NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Investment Strategies for University Endowment Funds

Robert C. Merton

NBER Working Paper No. 3820
Issued in August 1991
NBER Program(s):   ME

A common approach to the management of endowment is to treat it as if it were the only asset of the university. This approach leads to prescriptions for optimal investment and expenditure policies that are essentially the same across universities. Indeed, the resulting optimal portfolio strategies are focused almost exclusively on providing an efficient tradeoff between risk and expected return, a generic objective that is just as applicable to individuals and non-academic institutions as it is to universities. In contrast, the model developed here provides intertemporally optimal investment and expenditure rules for endowment that take account of the university's overall objectives and total resources. The explicit inclusion of other university assets in addition to endowment leads to optimal endowment portfolios that are not efficient in the sense of the risk-return tradeoff. Moreover, two universities with similar objectives and endowments can have very different optimal portfolios and expenditure patterns if their non-endowment sources of cash flow are different. The model also takes account of the uncertainty surrounding the costs of the various activities such as education, research, and knowledge storage that define the purpose of the university. As a result, the analysis reveals a perhaps somewhat latent role for endowment: namely, hedging against unanticipated changes in those costs.

download in pdf format
   (372 K)

email paper

This paper is available as PDF (372 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3820

Published:

Users who downloaded this paper also downloaded these:
Merton Optimal Investment Strategies for University Endowment Funds
Lerner, Schoar, and Wang w14341 Secrets of the Academy: The Drivers of University Endowment Success
Brown, Dimmock, Kang, and Weisbenner w15861 How University Endowments Respond to Financial Market Shocks: Evidence and Implications
Goetzmann and Oster w18173 Competition Among University Endowments
Hoxby w18626 Endowment Management Based on a Positive Model of the University
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us