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

The total return approach bases spending on a percentage of total portfolio value rather than limiting distributions to income alone, providing more consistent and predictable grantmaking.

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

PRIs count toward a private foundation's 5% distribution requirement because their primary purpose is furthering the foundation's exempt charitable purposes, not generating financial return.

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

Rebalancing corrects drift from the target asset allocation by selling outperforming assets and purchasing underperforming ones, maintaining the intended risk/return profile over time.

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

A true or permanent endowment permanently restricts the original gift principal per donor intent, with only investment income and returns available for spending.

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

Liquidity risk is the danger that too high a concentration in illiquid assets (private equity, real estate) prevents the foundation from meeting spending obligations or emergency cash needs.

(CAP) Certified Philanthropic Advisor Practice Test

(CAP) Certified Philanthropic Advisor Practice Test

CAP Investment Management & Endowments 2