Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may only spend investment earnings. The fund is expected to need between $500 000 and $1 000 000 to pay for new lab equipment for the science building. Which of the following is/are true?
i. The fund should have a target rate of return of at least 10%. II. The limitations on spending require the fund to limit its considerations to growth shares.
III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return.

Question

Quizplus · Accepted Answer

i. The fund should have a target rate of return of at least 10% - This is true because the fund can only spend investment earnings, so it needs to earn enough to cover the required spending. A 10% rate of return is a reasonable target to achieve this goal.

II. The limitations on spending require the fund to limit its considerations to growth shares. - This statement is not necessarily true. While growth shares may offer higher potential returns, they also come with higher risk. The fund should consider a variety of investments to achieve its target rate of return while managing risk.

III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return. - This is true because the fund may need to sell assets to provide the required spending, which could result in lower returns if the market conditions are unfavorable. This liquidity constraint should be considered in the investment strategy.

Medfield College's $10 Million Endowment Fund Is Not Allowed to Spend