Q27. Erica Turner is a trustee of the Turner Endowment Fund at Newsome College. The fund provides scholarships to students that demonstrate high achievement in the classroom that went to high school in Mississippi. The endowment has assets of $4 million. As the founder of the endowment, Turner would like to insure that at least 10 tuition scholarships are offered annually. Tuition at Newsome College is $18,000 annually, and expected to increase by 4% long-term. Inflation is expected to be 2% into the foreseeable future.
Because Turner is an investment professional, she volunteered to evaluate potential investment policies for the endowment.
|
Proposed Plan |
A |
B |
C |
D |
|
Return Requirement |
Endowment objective is to outperform relevant benchmark by 100 bps |
Match relevant benchmark |
11% |
9% |
|
Risk Tolerance |
Very high |
Moderate |
Low |
Very Low |
|
Time Horizon |
Infinite |
Annual |
Turner’s lifetime |
4 years |
|
Liquidity |
Very high |
Low |
High |
Moderate |
|
Tax Limitations |
None |
Tax Exempt |
Munis |
Unrelated Business Income Tax (UBIT) |
|
Regulatory & Legal |
ERISA |
None |
Very Few |
Eligible Investments |
|
Unique Circumstances |
Not applicable to endowments |
Structure of board |
Asset/Liability matching |
Financial status of college |
The current asset allocation of the Turner Endowment for Newsome College is shown below:
|
Asset Allocation | |||
|
|
Current Allocation |
Expected Return |
Expected Standard Deviation |
|
Treasury bills (t-bills) |
11% |
2% |
0% |
|
Intermediate bonds |
30% |
7% |
12% |
|
Long-term bonds |
14% |
9% |
15% |
|
High yield bonds |
5% |
10% |
18% |
|
Large cap stocks |
20% |
12% |
20% |
|
Small cap stocks |
20% |
15% |
30% |
|
|
100% |
|
|
Based on the information provided above, which policy statement has the appropriate language for the endowment’s investment policy statement with respect to time horizon?
A) Plan C.
B) Plan A.
C) Plan B.
Q28. Based on the information provided above, which policy statement has the appropriate language for the endowment’s investment policy statement with respect to unique circumstances?
A) Plan A.
B) Plan D.
C) Plan B.
Q29. Which of the following choices with respect to tax limitations for endowments is least appropriate?
A) Plan C.
B) Plan B.
C) Plan D.
Q30. Based on the information provided above, which policy statement has the appropriate language for the endowment’s investment policy statement with respect to regulatory and legal issues?
A) Plan C.
B) Plan D.
C) Plan B.
Q31. Based on the information provided above, which policy statement has the appropriate language for the endowment’s investment policy statement with respect to return requirements?
A) Plan D.
B) Plan B.
C) Plan C.
Q32. Based on the information provided above, which policy statement has the appropriate language for the endowment’s investment policy statement with respect to risk tolerance?
A) Plan C.
B) Plan A.
C) Plan B.
Thanks.
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