Background risk and university endowment funds
Dimmock, Stephen G.
Date of Issue2012
College of Business (Nanyang Business School)
This paper tests the effect of background risk on university endowment portfolios, where background risk is defined as the volatility of universities' nonfinancial 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 1 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.
Review of Economics and Statistics
© 2012 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. This paper was published in Review of Economics and Statistics and is made available as an electronic reprint (preprint) with permission of by the President and Fellows of Harvard College and the Massachusetts Institute of Technology. The paper can be found at the following official DOI: [http://dx.doi.org/10.1162/REST_a_00180]. One print or electronic copy may be made for personal use only. Systematic or multiple reproduction, distribution to multiple locations via electronic or other means, duplication of any material in this paper for a fee or for commercial purposes, or modification of the content of the paper is prohibited and is subject to penalties under law.