Explanation:
Private equity and real estate fall under the category of illiquid assets. Large trades of illiquid assets results in substantial market movement which may in turn trigger adverse price movements. Thus, an investor trying to cash in on illiquid assets in a short time period may have to suffer significant losses due to adverse price movement. Barring a change of plans by the university, a substantial amount of money is needed in next two years – and that’s where the problem lies. If the fund invests in illiquid assets, divesting such assets may force the institution to accept a lower market price or incur substantial transaction costs. Therefore, investment in illiquid assets must be avoided.
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Q.2426 Jude Wang, a portfolio manager, works at an investment management firm. She has been recently asked to manage the endowment fund of a large university. She meets the head of the university to discuss finer details about the fund, including the composition of the endowment fund. The university head informs her that the university plans to withdraw a substantial amount of the fund in next two years and use the money to establish a state-of-the-art financial laboratory. He also adds that the university board desires to keep the transaction cost as low as possible. After the discussion, Wang meets her colleague, Jane Jones, with whom she explores the asset classes that can possibly be included in the endowment fund. According to Jones, Wang should consider including private equity and real estate in the endowment fund as these asset classes have low correlation with stocks and bonds and can provide a better diversification effect to the overall portfolio. Jones goes further to opine that private equity and real estate would make it easier for Wang to generate an excess return compared to stocks and bonds. Which of the following does not support the idea of including private equity and real estate in the portfolio?
A
It would provide a better diversification effect to the portfolio.
B
It would help Wang to generate an excess return.
C
The university needs a substantial amount of funds in next two years for the laboratory.
D
It would improve the portfolio because of the assets’ low correlation with stocks and bonds.