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

Alan Barnett 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.Alan 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%.Alan 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 Alan currently have in the safe account; how much in the risky account?

Pension funds do not I) 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.

__________ refer to strategies aimed at attaining the established rate of return requirements while meeting expressed risk tolerance and applicable constraints.

The longest time horizons are likely to be set by

General pension funds typically invest __________ of their funds in equity securities.

Deferral of capital gains tax does not I) mean that the investor doesn't need to pay taxes until the investment is sold. II) allow the investment to grow at a faster rate. III) mean that you might escape the capital gains tax if you live long enough. IV) provide a tax shelter for investors.

The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.

The first step a pension fund should take before beginning to invest is to

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

Deferral of capital gains tax I) means that the investor doesn't need to pay taxes until the investment is sold. II) allows the investment to grow at a faster rate. III) means that you might escape the capital gains tax if you live long enough. IV) provides a tax shelter for investors.

__________ in the process of asset allocation.

Alan Barnett 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.Alan 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%.Alan 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 Alan expect to have in his risky account at retirement?

Professional financial planners should

Alan Barnett 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.Alan 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%.Alan 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. Of the total amount of new funds that will be invested by Alan and by his employer on his behalf, how much will he put into the safe account each year; how much into the risky account?

The optimal portfolio on the efficient frontier for a given investor depends on

The investment horizon is