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C R E A T I N G S U P E R I O R B A L A N C E S H E E T R I S K M A N A G E M E N T S O L U T I O N S
2008 EACUBO Annual Workshop
S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
2. E A C U B O 2 0 0 8
l
This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including
such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or
transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes
only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this
presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan.
The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date,
all of which are accordingly subject to change. JPMorgan’s opinions and estimates constitute JPMorgan’s judgment and should be regarded as indicative,
preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the
accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was
otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any
other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or
accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account
the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other
effects.
Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all
persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the
transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such
tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company
by JPMorgan.
JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a
rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. JPMorgan also prohibits its
research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to
benefit investors.
IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters
included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing
or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S.
tax-related penalties.
JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan
arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc,
J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other
commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing
entities.
This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange
credit or to provide any other services.
C R E A T I N G S U P E R I O R B A L A N C E S H E E T R I S K M A N A G E M E N T S O L U T I O N S
3. Agenda
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Treasury Management at University of Pennsylvania
Internal Bank Management at University of Virginia
Overview of Risk Management Principles
Introduction
1
1
5
15
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Today’s panelists
Helen Kreider, University of Pennsylvania
INSERT BRIEF BIO
Jim Matteo, University of Virginia
Director of Treasury Operations since August 2005, responsible for debt
management, banking & cash management, investment portfolio oversight, liquidity
& interest rate management
Charlie Giffin, JPMorgan
Co-Head of Issuer Solutions group within Tax Exempt Capital Markets, with specialty
in enterprise risk management, market analytics, and integrated solutions across
different markets
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I N T R O D U C T I O N
5. E A C U B O 2 0 0 8
What do we mean by “Balance Sheet Risk Management?”
Identify risk exposures
Financing risks
Investment risks
Operational risks
Construction risks
Quantify risk exposures (where possible)
Expected outcome
Volatility
Correlation
Manage risk vs. return
Accept appropriate amounts of risk
Maximize net financial performance
Anticipate “worst case” outcomes
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I N T R O D U C T I O N
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The danger of what we don’t yet know
“With these advances in technology, lenders have taken advantage of credit-scoring
models and other techniques for efficiently extending credit to a broader spectrum
of consumers. …Where once more-marginal applicants would simply have been
denied credit, lenders are now able to quite efficiently judge the risk posed by
individual applicants and to price that risk appropriately. These improvements
have led to rapid growth in subprime mortgage lending; indeed, today subprime
mortgages account for roughly 10 percent of the number of all mortgages
outstanding, up from just 1 or 2 percent in the early 1990s.”
- Alan Greenspan, April 5, 2005
“We are all wrong so often that it amazes me that we can have any conviction at all
over the direction of things to come. But we must.”
- Jim Cramer, CNBC
“It's tough to make predictions, especially about the future.”
- Yogi Berra
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I N T R O D U C T I O N
7. Agenda
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Treasury Management at University of Pennsylvania
Internal Bank Management at University of Virginia
Overview of Risk Management Principles
Introduction
5
1
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15
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Much of risk management can be simplified to averages
and standard deviations (volatility)
There are a number of common risk factors within investment management…
Investment Factors
Average Return Annual Volatility
S&P 500 7.50% 14.0%
Russell 2000 9.00% 18.0%
MSCI EAFE 10.00% 14.0%
Lehman Bros. Agg 6.00% 3.5%
US Treasury Bills 3.75% 0.5%
HFR FOF Strategic 8.00% 9.0%
HFR FOF Conserv 6.50% 3.5%
Yield Factors
Average Rate Annual Volatility
LIBOR 5.00% 25.0%
BMA 3.40% 25.0%
BMA/LIBOR 68.00% 9.0%
CPI 3.25% 40.0%
… as well as within debt management
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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Correlations between risk factors is what drives the
