2019 CFA level 3 qbank reading 15 managing institutional investor portfolios questions

10/11/2018 Learning Management System Lakeland Life Insurance Company is a U.S based underwriter of life insurance policies doing business in 23 states In the past years the company has completely revamped its product o erings, going from a focus on whole life policies to oating rate referenced variable and universal life policies The average duration of the company's insurance liabilities is eight years Lakeland targets a 1.5% spread on investment assets over liabilities The current expected nominal actuarial return is 5% (based on current capital market conditions), but management expects the rate environment to get more volatile in the coming months The company has segmented its investments into two portfolios: a xed-income portfolio and a surplus portfolio The xed-income portfolio is invested primarily in long-term corporate and in U.S Treasury bonds The surplus portfolio is currently invested in the common and preferred stock of large, well-known U.S companies The surplus portfolio has a dividend yield of 3% en tre Management expects equity markets to earn 12% per year in the long term bo ok c Question #1 of 164 The appropriate return objective for the xed-income portfolio is to earn a return: A) su cient to provide a spread of 1.5% over the promised rate on the company's variable rate insurance products while maintaining an average duration of years, in order to m f d li bili i B) of 6.5% while maintaining an average duration of slightly less than years due to o projected increased interest rate volatility C) of 6.5% su cient to meet current liabilities and fund long-term growth in policy w w w reserves through a total return approach Question #2 of 164 The appropriate risk tolerance for the surplus portfolio: A) is lower than that of the xed-income portfolio, to guard against loss of principal and maintain a constant income stream, in order to maintain public dence in the bili i i l d i f d li h ld li bili i B) is the same as that of the xed-income portfolio While the portfolios are nominally separated for regulatory purposes, they should actually be managed as a single https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 1/76 10/11/2018 Learning Management System C) is higher than that of the xed-income portfolio, because the funds should be used to support long-term growth in insurance volume Question #3 of 164 The appropriate time horizon constraint for the surplus portfolio: A) is longer than that of the xed-income portfolio, because the purpose of the surplus portfolio is to support long-term growth in new lines of business .in B) is the same as that of the xed-income portfolio While the portfolios are nominally en tre separated for regulatory purposes, they should actually be managed as a single f li b f d f h b d b h l fl h C) is shorter than that of the xed-income portfolio, because policies such as universal and Question #4 of 164 bo ok c variable life have shorter e ective maturities than traditional life insurance products Which of the following is NOT appropriate to include as tax or regulatory constraints in the m company's Investment Policy Statement? o A) The regulatory constraint should include a statement that the company is subject to the w w Prudent Expert Rule B) The regulatory constraint should include the recognition that, for U.S life insurance w companies, state law prevails over federal law C) The regulatory constraint should include the recognition that, by law, common stock holdings are typically limited to a certain percentage of assets Question #5 of 164 A portfolio manager at an endowment fund expects in ation to increase over the intermediate to long term How should the return objective of the investment policy statement re ect these expectations? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 2/76 10/11/2018 Learning Management System A) A total return objective should be pursued so that spending requirements are met, while at the same time purchasing power of fund assets is maintained B) An exclusive income oriented approach should be adopted so that spending requirements can be met in the impending in ationary environment C) An exclusive capital gain oriented approach should be followed so that purchasing power is preserved, while at the same time spending requirements must be reduced .in Question #6 of 164 activities and is best described as: en tre The funded status/surplus of a de ned bene t plan impacts the risk tolerance of investment A) larger pension surpluses indicate lower risk tolerance B) there is no relationship between surplus in risk tolerance in a de ned bene t plan m Question #7 of 164 bo ok c C) larger pension surpluses indicate higher risk tolerance .o The time horizon of a non-life insurance company di ers from that of a pension fund in that a w w nonlife insurance company's time horizon: A) is quite long due to the uncertainty of the liability structure associated with policies w sold, whereas a pension fund's time horizon will be much shorter due to the nite life of l B) may be quite short and will depend upon the characteristics of policies sold, whereas a pension fund's time horizon may be much longer, depending on workforce h i i C) is dependent on the uncertainties of policies sold, whereas the time horizon of a pension fund is a direct consequence of the business cycle Question #8 of 164 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 