Sample Questions
Question 1
Easy
An endowment's perpetual time horizon most directly affects its:
Solution
B is correct.
A perpetual endowment exists in theory forever, providing financial support in perpetuity. This extremely long time horizon allows the endowment to: tolerate short-term market volatility (downturns are temporary over such a long horizon), invest in illiquid assets with extended lock-up periods (5-10+ years for private equity), and take on more risk for higher expected returns.
A perpetual endowment exists in theory forever, providing financial support in perpetuity. This extremely long time horizon allows the endowment to: tolerate short-term market volatility (downturns are temporary over such a long horizon), invest in illiquid assets with extended lock-up periods (5-10+ years for private equity), and take on more risk for higher expected returns.
Question 2
Medium
Based on Exhibits 1 and 3, the change in Cascadia Foundation's expected portfolio return resulting from Whitfield's proposed reallocation is closest to:
Solution
A is correct. Swapping 5 percentage points from Fixed Income (E(R) 3.0%) into Private Equity (E(R) 10.0%) adds 0.05 × (10.0% − 3.0%) = 0.05 × 7.0% = 0.35 percentage points. Portfolio expected return rises from 6.66% to approximately 7.01%.
Question 3
Hard
Which of the following best describes the combined effect of Whitfield's proposed reallocation on Cascadia Foundation's ability to meet its required return and manage liquidity risk?
Solution
B is correct. The proposed allocation raises expected return from 6.66% to roughly 7.01%, still about 115 bps below the multiplicatively derived required return of 8.16% (from a 5% spending rate, 2.5% inflation, and 0.5% costs), so the gap narrows but does not close. Shifting 5 percentage points from Fixed Income into Private Equity lifts illiquid-asset weight from 32% to 37%, which extends capital-call and drawdown horizons and reduces the portfolio's capacity to fund spending during market stress — a clear increase in liquidity risk.
