Abstract
In this paper I empirically test the effect of background risk on portfolio choice using university endowment portfolios and university revenue risk, where background risk is measured as the standard deviation of the growth rate of university non-financial income. I show that universities with higher background risk invest significantly more in fixed income and less in alternative assets. An increase in background risk from one standard deviation below the mean, to one above, increases the allocation to fixed income by more than 10% relative to the mean. There is also evidence that wealthier, more selective, research oriented universities hold riskier portfolios.
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