Are Universities Fair? Risking the Endowment for Future Generations

38 Pages Posted: 31 Aug 2011 Last revised: 1 Jun 2012

See all articles by Thomas Gilbert

Thomas Gilbert

University of Washington - Department of Finance and Business Economics

Christopher M. Hrdlicka

University of Washington - Michael G. Foster School of Business

Date Written: September 16, 2011

Abstract

University endowments invest more than 70% of their assets in risky securities. This large allocation to risky assets matches the investment advice provided by standard consumption and portfolio choice models with long-horizon individual investors. But universities are not individuals. In this paper, we analyze the universities' infinite-horizon portfolio choice problem under the paradigm of maintaining intergenerational fairness with a zero rate of time preference. First, we quantify the oft-cited mandate of university trustees to maintain a policy of fairness across generations without any favoritism for the present over the future. Second, we show that the fairer the universities, the less they invest in the risky asset. In the limit, they forego the risky asset completely to provide constant consumption. Third, we explore how if generations are allowed to have differing risk aversions or if universities neglect extreme left-tail return events, then the contradiction between intergenerational fairness and risky asset allocation can be lessened.

Keywords: Endowments, Asset Allocation, Universities, Fairness, Equity, Time Preference

JEL Classification: D81, D91, G11, G12, G23, I22

Suggested Citation

Gilbert, Thomas and Hrdlicka, Christopher M., Are Universities Fair? Risking the Endowment for Future Generations (September 16, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1919764 or http://dx.doi.org/10.2139/ssrn.1919764

Thomas Gilbert

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States
206-616-7184 (Phone)

HOME PAGE: http://faculty.washington.edu/gilbertt/

Christopher M. Hrdlicka (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)

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