INV4801 ASSIGNMENT 01: 2024
UNIQUE NO: 301901
DUE DATE: 31 MAY 2024
QUESTION 1:
a) Formulate MAF’s return objective for next year. Show your calculations. (4)
b) Explain why the multiplicative approach to calculating the return objective is more precise than the additive
approac...
a) Formulate MAF’s return objective for next year. Show your calculations. (4)
1. Real Return Goal: The board's goal is to increase the endowment value by a rate
exceeding inflation (6%) to maintain purchasing power. So, the minimum acceptable
real return goal is 6% + inflation rate.
2. Distribution Goal: The board also intends to make annual distributions equal to 6.5%
of the average asset market value. However, this distribution uses some of the
principal amount, not just investment returns.
3. Total Return Objective: To achieve both goals (maintain purchasing power and make
distributions), we need to combine the real return goal and the distribution rate.
Here's the formula:
Total Return Objective = Real Return Goal + Distribution Rate
Total Return Objective = (6% inflation) + 6.5% = 12.5%
Therefore, MAF's return objective for next year should be 12.5%. This ensures the
endowment maintains its purchasing power while allowing for the planned distributions.
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