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

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 be sure of having in the safe account at retirement?

Which of the following are commonly thought to be good general investment guidelines?I) Don't try to outguess the market, buying and holding generally pays off.II) Diversify investments to spread risk.III) Investments should be highly concentrated in your company's stock.IV) 401K money is best placed in money market accounts because risk is very low.V) Investments should be allocated to stocks, bonds, and money-market funds.

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 expect to have in his risky account at retirement?

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. If the first year's actual investment return is 8%, what is the starting benefit payment?

The risk-management section of an Investment Policy Statement for individual investors typically contains

__________ can be used to create a perfect CPI-measured inflation hedge.

An important benefit of Keogh plans is that

The investment horizon is

Deferral of capital gains tax does notI) 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

A remainderman is

A fully-funded pension plan can invest surplus assets in equities provided it reduces the proportion in equities when the value of the fund drops near the accumulated benefit obligation. This strategy is referred to as

The standard by which broker-dealers must select investments for their clients is __________________?

Target-date retirement funds

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

The governance section of an Investment Policy Statement for individual investors typically contains

The fiduciary standard for investment advisors requires they must select investments for their clients which are classified as __________________?

The longest time horizons are likely to be set by

Which of the following are commonly thought to be bad general investment guidelines?I) Don't try to outguess the market, buying and holding generally pays off.II) Diversify investments to spread risk.III) Investments should be highly concentrated in your company's stock.IV) 401K money is best placed in money market accounts because risk is very low.V) Investments should be allocated to stocks, bonds, and money-market funds.