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Probability of Depletion
Definition
Probability of depletion is a risk metric computed from Monte Carlo simulation that answers a specific fiduciary question: in what fraction of possible market environments does the endowment exhaust its assets (or fall below a defined critical threshold) within the projection period? A depletion probability of 8.4% means that in roughly 1 out of 12 market environments, the portfolio would be depleted before the end of the horizon. This metric is particularly useful for evaluating whether a spending rate is sustainable given the portfolio's risk characteristics.
In the Context of Endowment Management
For perpetual endowments, the probability of depletion should approach zero across any reasonable projection horizon. For foundations with defined spend-down horizons (e.g., a foundation planning to sunset in 20 years), the depletion probability becomes a planning parameter — the foundation may accept a small probability of early depletion in exchange for higher annual distributions. Investment committees should establish a maximum acceptable depletion probability as part of their risk appetite framework.