59.
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 does Alan currently have in the safe account; how much in the risky account?
60.
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.
Of the total amount of new funds that will be invested by Alan and by his employer on his
behalf, how much will he put into the safe account each year; how much into the risky
account?
61.
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?
62.
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 expect to have in his risky account at retirement?
63.
An income beneficiary is
64.
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?
65.
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. If the first
year’s actual investment return is 9%, what is the starting benefit payment?
66.
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?
67.
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?
68.
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.
69.
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.
70.
The principle of duration matching is
71.
The principle of duration matching is not
72.
Target-date retirement funds
73.
Target-date retirement funds are not
74.
Target-date retirement funds
75.
The desirable components of an Investment Policy Statement for individual investors can
be divided into
76.
The scope and purpose section of an Investment Policy Statement for individual investors
typically consists of defining the
77.
The governance section of an Investment Policy Statement for individual investors
typically contains
28–95
78.
The risk management section of an Investment Policy Statement for individual investors
typically contains
Short Answer Questions
79.
Discuss the relationships between investor objectives, constraints, and policies.
80.
Discuss the tax status of the major categories of institutional investors described in the
text.
81.
Discuss investments as a hedge against inflation
82.
Discuss four factors you would need to include if you were constructing a retirement
planning worksheet.
83.
Discuss some of the advantages “personal funds” have over mutual funds.