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

Assume that at retirement you have accumulated $750,000 in a variable annuity contract. The assumed investment return is 9%, and your life expectancy is 25 years. If the first year's actual investment return is 9%, what is the starting benefit payment?

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. Of the total amount of new funds that will be invested by Dusty and by her employer on her behalf, how much will she put into the safe account each year; how much into the risky account?

The stage an individual is in his/her life cycle will affect his/her

The scope and purpose section of an Investment Policy Statement for individual investors typically consists of defining the

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

Variable life insurance

Assume that at retirement you have accumulated $500,000 in a variable annuity contract. The assumed investment return is 6%, and your life expectancy is 15 years. What is the hypothetical constant-benefit payment?

__________ are boundaries that investors place on their choice of investment assets.

The principle of duration matching is not

Which of the following investments allows the investor to choose how to allocate assets?

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 expect to have in her risky account at retirement?

The principle of duration matching is

The longest time horizons are likely to be set by

The prudent investor rule requires

Deferral of capital gains taxI) 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.

Workers who change jobs may wind up with lower pension benefits at retirement than otherwise identical workers who stay with the same employer, even if the employers have defined benefit plans with the same final-pay benefit formula. This is referred to as

Which of the following investments does not allow the investor to choose how to allocate assets?

Professional financial planners should

An income beneficiary is

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 does Chris currently have in the safe account; how much in the risky account?