medium · Frm Part 2 Risk & Investment Management
An endowment faces a denominator effect where its private equity allocation is now 40% (target 25%). The board is reluctant to sell at a secondary discount.
What is the 'implied' bet the board is making by choosing to 'wait it out'?
- They are betting that interest rates will fall, increasing the value of their bond portfolio.
- They are betting that private asset NAVs will be marked down significantly in the next quarter.
- They are betting that the illiquidity premium is zero and rebalancing doesn't matter.
- They are betting that public equity markets will recover rapidly, naturally shrinking the denominator ratio.
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