Background Risk and University Endowment Funds
Stephen G. Dimmock
Nanyang Technological University - Division of Finance
February 5, 2010
This paper tests the effect of background risk on university endowment portfolios, where background risk is defined as the volatility of universities’ non-financial income. The results show that higher background risk is associated with lower portfolio standard deviations. Universities with higher background risk invest significantly more in fixed income and less in alternative assets. A one standard deviation increase in background risk increases the allocation to fixed income by approximately 15% relative to the mean. There is also evidence that wealthier, highly selective universities hold riskier portfolios.
Number of Pages in PDF File: 36
Keywords: Endowment Funds, Background Risk, Asset Allocation, Portfolio Choice, Incomplete Markets
JEL Classification: G11, D52, I22
Date posted: February 19, 2007 ; Last revised: February 14, 2010
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