3/76 10/11/2018 Learning Management System The return objectives for a life insurance company can be broken into two segments, the xedincome and the surplus segments Which return objectives are mostly associated with each segment, respectively? A) Spread management and maximizing yield B) Yield maximization and spread management C) Spread management and capital gains .in Question #9 of 164 en tre A de ned bene t plan di ers from a de ned contribution plan in that the: A) risk/return tradeo s of plan assets accrue to the plan sponsor B) risk/return tradeo s of plan assets accrue to the participant m Question #10 of 164 bo ok c C) bene t paid by the sponsor is de ned by contributions made to the plan .o A life insurance company's liquidity requirement di ers from a non-life insurance company's w w requirement in that a life insurance company's liability structure is uncertain in its: A) timing and amount, while a non-life insurance company's liability structure is also uncertain in its amount and timing w B) amount, while a non-life insurance company's liability structure is uncertain in both its amount and timing C) timing, while a non-life insurance company's liability structure is uncertain in both its amount and timing Question #11 of 164 Which of the following underlying processes provides a natural framework from which to establish investment criteria and objectives? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 4/76 10/11/2018 Learning Management System A) Asset-liability management B) Community reputation risk management C) Credit risk management Lakeland Life Insurance Company is a U.S based underwriter of life insurance policies doing business in 23 states In the past years the company has completely revamped its product o erings, going from a focus on whole life policies to oating rate referred variable and universal life policies The average duration of the company's insurance liabilities is eight years Lakeland targets a 1.5% spread on investment assets over liabilities The current expected in nominal actuarial return is 5% (based on current capital market conditions), but management en tre expects the rate environment to get more volatile in the coming months The company has segmented its investments into two portfolios: a xed-income portfolio and a surplus portfolio The xed-income portfolio is invested primarily in long-term corporate and U.S Treasury bonds The surplus portfolio is currently invested in the common and preferred bo ok c stock of large, well-known U.S companies The surplus portfolio has a dividend yield of 3% Management expects equity markets to earn 12% per year in the long term Lakeland management has decided to widen the target margin between investment returns and liability costs from 1.5% to 2.0% The current allocation and expected return on the two m portfolios is outlined below Fixed-Income Portfolio Surplus Portfolio Treasury bills 10% 10% w o Current Asset Allocations Intermediate term Treasury bonds 15% 0% Intermediate term Corporate bonds 5% 0% Long-term Treasury bonds 50% 0% Long-term Corporate bonds 20% 0% Large company common stock 0% 60% w w Asset Class https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 5/76 10/11/2018 Learning Management System Large company preferred stock Total 0% 30% 100% 100% Expected Returns Current (dividend) yield 5.0% 3.0% Total return 7.0% 10.0% Question #12 of 164 in Which of the following changes if any should Lakeland make given the capital market en tre expectations to more closely match the rm's liabilities with the xed-income portfolio? A) Increase the allocation to long-term treasury and corporate bonds, and reduce the allocation to short-term treasury and corporate bonds, because the yield curve is i ll d l i B) Maintain the current asset allocation, because the total expected return is su cient to bo ok c provide the 2% spread over required return on liabilities C) Increase the allocation to intermediate term corporate bonds, and reduce the allocation to intermediate term treasury bonds and long-term treasury and corporate bonds, b d d f l i b d i ld o m b w w Question #13 of 164 Which of the following changes should Lakeland make to the surplus portfolio? w A) Increase the allocation to intermediate and long-term corporate and Treasury bonds, and reduce the allocation to equities, in order to reduce the risk exposure of the f li i li h f h di i l ili d i h h B) Increase the allocation to venture capital and international equities by reducing the exposure to large company common stock, in order to increase the long-term growth i l f h f li hil i i i i i f f d C) Liquidate the preferred stock and substantially reduce the allocation to large company equities Diversify by investing in other long-term growth vehicles, such as mid-cap and ll ii S i l di i l ii i ddi i https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 6/76 10/11/2018 Learning Management System Question #14 of 164 Which of the following statements concerning the risks in the xed-income portfolio is most accurate? A) Reinvestment risk is relatively less important, because the rate-sensitive nature of the company's policies signi cantly reduces this risk B) Credit risk is relatively less important, because the emphasis should be on Treasury bonds and AAA corporate bonds to be consistent with the low risk tolerance of the f li C) Interest rate risk is relatively less important, because the allocation to high-yielding in equities in the