Portfolio Management for Institutional Investors

Correct Answer: Add a 5% allocation to timberland, funded equally from the equity and fixed income allocations, and closely monitor the portfolio's liquidity profile and the timberland investment's performance.

Adding a 5% allocation to timberland, funded equally from the equity and fixed income allocations, is the most appropriate option for the Granite State Retirement System. Timberland can provide diversification benefits and a hedge against inflation, which aligns with the plan's objectives. By funding the allocation equally from equities and fixed income, the portfolio's overall risk profile is maintained. Closely monitoring the liquidity profile and performance of the timberland investment is crucial to address the concerns raised about illiquidity and valuation challenges. The other options are less suitable because: - Maintaining the current allocation and exploring alternative diversifiers may miss out on the potential benefits of timberland investments. - Adding a 10% allocation to timberland entirely from fixed income and increasing equity exposure could significantly alter the portfolio's risk profile and expose it to greater illiquidity and valuation risks.

Correct Answer: Allocate 15% to private equity, funded proportionally from the global equity and fixed income allocations, and implement a phased approach to reach the target allocation over a 3-year period, allowing for proper due diligence and manager selection.

The best option is to allocate 15% to private equity, funded proportionally from the global equity and fixed income allocations, and implement a phased approach to reach the target allocation over a 3-year period. This allows for proper due diligence and manager selection, which is crucial given the illiquid nature and higher fees associated with private equity investments. The other options are less suitable because: - Maintaining the current allocation and exploring alternative public market strategies may not provide the same level of return enhancement and diversification benefits as private equity. - Allocating 15% to private equity entirely from global equities and investing the full amount immediately could lead to increased short-term volatility and liquidity risk in the portfolio, which may not align with the endowment's risk tolerance.

Correct Answer: Allocate 15% to alternative investments, funded proportionally from the global equity and fixed income allocations, and implement a thorough due diligence process to select high-quality managers across the alternative investment spectrum. Regularly monitor and assess the performance, risks, and costs associated with the alternative investments, making adjustments as needed to ensure alignment with the foundation's goals.

The best answer is to allocate 15% to alternative investments, funded proportionally from the global equity and fixed income allocations. This approach allows the foundation to diversify its portfolio and potentially enhance returns, while managing the risks associated with alternative investments. By implementing a thorough due diligence process and regularly monitoring the performance, risks, and costs of the alternative investments, the foundation can ensure that these investments align with its long-term goals and risk tolerance. Maintaining the current asset allocation without adding alternative investments may limit the foundation's ability to diversify and potentially improve risk-adjusted returns. Concentrating the entire alternative investment allocation in hedge funds may not provide sufficient diversification benefits and could expose the portfolio to specific risks associated with hedge fund strategies.