CAP Investment Management & Endowments 2

Question 1

What is the 'total return' approach to endowment spending?

Accepted Answer

Spending a predetermined percentage of total portfolio value, including both income and capital appreciation

Answer

Spending only dividend and interest income generated by the portfolio

Answer

Returning all investment gains to the original donors

Answer

Allocating 100% of annual returns to grantmaking activities

Question 2

Program-related investments (PRIs) differ from mission-related investments (MRIs) primarily because PRIs:

Accepted Answer

Count toward the private foundation's mandatory 5% annual distribution requirement

Answer

Require above-market financial returns to compensate for philanthropic risk

Answer

Must be structured exclusively as equity investments in for-profit companies

Answer

Are restricted to investments within the foundation's home state

Question 3

What does 'rebalancing' an endowment portfolio mean?

Accepted Answer

Restoring the portfolio to its target asset allocation after market movements shift the actual mix

Answer

Adding new donors to the foundation's beneficiary and distribution list

Answer

Transferring investment assets between multiple affiliated foundations

Answer

Converting all investment holdings to cash in preparation for a major grant cycle

Question 4

Which type of endowment fund permanently restricts the principal by donor intent, allowing only investment returns to be spent?

Accepted Answer

True (permanent) endowment

Answer

Quasi-endowment (board-designated fund)

Answer

Term endowment with a fixed expiration date

Answer

Unrestricted operating reserve fund

Question 5

What is 'liquidity risk' in the context of endowment management?

Accepted Answer

The risk that the endowment becomes unable to meet short-term cash needs due to excessive illiquid holdings

Answer

The risk of investing in foreign currency-denominated assets

Answer

The risk of holding too much cash and missing investment returns

Answer

The risk that donor restrictions will be changed after the gift is accepted

Question 6

When advising a client on a donor-advised fund (DAF) investment strategy, a key consideration is:

Accepted Answer

The investment timeline should align with the donor's philanthropic goals and anticipated grant distribution horizon

Answer

DAF investments must exactly mirror the sponsoring organization's own portfolio

Answer

The donor retains full legal ownership and control over the invested assets

Answer

DAF assets must be fully distributed within five years of contribution

Question 7

What does 'investment due diligence' mean in the context of foundation endowment management?

Accepted Answer

Investigating and evaluating investment managers and strategies before committing foundation assets

Answer

Filing required annual tax and financial returns with the IRS

Answer

Auditing grant recipients for proper use of distributed funds

Answer

Verifying the charitable intent of prospective major donors