benefits of portfolio diversification
Correlation Matrix
LIBOR BMA/LIB 5Y LIB S&P 500 Russell 2000 MSCI EAFE Lehman Agg T-Bills HFR FOF A HFR FOF B
LIBOR 1.00 (0.35) 0.65 0.06 0.01 0.20 (0.05) (0.02) 0.09 0.08
BMA/LIB (0.35) 1.00 (0.20) 0.07 (0.01) 0.00 0.08 0.01 (0.10) (0.07)
5Y LIB 0.65 (0.20) 1.00 0.24 0.23 0.20 (0.88) (0.09) 0.16 0.12
S&P 500 0.06 0.07 0.24 1.00 0.74 0.82 (0.22) (0.00) 0.57 0.46
Russell 2000 0.01 (0.01) 0.23 0.74 1.00 0.72 (0.18) (0.08) 0.77 0.56
MSCI EAFE 0.20 0.00 0.20 0.82 0.72 1.00 (0.20) (0.08) 0.67 0.58
Lehman Agg (0.05) 0.08 (0.88) (0.22) (0.18) (0.20) 1.00 0.10 (0.15) (0.12)
T-Bills (0.02) 0.01 (0.09) (0.00) (0.08) (0.08) 0.10 1.00 (0.03) 0.02
HFR FOF A 0.09 (0.10) 0.16 0.57 0.77 0.67 (0.15) (0.03) 1.00 0.89
HFR FOF B 0.08 (0.07) 0.12 0.46 0.56 0.58 (0.12) 0.02 0.89 1.00
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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For investment portfolio management, the “efficient
frontier” is a common representation of risk vs. return
Potential Investment Allocation Alternatives1Potential Investment Allocation Alternatives1
1
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current
market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary
substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should
not be taken as a guarantee of future results. Analysis includes assumptions for initial and average interest rates, correlations, volatility and reversion speed, among others.
Volatility is defined here as standard deviation of annual changes in an exposure, and not necessarily a cross section of potential future cumulative outcomes.
Current Portfolio
Efficient Frontier of
investment alternatives
Current Portfolio Allocation
Balance
S&P 500 25,000,000
Russell 2000 25,000,000
MSCI EAFE 25,000,000
Lehman Bros. Agg 25,000,000
US Treasury Bills 200,000,000
HFR FOF Strategic 100,000,000
HFR FOF Conserv 100,000,000
Total 500,000,000
Institutions can choose an
efficient portfolio of
investment alternatives,
subject to individual risk
tolerance constraints
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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Debt managers can benefit from adopting risk management
principles developed through the investment community
Investment Management Debt Management
Sensitivity Total Return (Mark to Market) Cost (Cash Flow)
Risk Measures Value at Risk (VaR); Price Volatility Cash Flow at Risk (CFaR); Cost
Volatility
Objective Maximize Return; Minimize Risk Minimize Cost; Minimize Risk
Analytics Capture Correlations of Returns Capture Correlations of Carry
Diversification Uncorrelated Sources of Return Uncorrelated Sources of Carry
Market
Constraints
Value at Risk Important Both VaR and CFaR Important
Market
Opportunities
Hedge Funds, Energy, Weather BMA, LIBOR, CPI, CMS, ???
Investment Management Compared to Debt Management
Investment Management Compared to Debt Management
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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We can also create an “efficient frontier” for various debt
management strategies in the current market
Potential Investment Allocation Alternatives1Potential Investment Allocation Alternatives1
1
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current
market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary
substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should
not be taken as a guarantee of future results. Analysis includes assumptions for initial and average interest rates, correlations, volatility and reversion speed, among others.
Volatility is defined here as standard deviation of annual changes in an exposure, and not necessarily a cross section of potential future cumulative outcomes.
Current Portfolio
Efficient Frontier of
debt alternatives
Current Portfolio Allocation
Balance
Fixed 150,000,000
% Libor Synthetic Fixed 150,000,000
Floating 100,000,000
BMA Basis Swap -
CMS Swap -
Total 400,000,000
Institutions can choose an
efficient portfolio of debt
instruments, again subject to
individual risk tolerance
constraints
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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Finally, we can also incorporate operational exposures that
are specific to each institution
Institutions have a number of potential operational risk exposures:
Changes in top line revenue
Changes in expenses
Changes in Endowment distribution
Other potential sources of risk:
Healthcare related income / expenses
Royalties
State contributions
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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The Central Treasury function manages a number of
different risks for the University
Internal
Loans
Internal
Deposits
Return: 4.5%
Volatility: 0.5%
Cost: 5.0%
Volatility: 0.0%
Capital
Projects
Operations
$250mm
Central
Treasury
External
Assets
External
Debt
Return: 6.5%
Volatility: 4.5%
Cost: 4.25%
Volatility: 0.4%
$500mm
$400mm
$350mm
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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With this framework, institutions can choose an appropriate
level of risk, and maximize related net returns
Potential Net Risk/Return Alternatives1Potential Net Risk/Return Alternatives1
Current Portfolio
Efficient Frontier of
Central Treasury
1
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current
market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary
substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should
not be taken as a guarantee of future results. Analysis includes assumptions for initial and average interest rates, correlations, volatility and reversion speed, among others.
