CAP Investment Management & Endowments 3

Question 1

The 'Yale Model' (endowment model) of institutional investing is characterized by:

Accepted Answer

A highly diversified strategy emphasizing alternative assets such as private equity, hedge funds, and real assets

Answer

The Yale Model, developed by David Swensen, emphasizes heavy allocation to alternative asset classes—private equity, real assets, and absolute return strategies—to achieve superior long-term returns through diversification.

Question 2

An 'absolute return' strategy in endowment investing aims to:

Accepted Answer

Generate positive returns regardless of overall market direction

Answer

Absolute return strategies seek positive returns in all market environments using diverse, uncorrelated approaches, helping endowments reduce volatility and protect capital during market downturns.

Question 3

A foundation's endowment 'spending policy' is important primarily because it:

Accepted Answer

Determines how much of the endowment can be distributed annually, balancing current impact with long-term sustainability

Answer

A spending policy governs the annual distribution rate from the endowment, which is critical for balancing current charitable impact with the long-term preservation of real purchasing power.

Question 4

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

Accepted Answer

Potential losses from changes in foreign exchange rates affecting international investment values

Answer

Currency risk arises when a foundation holds investments denominated in foreign currencies; exchange rate fluctuations can increase or decrease the U.S. dollar value of those holdings when converted.

Question 5

Compared to a small community foundation, a large university endowment can more readily invest in illiquid alternative assets primarily because:

Accepted Answer

Large endowments benefit from economies of scale, specialized staff, and longer time horizons that make illiquidity tolerable

Answer

Scale enables large endowments to access institutional-class alternative investments (private equity, infrastructure) with high minimums, while their long time horizons allow them to tolerate the illiquidity premium these assets require.

(CAP) Certified Philanthropic Advisor Practice Test

(CAP) Certified Philanthropic Advisor Practice Test

CAP Investment Management & Endowments 3