Institutional Risk Tolerance interest, foundation, positive, net, general

LPoulin133

If you are asked for the risk tolerance of an institution is it vs. a typical institution of the same type (ex compare your foundation with foundations in general) or vs. the other institutions?

For example, lets say you have an endowment where a charity depends on them for support as well as unpredictable cash flows and a bank that has a huge asset surplus and has been consistently been earning a positive net interest spread.

Would the endowment be considered below average and the bank above average? Or would the bank always be considered below average vs. institutions like endowments or foundations b/c of the nature of the business?

aidebaobao

If you are asked to compare with an industry then you can go ahead if not then you have to consider it on a standalone basis.

For the example you just gave, I will say the risk for the tolerance for the endowment is low but for the bank it is high. However, regulatory requirements usually force the risk tolerance down as the central bank will frown on a bank that prefers to invest in securities rather than lend. Regulations also restrict the type of assets banks can invest in and that makes it very uncommon for a bank to have a large surplus.

cityboy

I would say you compare to holding the market portfolio.

given an IPS it should be clear what asset allocation in relation to the available assets and capital market expectations (Market Portfolio)

mar350

Great question! I was wondering the same. Anyone with the logical answer and explanation?