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A linear control model of a university budget is presented as an aid to developing optimal strategies for dealing with major exogenous uncertainties. The specific uncertainties treated are those associated with inflation, endowment returns, and fund-raising. The model seeks to stabilize budget growth by adhering as closely as possible to prescribed limits for certain financial ratios, such as the ratio of the budget to the endowment. Sample runs for Stanford University are given, along with an analysis of the financial effects of varying the level of investment risk carried by the endowment.
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Grinold et al. (1978) studied this question.
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