Question

A financial adviser manages an equity portfolio for an endowment fund, which has an 8.2% return objective. The adviser makes a strategic allocation recommendation that produces a return of 8.5% in an economy that has experienced a 2.9% rate of inflation. The advisor also creates her own benchmark for the fund which includes multiple indexes that have similar risk profiles of the securities in the fund. The benchmark return during the period is 8.9%. Is the endowment fund satisfied with the advisor's performance?

Answer 1

The endowment fund is not satisfied with the advisor's performance

Step-by-step explanation:

Judging from a nominal interest rate perspective where return expected of an investment comprises of real rate of return and an extra return which is a compensation for inflation rate in the economy,the endowment fund is not satisfied with performance of the advisor.

The satisfactory rate of return that would be expected of the advisor is computed below:

nominal interest rate=real rate+inflation rate

real rate is 8.2%

inflation rate is 2.9%

nominal interest rate=8.2%+2.9%

=11.10%