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 stocks.
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 is true because the fund needs to earn at least 10% to generate enough investment earnings to cover the cost of the lab equipment. 
II is false because the fund can invest in any type of security that is expected to generate investment earnings. 
III is true because the need for liquidity may force the fund to sell investments at a suboptimal time, which could reduce its rate of return.

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