Optimal Allocation for Endowments

Endowments consider the risk associated with equities not worth the extra return due to potential large drawdowns. It is deemed socially suboptimal for endowments to hold a significant endowment without serving an appropriate purpose. The trend has been to decrease public equities allocation and move towards private equity investments. Private equity's risk-adjusted returns are attractive but tricky to evaluate due to the lack of clear transaction prices. Private equity returns can be predicted by analyzing market conditions and adjusting for leverage, with occasional exceptional performance in bad quarters.

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