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Book Review: The Endowment Model of Investing by Martin L. Leibowitz, Anthony Bova and P. Brett Hammond

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The Endowment Model of Investing by Martin L. Leibowitz, Anthony Bova and P. Brett Hammond is an important work in finance. The main theme of the book is that the U.S. equities of stocks or bonds represent the primary risk elements in most institutional portfolios.

The U.S. institutional funds share common characteristics. For instance, the total portfolio volatility may be with the equities in stocks or bonds. In addition, the total projected volatilities are about 10% under normal market conditions. Despite the uncertainties, diversification remains one of the most powerful tools to reduce risk and enhance returns in the arsenal of tools available to the investor.

The authors explain how college and university endowment funds have increased their investment allocations from 3% to over 25% or more in non-traditional assets like real estate, hedge funds, private equity, natural resources and venture capital. At the same time, asset allocations decreased in such areas as fixed income, cash or cash equivalents. And so, U.S. equities continue to be the dominant risk factor for most institutional portfolios as demonstrated by the 2008 market crash.

The book explains that volatility in the markets is not dispositive. The more worrisome prospect is market deterioration so severe that it undermines an institution’s investment philosophy and forces a fundamental reconsideration of basic assumptions underlying the investment portfolios. Vulnerable assets include international equity investments and emerging market equity during short term periods of stress in the markets which may translate to downside risk.

The authors have utilized the term “dragon risk” to denote unchartered territories where dragons might dwell. Examples are the potential perils of new investment vehicles like exotic derivatives and the wider range of performance outcomes for less efficient assets which depend more on having a top manager for the investment.

The Endowment Model of Investing is an important book on investments which describes both traditional and non-traditional investments, as well as, the inherent downside risks. This is an investment resource for anyone owning or managing a portfolio of any size or complexity.

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About Dr Joseph S Maresca

I've taught approx. 34 sections of collegiate courses including computer applications, college algebra, collegiate statistics, law, accounting, finance and economics. The experience includes service as a Board Director on the CPA Journal and Editor of the CPA Candidates Inc. Newsletter. In college, I worked as a statistics lab assistant. Manhattan College awarded a BS in an allied area of operations research. The program included courses in calculus, ordinary differential equations, probability, statistical inference, linear algebra , the more advanced operations research, price analysis and econometrics. Membership in the Delta Mu Delta National Honor Society was granted together with the degree. My experience includes both private account and industry. In addition, I've worked extensively in the Examinations Division of the AICPA from time to time. Recently, I passed the Engineering in Training Exam which consisted of 9 hours of examination in chemistry, physics, calculus, differential equations, linear algebra, probability/ statistics, fluids, electronics, materials science/structure of matter, mechanics, statics, thermodynamics, computer science, dynamics and a host of minor subject areas like engineering economics. A very small percentage of engineers actually take and pass the EIT exam. The number has hovered at circa 5%. Several decades ago, I passed the CPA examination and obtained another license in Computer Information Systems Auditing. A CISA must have knowledge in the areas of data center review, systems applications, the operating system of the computer, disaster recovery, contingency planning, developmental systems, the standards which govern facility reviews and a host of other areas. An MBA in Accounting with an Advanced Professional Certificate in Computer Applications/ Information Systems , an Advanced Professional Certificate in Finance and an Advanced Professional Certificate in Organizational Design were earned at New York University-Graduate School of Business (Stern ). In December of 2005, an earned PhD in Accounting was granted by the Ross College. The program entrance requires a previous Masters Degree for admittance together with a host of other criteria. The REGISTRAR of Ross College contact is: Tel . US 202-318-4454 FAX [records for Dr. Joseph S. Maresca Box 646 Bronxville NY 10708-3602] The clinical experience included the teaching of approximately 34 sections of college accounting, economics, statistics, college algebra, law, thesis project coursework and the professional grading of approx. 50,000 CPA examination essays with the American Institute of Certified Public Accountants. Additionally, membership is held in the Sigma Beta Delta International Honor Society chartered in 1994. Significant writings include over 10 copyrights in the name of the author (Joseph S. Maresca) and a patent in the earthquake sciences.