Exam 28: Investment Policy and the Framework of the CFA Institute Appendices

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?

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

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?

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.

For an individual investor,the value of home ownership is likely to be viewed

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 expect to have in her risky account at retirement?

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

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 expect to have in his risky account at retirement?

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.

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

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

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

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

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.

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.

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 longest time horizons are likely to be set by

Discuss investments as a hedge against inflation

Liquidity is: