution of 4% of its year end portfolio market value to support HU’s operating budget. The annual endowment contribution represents 25% of HU’s annual operating budget.
The university’s operating expenses are expected to grow at a rate of 2.5% annually, while the rate of inflation in the economy is expected to be 1% a year.
Investment management expenses are estimated to be 0.65% of the endowment’s market value. The investment committee has asked Zubov to present his views on the risk and return objectives and liquidity constraints for the endowment. Zubov responds with the following statements:
- Based on the information provided, an annual total return objective in the range of 7%–7.5% would be appropriate for the fund.
Question: Did he come up with this range by adding: 4% (contribution) + 2.5% (expense growth) + 1% (inflation)
I’m trying to make it simple so I’m not using geometric return …
I thought 4% is 25% of annual operating budget, then 4%/25% = 16% should be the budget or what?
- To meet the endowment’s spending needs for this year, the liquidity need is in the range of 4.5% –5% of the year-end portfolio value.
Question: is this range = 2.5% + 1 + 0.65% or what? I got confused by the wording 25% of annual operating budget …
Thanks,