surplus portfolio o sets the interest rate risk in the xed-income en tre f li Question #15 of 164 bo ok c Which of the following statements least accurately describe the evolution in the investment policies of insurance companies like Lakeland in the past 15-20 years? A) Life insurance companies have segmented their investment portfolios along product lines with di erent time horizons, liquidity constraints, and return objectives m B) The time horizon has gotten longer as the average life span of policyholders has o increased with improvements in health care w w C) A more volatile interest rate environment has forced companies to create new, rate- w sensitive insurance products to prevent disintermediation Question #16 of 164 A nonlife insurance company is facing the end of its underwriting cycle What should the rm with respect to the duration of its xed-income portfolio and the liquidity constraints in its policy statement? The duration of the nonlife insurance company's xed-income portfolio should be: A) lowered in expectation of decreasing claims, and the investment policy statement should re ect the possibility of a decreasing claims environment in its liquidity i d h d fi d ii l https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 7/76 10/11/2018 Learning Management System B) lengthened in expectation of decreasing claims, and the investment policy statement should re ect the possibility of a decreasing claims environment in its liquidity i d h d fi d ii l C) shortened in expectation of increasing claims, and the investment policy statement should re ect the possibility of an increasing claims environment in its liquidity i d h d fi d ii l Question #17 of 164 Connie King prepared a memo for her supervisor that listed the similarities and di erences in between the investment objectives of a life insurance company versus the investment objective en tre of a commodity pool The memo contained the following statements: Both life insurance companies and commodity pools are taxable entities Statement 2: Life insurance companies invest in order to meet various funding requirements while commodity pools invest according to objectives advertised to investors Statement 3: The source of invested assets for both life insurance companies and commodity pools are assets pooled from investors m o King's memo is: bo ok c Statement 1: w w A) correct with respect to Statements and 2, but incorrect with respect to Statement B) correct with respect to Statements 1, 2, and w C) correct with respect to Statement 2, but incorrect with respect to Statements and Question #18 of 164 Which of the following statements regarding foundations is CORRECT? A) An operating foundation is generally funded to support a variety of social causes over time B) Independent foundations provide grants to charities, educational institutions, and social organizations https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 8/76 10/11/2018 Learning Management System C) A community foundation is dedicated solely to support a speci c organization or some on-going research initiative Bob Monarch, CFA, has been managing portfolios for individuals for about 10 years It started out as a second job, but about years ago he left his full-time position to manage the portfolios as his sole occupation His clients are largely retired or persons near retirement who would be considered to be conservative investors In the last two years, Monarch has been sending out resumes to institutional investment rms of various types in the hopes of becoming a full-time manager of a single fund Recently, he has in been invited to two interviews for the position of portfolio manager The rst interview he en tre schedules is with an investment company for a position as manager of their mid-cap growth equity mutual fund Monarch's second interview will be with Starling College (Starling) for the position of endowment manager The endowment fund has been highly correlated with the S&P 500 in bo ok c growth and income, but with a beta of about 0.6 The endowment follows a "socially conscious" investment policy The current spending rate is set at 3% annually, the minimum needed to support Starling's operating budget This is unlikely to change To provide for real growth of the principal, the fund's moderately aggressive return target is also unlikely to be altered m Both the mutual fund and the endowment have assets in the tens-of-millions of dollars, and o each is o ering a roughly equivalent salary and bene ts package Consequently, Monarch feels he would be happy with either position As he prepares for his interviews, he compares the w w portfolio management approach he currently employs to what would be appropriate in either of the two prospective positions He creates the following template and begins to summarize w his thoughts: Current Clients vs Investment Co & Endowment Fund Return Objective Investment Company Endowment Fund Higher Higher Risk Objective Time Horizon Taxes Liquidity Legal & Regulatory https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 9/76 10/11/2018 Learning Management System Unique Constraints Focus on Single Asset Class Socially Conscious After work that evening, Monarch calls Antonia Linn, a friend who is an emerging markets debt analyst for a large investment bank He wants her advice on the two positions he is considering, and hopes she can give him some helpful interviewing tips During the course of their discussion, Linn asks Monarch to