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

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Question 1

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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?

A) $2,731,838
B) $2,915,415
C) $1,425,316
D) $224,651
E) $3,545,886

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Question 2

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

A) relevant constraints.
B) other relevant considerations.
C) performance measurement accountabilities, metrics for risk measurement, and the rebalancing process.
D) relevant constraints and other relevant considerations.

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Question 3

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

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

The CFA Institute divides the process of portfolio management into three main elements, which are ______, ______, and ______.

The longest time horizons are likely to be set by

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

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.

Questionnaires and attitude surveys suggest that risk tolerance

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

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?

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?

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 $750,000 in a variable annuity contract.The assumed investment return is 9%, and your life expectancy is 25 years.What is the hypothetical constant-benefit payment?

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?

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.If the first year's actual investment return is 7%, what is the starting benefit payment?

A ___________ is established when an individual confers legal title to property to another person or institution to manage the property for one or more beneficiaries.

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?

Target-date retirement funds are not

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?