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

Genny Webb 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.Genny 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%.Genny 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 Genny be sure of having in the safe account at retirement

Target-date retirement funds

The longest time horizons are likely to be set by

Variable life insurance

__________ in the process of asset allocation.

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

Stephanie Watson 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.Stephanie 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%.Stephanie 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 Stephanie expect to have in her risky account at retirement

One incorrect belief that is often cited as a reason for fully-funded pension funds to invest in equities is

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

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.

The principle of duration matching is

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. How much can Alan be sure of having in the safe account at retirement

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.

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

Target-date retirement funds

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 __________ the proportion of total return that is in the form of price appreciation, the __________ will be the value of the tax-deferral option for taxable investors.

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.

Alex Goh 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.Alex 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%.Alex 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 Alex be sure of having in the safe account at retirement