distinguish between endowments and foundations They disagree on the issues of taxation and the allowable functions foundations and endowments may undertake Monarch states that "while both are considered tax-exempt entities, endowments are generally in organized to provide ongoing budgetary support for the operations of a speci c entity, such as a university or some other charity Foundations are typically formed for grant-making purposes, en tre but can also be created to provide perpetual support for a speci c charitable organization." Linn responds: "Well, I know that's not my eld, but as I understand it, foundations are taxable while endowments are not In addition, I think that foundations can make grants, but can't be interviews." Question #19 of 164 bo ok c set up to provide permanent support You'd better be sure to know the distinctions before your m Compared to the risk tolerance of Monarch's current clients, the risk tolerance of the o investment company and endowment fund would be: A) less w w Investment Co more B) more less C) more more w Endowment Fund Question #20 of 164 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 10/76 10/11/2018 Learning Management System A) Plan D B) Plan B C) Plan A Question #135 of 164 Based on the information provided above, which policy statement has the appropriate language for Waldrop's investment policy statement (IPS) with respect to unique in circumstances? en tre A) Plan B B) Plan A Question #136 of 164 bo ok c C) Plan C w w B) higher .o A) lower m Waldrop's plan allocation to Treasury bills should be: w C) the same and then increase over time as the median age of their work force increases Question #137 of 164 The liquidity requirement of a pension plan is directly related to and increased by a: A) high proportion of active lives B) low proportion of retired lives C) high proportion of retired lives https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 62/76 10/11/2018 Learning Management System Question #138 of 164 Which of the following statements best describes the tax constraints existing for endowments and life insurance companies? A) Both entities are taxable B) Endowments are tax free entities, whereas life insurance companies are taxable C) Endowments are taxable entities, whereas life insurance companies are tax free Question #139 of 164 en tre in entities When formulating an investment policy statement for a de ned bene t pension plan, legal and regulatory factors, in addition to unique circumstances, must be considered In this regard, bo ok c which of the following statements is least accurate? A) In the United States, the provisions of the Employee Retirement Income Security Act (ERISA) must be adhered to regardless of any state or local laws and regulations that i i i i B) The basic tenet of the Employee Retirement Income Security Act (ERISA) is that pension m plans be managed with equal regard for the interests of plan sponsors and plan o b i i C) Due to either ethical or political objections, a pension plan may disallow investments in w w w certain types of traditional or alternative asset classes Question #140 of 164 Which of the following statements best compares the legal and regulatory constraints when managing a pension plan versus managing an endowment fund? A) State pension laws generally supersede Federal pension laws regarding pension plans whereas endowment funds are primarily regulated at the Federal level B) Endowment funds are managed according to the "prudent expert" rule while bene t plans are managed under the "prudent investor" rule https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 63/76 10/11/2018 Learning Management System C) Pension plans are managed according to the Employee Retirement Income Security Act while endowment funds are governed by the Uniform Management Institutional Funds A World Wide Telecom (WWT), a troubled internet service provider recently led Chapter 11 bankruptcy after seven unsuccessful years of operations It was a plan sponsor in WWT Pension Plan for the bene t of its employees The following information was available at the time of its bankruptcy ling: Employees: 500 in Plan assets: $15 million Average age of workforce: 30 en tre Plan liabilities: $19 million 1% of plan assets are being paid out to retirees and no more participants are expected to retire over the next ve years Due to the company's nancial condition, the plan was under-funded bo ok c The duration of the plan liabilities is 25 years In ation is expected to be approximately 1% over the next ve years The bankruptcy trustee appointed Eric Geecu, CFA, as the portfolio manager overseeing the WWT Pension Plan to develop guidelines for its investment policy statement and the ultimate m distribution of the proceeds of the plan upon fully funded status Geecu believes that fully funded status could be achieved within the next ve years, assuming the plan earns an o expected rate of return in excess of its plan liabilities The plan liabilities are expected to w w increase at the rate of in ation w Question #141 of 164 In developing an investment policy statement (IPS) for WWT Pension Plan, which constraints should Geecu consider? A) A long time horizon, unique circumstances associated with the Chapter 11 bankruptcy, with no current taxes to be considered for the pension plan B) A short time horizon, low liquidity needs, with assets managed according to the "prudent expert" rule C) The pension plan is governed under ERISA, unique