Institutional risk tolerance

[derswap07]

Zubov topic test:
I do not agree with the following answer:
The endowment’s risk tolerance is low to moderate, not high, because the endowment’s contribution represents 25% of the university’s operating budget. Thus, a modest drop in the endowment’s value may have a significant impact on university operations. Another factor supporting a lower risk tolerance is the use of a simple spending rule. The absence of a smoothing rule means the endowment has less tolerance for short-term portfolio risk. Although a return objective of 7%–7.5% may ostensibly be used to support a higher risk tolerance, the risk of a short-term drawdown poses a much larger risk and thus, on balance, a low to moderate risk tolerance is more appropriate for the endowment
I think that the risk tolerance is high. What do others think?

 

[onlysimon]

i didn’t do this question, but anything that is funding someones salary is gonna be low tolerance.

 

[derswap07]

but it’s paying only 25% of the operating budget???!!

 

[onlysimon]

‘only’ is a word which you slipped in there. the question says ‘significant’

 

[Citizen3]

I just did a CFAI mock and one of the questions had an endowment with a similar situation (where the endownment was responsible for funding 75% of an operating budget). The answer was high risk tolerance because endowments have long time horizons and are able to replenish through donations. It was the CFA 2016 AM mock pdf found in candidate resources. Question 46.