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Exam 28: Investment Policy and the Framework of the Cfa Institute

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Question 41

Multiple Choice

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The optimal portfolio on the efficient frontier for a given investor does not depend on

A) the investor's degree-of-risk tolerance.
B) the coefficient, A, which is a measure of risk aversion.
C) the investor's required rate of return.
D) the investor's degree-of-risk tolerance and the investor's required rate of return.
E) the investor's degree-of-risk tolerance and the coefficient, A, which is a measure of risk aversion.

F) A) and B)
G) C) and E)

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Question 42

Multiple Choice

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Alex Moore is 43 years old and has accumulated $78,000 in his self-directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk-free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alex now has 40% of his money in the risk-free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much does Alex currently have in the safe account; how much in the risky account?

A) $31,200; $46,800
B) $39,000; $39,000
C) $15,900; $62,100
D) $45,300; $32,700
E) $64,000; $14,000

F) A) and B)
G) A) and E)

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Question 43

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Dusty Jones is 23 years old and has accumulated $4,000 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Dusty thinks she will retire at age 67 and figures she will live to age 81. The plan allows for two types of investments. One offers a 3.5% risk-free real rate of return. The other offers an expected return of 10% and has a standard deviation of 23%. Dusty now has 5% of her money in the risk-free investment and 95% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. How much can Dusty be sure of having in the safe account at retirement?

Institutional investors will rarely invest in which of these asset classes?

When a company sets up a defined contribution pension plan, the __________ bears all the risk, and the __________ receives all the return from the plan's assets.

__________ center on the trade-off between the return the investor wants and how much risk the investor is willing to assume.

Endowment funds are held by

__________ in the process of asset allocation.

Chris Silvers is 39 years old and has accumulated $128,000 in his self-directed defined contribution pension plan. Each year he contributes $2,500 to the plan, and his employer contributes an equal amount. Chris thinks he will retire at age 62 and figures he will live to age 86. The plan allows for two types of investments. One offers a 4% risk-free real rate of return. The other offers an expected return of 11% and has a standard deviation of 37%. Chris now has 25% of his money in the risk-free investment and 75% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much can Chris be sure of having in the safe account at retirement?

Alex Moore is 43 years old and has accumulated $78,000 in his self-directed defined contribution pension plan. Each year he contributes $1,500 to the plan, and his employer contributes an equal amount. Alex thinks he will retire at age 60 and figures he will live to age 83. The plan allows for two types of investments. One offers a 4% risk-free real rate of return. The other offers an expected return of 10% and has a standard deviation of 34%. Alex now has 40% of his money in the risk-free investment and 60% in the risky investment. He plans to continue saving at the same rate and keep the same proportions invested in each of the investments. His salary will grow at the same rate as inflation. How much can Alex expect to have in his risky account at retirement?

Liquidity is

Paulina Lesky is 27 years old and has accumulated $7,500 in her self-directed defined contribution pension plan. Each year she contributes $2,000 to the plan, and her employer contributes an equal amount. Paulina thinks she will retire at age 63 and figures she will live to age 90. The plan allows for two types of investments. One offers a 3% risk-free real rate of return. The other offers an expected return of 12% and has a standard deviation of 39%. Paulina now has 20% of her money in the risk-free investment and 80% in the risky investment. She plans to continue saving at the same rate and keep the same proportions invested in each of the investments. Her salary will grow at the same rate as inflation. How much can Paulina expect to have in her risky account at retirement?

The planning phase of the CFA Institute's investment management process

A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries.

The desirable components of an Investment Policy Statement for individual investors can be divided into

The execution phase of the CFA Institute's investment management process

Which of the following is considered a passive investment?

Pension funds do notI) accept contributions from employers, which are tax deductible.II) pay distributions that are taxed as ordinary income.III) pay benefits only from the income component of the fund.IV) accept contributions from employees, which are not tax deductible.

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. If the first year's actual investment return is 7%, what is the starting benefit payment?

Assume that at retirement you have accumulated $825,000 in a variable annuity contract. The assumed investment return is 5.5%, and your life expectancy is 18 years. What is the hypothetical constant-benefit payment?