Portfolio Choice with Endogenous Donations - Modeling University Endowments

Using monthly data from 1997 to 2023, we construct mean-variance optimized portfolios of common university endowment asset classes, including domestic equity, international equity, global bonds, hedge funds, private equity, real estate, and natural resources. We find substantial variation in optimal allocations to these asset classes across subperiods. Some asset classes are substantially more persistent in receiving allocations than others, while some asset classes rarely receive sizable allocations at all. Our results highlight the relevance of asset allocation in portfolio performance and may inform future decisions by institutional investors and endowment portfolio managers.

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Equilibrium policy portfolios when some investors are restricted from holding certain assets

Randl

Westerkamp²,

Zechner

2022

CFRI

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PurposeThe authors analyze the equilibrium effects of non-tradable assets on optimal policy portfolios. They study how the existence of non-tradable assets impacts optimal asset allocation decisions of investors who own such assets and of investors who do not have access to non-tradable assets.Design/methodology/approachIn this theoretical analysis, the authors analyze a model with tradable and non-tradable asset classes whose cash flows are jointly normally distributed. There are two types of investors, with and without access to non-tradable assets. All investors have constant absolute risk aversion preferences. The authors derive closed form solutions for optimal investor demand and equilibrium asset prices. They calibrated the model using US data for listed equity, bonds and private equity. Further, the authors illustrate the sensitivities of quantities and prices with respect to the main parameters.FindingsThe study finds that the existence of non-tradable assets has a large impact on optimal asset allocation. Investors with (without) access to non-tradable assets tilt their portfolios of tradable assets away from (toward) assets to which non-tradable assets exhibit positive betas.Practical implicationsThe model provides important insights not only for investors holding non-tradable assets such as private equity but also for investors who do not have access to non-tradable assets. Investors who ignore the effect of non-tradable assets when reverse-engineering risk premia from asset covariances and market capitalizations might severely underestimate the equity risk premium.Originality/valueThe authors provide the first comprehensive analysis of the equilibrium effects of non-tradability of some assets on optimal policy portfolios. Thus, this paper goes beyond analyzing the effects of market imperfections on individual portfolio choices.

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Portfolio Choice with Endogenous Donations - Modeling University Endowments

Cited by 3 publications

References 31 publications

University Endowments

University Endowments

Endowment asset allocations: insights and strategies

Equilibrium policy portfolios when some investors are restricted from holding certain assets

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