Volatility is defined here as standard deviation of annual changes in an exposure, and not necessarily a cross section of potential future cumulative outcomes.
$354
$455
$556
$657
$758
$859
$960
$1,061
$1,162
$1,263
5Y Ending Balance
Current Solution
Ending Balance Distribution ($mm)Ending Balance Distribution ($mm)
Solution
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
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Better understanding of risk exposures leads to superior
balance sheet risk management
Measures of annual risk exposure
Annual external debt portfolio volatility of $4 million
Annual external investment volatility of $22 million
Annual net balance sheet volatility of $23 million
Size appropriate reserves
95% confidence level reserve: $55 million
Determine appropriate liquidity requirements
A liquidity strategy is essential to anticipate sources of risk that cannot
be wholly quantified
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O V E R V I E W O F R I S K M A N A G E M E N T P R I N C I P L E S
17. Agenda
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Treasury Management at University of Pennsylvania
Internal Bank Management at University of Virginia
Overview of Risk Management Principles
Introduction
15
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University of Virginia Overview
Public University Founded by Thomas Jefferson in 1819
Ranked #2 among public universities and #23 among all universities in U.S. News and
World Report’s 2008 Rankings
Fall 2007 - 20,834 students enrolled in 10 Schools on Main Grounds
FY 2007 Financial Data
Net Assets = $5.4b
Total Revenue = $2.8b
Debt Outstanding = $573m
Endowment Value = $4.4b
AAA ratings from Moody’s, S&P, and Fitch
Operates the University of Virginia Medical Center
Recognized among Solucient’s Top 100 Hospitals every year since 1998
Responsible for 31% of University’s FY07 Total Revenue
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University of Virginia Treasury Department Overview
Debt Management
Fixed and Variable Rate Bonds
Commercial Paper
Interest Rate Derivatives
Investment Management
ST Investment Management
Oversight of LT Investments in Endowment
Oversight of Other Financial Assets (Securities, Trusts, etc.)
Cash Management
Bank Account Management
Cash Forecasting
Internal Bank Management
Internal Loan Program
Internal Investment Program
Quasi-endowment Administration
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Dual Goals of Treasury
University-wide Goals
Optimize risk/return profile for financial assets and liabilities
Provide for sufficient liquidity
Manage the cash flow volatility
Treasury Internal Bank Goals
Manage Budgetary Volatility
Manage Allocation of Financial Resources
Manage Margins
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Scope of Identified Risk Exposures
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I N T E R N A L B A N K M A N A G E M E N T A T U N I V E R S I T Y O F V I R G I N I A
University-wide Internal Bank
Investment
Activities
External Investments External Investments
Internal Loans to Units
Financing Activities External Borrowing External Borrowing
Internal Investments by
Units
Operating Activities University Operating Cash Flow
University Non-Financial Capital
Flows
Cash Flow Managed by
Treasury
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Treasury Internal Bank Balance Sheet
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I N T E R N A L B A N K M A N A G E M E N T A T U N I V E R S I T Y O F V I R G I N I A
Assets
Cash 27,232
Short Term Investments 98,393
Internal Borrowing Program Receivable 321,521
Long Term Investments (LTP) 539,822
Total Assets 986,968
Liabilities
Short Term Debt - Commercial Paper and Other 84,900
Long Term Debt - Bonds 505,151
Bond Premium/Discount 17,779
Internal Investment Program (IIP) Deposits 358,859
Deposits Due To/(From) Departments (9,218)
Total Liabilities 957,471
Retained Earnings 29,868
Net Assets Designated to Budget Office (372)
Net Assets 29,496
Total Net Assets and Liabilities 986,968
Internal Bank Balance Sheet – December 31, 2007 ($000’s)
Internal Bank Balance Sheet – December 31, 2007 ($000’s)
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Initial Internal Bank risk assessment
Internal Bank Risk Factors ($ in mm) – FYE 12/30
Internal Bank Risk Factors ($ in mm) – FYE 12/30
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Pursuing the Efficient Frontier
Potential Internal Bank Alternatives1Potential Internal Bank Alternatives1
1
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market trends, which are based on current
market conditions. We believe the information provided herein is reliable, but it should not be assumed to be either accurate or complete. Actual cash flows may vary
substantially from figures shown based upon changes in market condition, our judgment or the underlying assumptions or methodology employed. Past performance should
not be taken as a guarantee of future results. Analysis includes assumptions for initial and average interest rates, correlations, volatility and reversion speed, among others.
