Background Risk and University Endowment Funds

36 Pages Posted: 19 Feb 2007 Last revised: 14 Feb 2010

See all articles by Stephen G. Dimmock

Stephen G. Dimmock

National University of Singapore; Asian Bureau of Finance and Economic Research (ABFER)

Date Written: 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.

Keywords: Endowment Funds, Background Risk, Asset Allocation, Portfolio Choice, Incomplete Markets

JEL Classification: G11, D52, I22

Suggested Citation

Dimmock, Stephen G., Background Risk and University Endowment Funds (February 5, 2010). Available at SSRN: or

Stephen G. Dimmock (Contact Author)

National University of Singapore ( email )

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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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