Background Risk and University Endowment Funds

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

Stephen G. Dimmock

Nanyang Technological University - Division of Finance

Date Written: February 5, 2010

Abstract

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: https://ssrn.com/abstract=921910 or http://dx.doi.org/10.2139/ssrn.921910

Stephen G. Dimmock (Contact Author)

Nanyang Technological University - Division of Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

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