Texas A&M UniversityFINC MISCInstructions: You must enter your answers to each assessment question in the sections notedbelow, and must not change any information contained within the first set of black brackets [] foreach Task.[ Task 1 ]ksatMemorandumTo: Project LeadFrom; FAP CandidateRe: Risk Management Policies Supporting the CDEFThis memorandum is intended to provide the CDEF management team w
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Instructions: You must enter your answers to each assessment question in the sections noted
below, and must not change any information contained within the first set of black brackets [] for
each Task.
[ Task 1 ]
ksat
Memorandum
To: Project Lead
From; FAP Candidate
Re: Risk Management Policies Supporting the CDEF
This memorandum is intended to provide the CDEF management team with a list of risks that the
fund faces along with recommended risk mitigation strategies for the most important of those risks.
The following risk categorization and definition tool (RCD) identifies multiple risk relevant to the
management of the education fund in the four major categories of risks: Financial, Strategic, Insurance,
and Operational.
[ Task 2 ]
ksat
Memorandum
To: Project Lead
From; FAP Candidate
Re: Recommended asset mix and contribution rate for CDEF
Available Risk Measures
The risk measures currently available include mean, minimum, maximum, standard deviation,
value at risk (VAR), and conditional tail expectation (CTE). The table below evaluates the pros and cons
of each risk measure.
[ Task 3 ]
ksat
Memorandum
To: Project Lead
From; FAP Candidate
Re: Specialized Asset Class Recommendation for the CDEF
The Investment Committee is currently considering changing the recommended investment mix to
include specialized asset classes including real estate, gold bullion, and zero-coupon bonds. The
committee could also procure an external specialized asset management team to complement the existing
Investment Committee.
Real estate investment would involve the buying and selling of physical real estate. It is typically
a long-term investment, and there are significant costs associated with transactions. Gold bullion
investments require the purchase of physical gold, where returns have historically been positive due to
fixed supply (amount of mineable gold on earth) compared to increased demand (population growth and
other factors). Zero-coupon bonds are similar to the coupon bonds already being considered for the
investment portfolio, differing only in that the purchaser forgoes periodic interest payments (coupons) in
favor of a lower purchase price, essentially realizing all interest gains at the maturity date. The risks and
rewards of each asset class and the asset management team are described in the table below.
[ Task 4 ]
ksat
Memorandum
To: Project Lead
From; FAP Candidate
Re: Sensitivity Testing Assumptions in CDEF Projection Model
Sensitivity Test Results for CDEF Model
Sensitivity tests were conducted on variables in the CDEF model. The results of the test indicate
that the most material assumptions are Inflation on Tuition, Attrition, and Net Employed Population
Change. Student Population growth had a modest impact, while any plausible variation in the fund
management expense is immaterial to the overall results.
[ Task 5 ]
ksat
Memorandum
To: CDEF Board
From: Fir Consulting
Re: CDEF Asset Mix and Investment Policy
Executive Summary
Newly enacted legislation calls for the setup of the Cascadia Department of Education Foundation
(CDEF) to support higher education costs for Cascadian youth. Fir Consulting has been retained to
make recommendations for the CDEF’s asset mix and investment policy that meet the funds goals as
stated in the CDEF legislation. The goals are:
Assist the CDEF in meeting its obligations to beneficiaries and their contributors;
Manage the assets in the best interest of the CDEF beneficiaries and contributors;
Invest assets to achieve a maximum rate of return without undue risk of loss; and
Ensure the CDEF meets its financial obligations on any given business day.
Key risks identified by Fir Consulting include market returns, inflation, capital availability/liquidity,
and the impact that the fund will have on beneficiary behavior (i.e. student attrition rates). To mitigate
these risks, we recommend keeping less 50% of assets in any single asset class to avoid over-dependence
on returns of a single asset class, at least 40% in treasury bills to maintain liquidity, consideration of
inflation-hedging specialized assets, and the development of an attrition improvement assumption for
future modeling purposes.
With these goals and key risks in mind, Fir Consulting recommends a strategy focused on minimal
solvency risk, sufficient asset liquidity, and maximizing the expected return on investment. The
recommended tax per employed person is $895 per year, which will allow the fund to remain solvent with
very high likelihood without placing undue burden on tax contributors. The recommended investment mix
is 40% treasuries, 30% bonds, and 30% equities. This investment mix minimizes solvency risk while
maintaining high expected return and sufficient liquidity.
Fir Consulting also recommends that the CDEF consider utilizing a specialized asset
management team to evaluate gold bullion, real estate, and commodities to further diversify the portfolio
and hedge against inflation. Since the CDEF Investment Committee does not have any specialty asset
experts, Fir Consulting recommends that the Investment Committee pursues a specialty asset
management team to advise on those investments. We also recommend a dollar-cost-averaging approach
for the execution of trades in the portfolio.
[ Task 6 ]
ksat
Memorandum
To: Project Lead
From; FAP Candidate
Re: CDEF Year 5 Experience Review and Recommended Changes
In the 5 years since the implementation of the CDEF, new experience has emerged that differs from
expectations. The following sections contains chart summarizing actual experience vs expectations and
recommended changes to assumptions where needed.
Student Population Growth
Recommendation: Increase student population growth rate assumption from 2.0% to 2.2%. This will
increase the required tax per employed person minimally.
Observations relevant to this recommendation:
The variance in actual versus expected student population growth is small: +0.1% in years 1-3
and +0.2% in years 4 and 5.
While the magnitude is small, a trend of growth acceleration is appearing in years 4 and 5. The
revised assumption should consider this trend by relying more heavily on recent data points
As seen in the sensitivity test results prior to the implementation of CDEF, a student population
growth assumption of 2.5% instead of 2.0% starting in year 1 would have increased the required
tax per employed person by only 4%.
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