circumstances that the plan cannot provide any funds to meet the plan's underfunded status, and a long time horizon https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 64/76 10/11/2018 Learning Management System Question #142 of 164 In developing an IPS for WWT Pension Plan, what must Geecu consider with respect to the return objective and risk tolerance for the plan? A) Return requirement = 7.33%, risk tolerance = low to average B) Return requirement = 6.84%, risk tolerance = low or below average .in C) Return requirement = 7.89%, risk tolerance = moderate to high w w w o m bo ok c en tre Question #143 of 164 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 65/76 10/11/2018 Learning Management System Based on the information presented in the case above and the IPS, which of the following Portfolio B Portfolio C U.S Treasury Bills 1% 5% 5% 5% U.S Treasury 10-Year Bonds 5% 5% 25% 10% U.S Corp 5-Year Bonds 5% 20% 35% 35% U.S Corp 10-Year Bonds 8% 5% 25% 10% U.S Stocks - S&P 500 9% 25% 5% 15% U.S Stocks - Small Cap 12% 15% 0% 5% U.S Stocks – Mid Cap 10% 20% 5% 10% 12% 5% 0% 10% 8.35% 6.00% 7.25% 1.67% 2.50% 2.10% 0.35 0.40 0.38 Real Estate Investment Trusts Yield w w Sharpe Ratio o m Total Return in Portfolio A bo ok c Expected Return en tre portfolios would be the most appropriate for WWT: A) Portfolio A w B) Portfolio C C) Portfolio B Question #144 of 164 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 66/76 10/11/2018 Learning Management System Which of the following statements are correct regarding a participant-directed de ned contribution plan? Statement 1: The plan should be responsible for establishing and revising the interest rate for plan loans to participants Statement 2: The plan should provide criteria for manager/fund selection, termination and replacement Statement Statement Incorrect B) Correct Correct C) Incorrect Correct en tre bo ok c Question #145 of 164 in A) Incorrect Which of the following return objectives is most appropriate for a de ned bene t pension plan? A) The return on plan assets should be equal to or greater than the plan's spending rate m B) The return on plan assets should be 50 basis points greater than the actuarial rate o applied to the plan's liabilities w w w C) To earn an in ation-adjusted return that is adequate to fund plan liabilities Question #146 of 164 The following statements concern di erences between the investment policy statement for an institution and that for an individual Which of these statements is least accurate? The institutional investment policy statement: A) has four main steps planning, estimation, execution, and feedback while the individual investment policy statement has three B) may have asset structure and liquidity requirements that are driven by the institution's liability structure https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 67/76 10/11/2018 Learning Management System C) is likely to give more prominence to legal constraints International American Group (IAG) is a U.S based leader in the property and casualty (P&C) insurance industry It is a nancially strong rm with a surplus portfolio valued at $50 billion IAG's primary business line is the commercial P&C market IAG competes aggressively by o ering the most attractive premiums and lowest expense rates in the industry Careful underwriting procedures have helped it experience a low claims volume IAG has been able to keep premiums down and grow their business by maintaining a surplus level larger than its competitors and earning investment returns above the industry average .in Ronald Lott, the Chief Financial O cer, wants to document the investment process that is being en tre used to manage IAG's two portfolios: xed income and surplus He believes it is important to have written Investment Policy Statements (IPS) that can serve as a "blueprints" for internal portfolio managers to carefully follow Lott is particularly concerned about the surplus segment and has delegated this task to Renee Echinard, a recent hire from a well-known French life bo ok c insurance company He assigns the xed income IPS to Geo Korman, another talented new employee from the United Kingdom Lott believes this will give Echinard and Korman the opportunity to better understand the U.S market, as well as the investment management di erences between life and non-life companies Before beginning a draft of the IPS for the surplus segment, Echinard decides to review the key m di erences between life and non-life insurance At a morning sta meeting, she asks Korman if o he would like to collaborate with her on their projects They decide to meet the next week to w w gauge their progress and help one another resolve any questions each might have A week later Echinard and Korman compare their IPS drafts and discover they are a bit w confused about a few issues Speci cally, they disagree about time horizon and liquidity Echinard says, "I think that liquidity needs are greater for life insurance companies due to the requirement for a valuation reserve, and the need for funds to pay death bene ts In addition, the chance of disintermediation in a high interest rate environment also mandates higher liquidity As to time horizon – it's de nitely longer than for a non-life company." Korman disagrees, stating "Non-life companies have higher liquidity needs due to the underwriting cycle and the greater uncertainty of claims And because of long-tailed liabilities, time horizons are just as long