Volatility is defined here as standard deviation of annual changes in an exposure, and not necessarily a cross section of potential future cumulative outcomes.
UVA can choose a desirable risk level and implement changes to any number of the
underlying risk factors
External investments
External debt
Internal debt
Internal deposits
Current Portfolio
Efficient Frontier of portfolio
combinations
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Developing a Planning Horizon
INSERT
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Next Steps on Balance Sheet Management
Education and Buy-in
Drawing from the Endowment Model
Making it manageable
Setting Priorities between External and Internal Goals
Implementation
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29. Agenda
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Treasury Management at University of Pennsylvania
Internal Bank Management at University of Virginia
Overview of Risk Management Principles
Introduction
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University overview & background
Academic Component
12 Schools
Health System
3 Hospitals
19 Clinical Practices
Revenues of $4.8 billion
55% Health System
15% Research; 13% Tuition; 6% Investment income; 10% Other
Expenses of $4.4 Billion
53% Health System
47% Academic
$7.3 Billion Investments
$6.6 billion Endowment
$1.3 Billion Debt
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T R E A S U R Y M A N A G E M E N T A T U N I V E R S I T Y O F P E N N S Y L V A N I A
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Overview of treasury structure
$705 Million Working Capital at December 31,2007
$340 Million money market investment
— Recent in depth review of all money market funds in conjunction with our
Investment Office
$320 Million invested in the University’s endowment
$45 Million in Stafford loans
$570 Million Debt
$228 Million variable rate
— $123 Million in auction market
— $62 Million in VRDO market
— $43 Million in private placements, bank loans
$342 Million fixed rate debt
$200 Million Projected Borrowing Needs
$100 Million forward starting fixed rate swap
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Management goals & objectives
Optimize investment return within acceptable risk parameters
Primary object for working capital is preservation of capital
Competitive real return
— Cash return (benchmarked at tbill) supports operating budget
— Excess return funds a reserve and supports President’s initiatives
Stable return
— Reserve fund created
— Currently 5% of equity fund
— Target 10% of equities
Optimize debt service cost within acceptable risk parameters
Debt policy
— Consider the hedge between cash and variable debt
— May choose to issue fixed rate in historically low environments to preserve
variable capacity
Derivatives policy
— May be used to reduce costs or hedge exposures
— Review broker exposures relative to market value of derivatives
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Scope of identified risk exposures
Investment activities
Return volatility
Call on cash from schools
Capital expenditures
Financing activities
Variable Rate exposure
— SIFMA vs LIBOR
— Health System risk
Operational activities
Business continuity
— Identified critical procedures
— Contract for off campus facilities in emergency
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Sample analysis of alternative investment portfolios for
working capital
Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements on financial market
trends, which are based on current market conditions. We believe the information provided herein is reliable, but it should not be assumed
to be either accurate or complete. Actual cash flows may vary substantially from figures shown based upon changes in market condition,
our judgment or the underlying assumptions or methodology employed. Past performance should not be taken as a guarantee of future
results.
Alternative Investment Analysis ($inMM)
Current
Portfolio
More
Endowment
More Fixed
Income
More
Alternatives
Cash 430 310 100 80
ML 1-3 - - 180 75
Lehman Agg - - 150 50
S&P 500 - - - -
Russell 2000 - - - -
HFR FOF
Conserv. - - - 150
HFR FOF
Strategic - - - 75
Penn Endowment 330 450 330 330
760 760 760 760
Expected Return 6.30% 7.15% 6.93% 7.59%
Volatility 3.63% 4.92% 4.02% 4.12%
Average Annual
NFI 56.0 66.4 57.3 67.4
95% Worst Case
NFI (38.0) (64.9) (47.0) (43.5)
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