Describe the following three primary rebalancing strategies: Buy and hold, Constant mix, Constant-proportion portfolio insurance

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Marvis University (MU) is a private, multiprogram U.S. university with a $2 billion endowment fund as of fiscal year-end May 31, 2002. With little government support, MU is heavily dependent on its endowment fund to support ongoing expenditures, especially because the university’s enrollment growth and tuition revenue have not met expectations in recent years. The endowment fund must make a $126 million annual contribution, which is indexed to inflation, to MU’s general operating budget. The U.S. Consumer Price Index is expected to rise 2.5 percent annually, and the U.S. higher education cost index is anticipated to rise 3 percent annually. The endowment has also budgeted $200 million due on January 31, 2003, representing the final payment for construction of a new main library.
In a recent capital campaign, MU met its fundraising goal only with the help of one very successful alumna, Valerie Bremner, who donated $400 million of Bertocchi Oil and Gas common stock at fiscal year-end May 31, 2002. Bertocchi Oil and Gas is a large-capitalization, publicly traded U.S. company. Bremner donated the stock on the Chapter 11 Monitoring and Rebalancing 111 condition that no more than 25 percent of the initial number of shares may be sold in any fiscal year. No substantial additional donations are expected in the future.
Given the large contribution to and distributions from the endowment fund, the fund’s investment committee has decided to revise its investment policy statement.
In the revised IPS, the endowment portfolio manager established that MU’s return requirement is 10 percent. MU’s average ability to take risk restrains its risk tolerance.
Five years have passed, and the Marvis University endowment fund’s willingness and ability to assume risk have increased. The endowment fund’s investment committee asks its consultant, James Chan, to discuss and recommend a rebalancing strategy to incorporate the new risk tolerance. Chan anticipates a bull market in growth assets over the next three to five years. He also believes that volatility will be below historical averages during that same time period. The investment committee directs Chan to incorporate his views into his recommendation. The committee also does not want the market value of the portfolio to decline more than 15 percent below its current market value.


Describe the following three primary rebalancing strategies:
Buy and hold
Constant mix
Constant-proportion portfolio insurance

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