as for life companies." Following their discussion, Echinard and Korman review the table below that shows the current asset allocations for the xed income and surplus segments of IAG's portfolio: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 68/76 10/11/2018 Learning Management System International American Group - Portfolio Segments Surplus Segment Percent U.S Treasury Bills 10 U.S Treasury Bonds 65 30 U.S Corporate Bonds 10 20 U.S Stocks – Large Cap 10 U.S Stocks – Small Cap 15 International Stocks – Developed International Stocks – Emerging 20 bo ok c Question #147 of 164 en tre Asset Class in Fixed Segment Percent With respect to her statements about the di erences between life and non-life time horizons and liquidity needs, Echinard is: A) correct about time horizon and correct about liquidity needs m B) incorrect about time horizon and incorrect about liquidity needs w w o C) correct about time horizon and incorrect about liquidity needs w Question #148 of 164 Which of the following are the most important IPS constraints for Echinard to consider? A) The long time horizon; low liquidity needs; potentially high taxes B) A less strict regulatory environment; above average levels of risk tolerance; the required asset valuation reserve C) The ite long-tailed claims, the liquidity requirements of non-life companies are usually higher due to uncertainty about both the timing and size of claimjective https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 69/76 10/11/2018 Learning Management System Question #149 of 164 In developing an IPS for IAG, what must Echinard consider with respect to the return objectives and risk tolerance of the surplus portfolio? Return objective Above average levels of risk Capital appreciation B) Maximum capital Above average levels of risk preservation C) Capital appreciation en tre Average levels of risk in A) Risk Tolerance bo ok c Question #150 of 164 Lott wants to raise the return target for the surplus without incurring excessive volatility To so, which of the following revisions to the asset allocation strategy would be best? A) Reduce U.S Treasury bonds; increase developed international stocks; increase m corporate bonds stocks .o B) Reduce corporate bonds; increase U.S small cap stocks; increase emerging markets w w C) Reduce U.S Treasury bonds; increase U.S large cap stocks; reduce emerging markets w stocks Question #151 of 164 Korman thinks IAG should consider adding venture capital to the surplus portfolio Which of the following would NOT be a reason to so? A) Improved liquidity B) Improved diversi cation C) Enhanced returns https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 70/76 10/11/2018 Learning Management System Question #152 of 164 Echinard believes direct real estate would be a better addition to the surplus portfolio than venture capital Which of the following attributes of real estate would be least bene cial? A) In ation protection B) Low correlation with U.S stocks and bonds .in C) Improved cash ow en tre Question #153 of 164 Which of the following CORRECTLY describes the primary source of invested funds to meet bo ok c funding requirements for an endowment fund and an investment company? Endowment Fund A) Own assets Own assets Own assets Assets pooled from investors m B) Assets pooled from investors w w o C) Assets pooled from investors Investment Company w Grace Manufacturing is a medium-sized industrial company whose stock returns are highly correlated with the Dow Jones Industrial Average The company administers and manages inhouse a de ned-bene t pension plan for its employees The average age of the work force is only 30 years, and only 5% of the plan bene ciaries are currently retired Recent strong operating results have enabled Grace to over-fund the plan by 15% Based on actuarial assumptions, the required real rate of return on the fund is 6% Because of the recent downturn in domestic markets, particularly in the high-tech industry, as well as turmoil and uncertainty in international markets, the company has restricted investment in the fund to a small number of large, moderate-yield domestic industrial stocks https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 71/76 10/11/2018 Learning Management System with proven dividend track records, AAA corporate and U.S Treasury bonds, as well as Treasury Bills Current Asset Allocation Allocation Expected Return Volatility Equally weighted portfolio of 25 large U.S industrial companies 25% 9% 18% AAA Corporate Bond Portfolio 20% 7% 8% Treasury Bonds (8-year duration) 30% 6% 7% Treasury Bills 25% 4% 0% in Portfolio en tre This conservative stance is re ected in the risk tolerance objective of the fund's Investment Policy Statement (IPS) Investment Policy Statement The fund's return objective is to achieve total returns of 10%, su cient to fund the required real rate of 6% plus the expected in ation rate of 4% Risk Tolerance The risk tolerance of the company is below average The plan must guarantee the safety of the plan assets to insure income will be available to fund retirees' pension payments in the future Liquidity Constraint The fund's liquidity requirements are low because of the long time horizon and relatively young workforce w w o m bo ok c Return Objective The company has asked Elaine Sargent, CFA, for advice in revising the IPS and reviewing the w current asset allocation for potential inclusion of one or more of the following portfolios: Expected Return Volatility