Free CFA Level III: Portfolio Management Case Study: Endowment Practice Questions
Endowment case studies on CFA Level III test integrated portfolio management decisions for institutional investors, covering investment policy statement construction, strategic asset allocation, and governance frameworks.
Sample Questions
Question 1
Easy
An endowment's perpetual time horizon most directly affects its:
Solution
B is correct.
A perpetual endowment exists in theory forever, providing financial support in perpetuity. This extremely long time horizon allows the endowment to: tolerate short-term market volatility (downturns are temporary over such a long horizon), invest in illiquid assets with extended lock-up periods (5-10+ years for private equity), and take on more risk for higher expected returns.
A perpetual endowment exists in theory forever, providing financial support in perpetuity. This extremely long time horizon allows the endowment to: tolerate short-term market volatility (downturns are temporary over such a long horizon), invest in illiquid assets with extended lock-up periods (5-10+ years for private equity), and take on more risk for higher expected returns.
Question 2
Medium
Based on Exhibits 1 and 3, the change in Cascadia Foundation's expected portfolio return resulting from Whitfield's proposed reallocation is closest to:
Solution
C is correct. Swapping 5 percentage points from Fixed Income (E(R) 3.0%) into Private Equity (E(R) 10.0%) adds 0.05 × (10.0% − 3.0%) = 0.05 × 7.0% = 0.35 percentage points. Portfolio expected return rises from 6.66% to approximately 7.01%.
Question 3
Hard
Which of the following best describes the combined effect of Whitfield's proposed reallocation on Cascadia Foundation's ability to meet its required return and manage liquidity risk?
Solution
C is correct. The proposed allocation raises expected return from 6.66% to roughly 7.01%, still about 115 bps below the multiplicatively derived required return of 8.16% (from a 5% spending rate, 2.5% inflation, and 0.5% costs), so the gap narrows but does not close. Shifting 5 percentage points from Fixed Income into Private Equity lifts illiquid-asset weight from 32% to 37%, which extends capital-call and drawdown horizons and reduces the portfolio's capacity to fund spending during market stress — a clear increase in liquidity risk.