Correlation with DJIA Portfolio A 7% 10% 0.5 Portfolio B 11% 15% 0.7 Portfolio C 14% 22% 0.3 Dow Jones Industrial Average (DSIA) Index Fund 10% 18% 1.0 Portfolios https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 72/76 10/11/2018 Learning Management System Question #154 of 164 Which of the following changes to the fund's IPS should Sargent recommend? A) The fund's liquidity constraint should be rewritten to re ect moderate liquidity requirements consistent with the fund's low risk tolerance B) A return objective of 10% is not consistent with a below average risk tolerance Therefore, the fund should target a lower return objective in order to be consistent with h l i k l C) The risk tolerance for the fund should be much higher because of the long-term nature of the obligations and the need to preserve capital through equity investment to guard i i di h l f h en tre in i Question #155 of 164 bo ok c Sargent should recommend that the allocation to the equally weighted equity portfolio be: A) decreased signi cantly because it is not consistent with the fund's return objective B) increased signi cantly because it has favorable risk-return characteristics relative to the other funds w w o operating cash ows m C) decreased signi cantly because it is most likely highly correlated with the rm's w Question #156 of 164 Sargent should recommend which of the following allocations? AAA Corporate Bonds Treasury Bills A) increase increase B) decrease decrease C) increase decrease https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 73/76 10/11/2018 Learning Management System Question #157 of 164 HAL Corporation is considering shifting their current de ned-bene t pension plan to a cash balance plan In an e ort to educate HAL's board of directors about cash balance plans, Mark Davidson, HAL's Vice President of Human Resources puts together a memo that includes two statements regarding cash balance plans The amount credited to a participant's account in a cash balance plan is a function of salary, length of employment, and a benchmark interest rate Statement 2: Converting our de ned-bene t pension plan to a cash balance plan would e ectively shift investment risk from us as the employer to the employee en tre in Statement 1: With regard to the statements in the memo, Davidson is: A) correct with respect to Statement 1, but incorrect with respect to Statement B) correct with respect to Statement and Statement m Question #158 of 164 bo ok c C) incorrect with respect to Statement 1, but correct with respect to Statement .o One di erence between the asset liability management techniques between a life and nonlife w w insurance company is liability payment: A) amounts are unknown for the nonlife insurance company w B) amounts are known for the nonlife insurance company C) timing is known with certainty for the nonlife insurance company Question #159 of 164 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 74/76 10/11/2018 Learning Management System The pension plan at Ferrell Manufacturing currently has a surplus Ferrell's management team wants to maintain the level of the surplus and keep it as stable as possible In order to accomplish their goal, how should they position the correlation of the pension plan's assets with the pension liabilities and the rm's operations respectively? High B) High Low C) Low Low en tre A) High in Correlation of Assets with Correlation of Assets with Liabilities Firm Operations Question #160 of 164 bo ok c Which of the following types of foundations NOT have a spending requirement? A) Independent B) Operating w w o m C) Community Question #161 of 164 w Pension fund risk tolerance is increased by a young workforce and: A) low retired-lives proportion B) high retired-lives proportion C) high plan sponsor leverage Question #162 of 164 A de ned bene t plan should: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 75/76 10/11/2018 Learning Management System A) construct an investment policy statement (IPS) after a manager has been chosen for the plan B) review investment performance on a yearly basis C) invest plan assets without distinction between the tax consequences of returns generated from income and returns generated from capital gains Question #163 of 164 in Which of the following represents the most appropriate objective found in a bank's investment en tre portfolio? A) Assist with generating capital gains-only pro ts B) Assist with increasing after-tax income m Question #164 of 164 bo ok c C) Assist with generating income-only pro ts Which of the following statements would NOT be consistent with an investment policy o statement (IPS) for a de ned bene t plan? w w A) Adequate liquidity must be maintained to meet liabilities B) No objectives and constraints are needed w C) Tax consequences can be ignored https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83414537/print 76/76 ... Year-End $32 0 $38 0 years years $280 $32 0 years years Table B https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925 6150 29a3fd/practice /qbank/ 24 038 518/quiz/ 834 14 537 /print 30 /76... assets, and 30 % of the fund's annual payout was allocated https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925 6150 29a3fd/practice /qbank/ 24 038 518/quiz/ 834 14 537 /print 33 /76 10/11/2018... respectively, for managing Enterprise's surplus? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925 6150 29a3fd/practice /qbank/ 24 038 518/quiz/ 834 14 537 /print 32 /76 10/11/2018