Chapter 28 – Investment Policy and the Framework of the CFA Institute
28–17
44. Which of the following investments allows the investor to choose how to allocate assets?
Difficulty: Moderate
45. Pension funds
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.
Difficulty: Moderate
28–18
46. 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.
Difficulty: Moderate
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.
47. How much does Stephanie currently have in the safe account; how much in the risky
account?
Difficulty: Easy
28–19
48. 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?
Difficulty: Easy
49. How much can Stephanie be sure of having in the safe account at retirement?
Difficulty: Moderate
50. How much can Stephanie expect to have in her risky account at retirement?
Difficulty: Moderate
Chapter 28 – Investment Policy and the Framework of the CFA Institute
28–20
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.
51. How much does Genny currently have in the safe account; how much in the risky
account?
Difficulty: Easy
52. 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?
Difficulty: Easy
28–21
53. How much can Genny be sure of having in the safe account at retirement?
Difficulty: Moderate
54. How much can Genny expect to have in her risky account at retirement?
Difficulty: Moderate
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.
28–22
55. How much does Alex currently have in the safe account; how much in the risky account?
Difficulty: Easy
56. Of the total amount of new funds that will be invested by Alex and by his employer on his
behalf, how much will Alex put into the safe account each year; how much into the risky
account?
Difficulty: Easy
57. How much can Alex be sure of having in the safe account at retirement?
Difficulty: Moderate
28–23
58. How much can Alex expect to have in his risky account at retirement?
Difficulty: Moderate
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.
59. How much does Alan currently have in the safe account; how much in the risky account?
Difficulty: Easy
28–24
60. 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?
Difficulty: Easy
61. How much can Alan be sure of having in the safe account at retirement?
Difficulty: Moderate
62. How much can Alan expect to have in his risky account at retirement?
Difficulty: Moderate
28–25
63. An income beneficiary is __________.
Difficulty: Easy
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?
Difficulty: Moderate
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?
Difficulty: Difficult
28–26
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?
Difficulty: Moderate
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?
Difficulty: Difficult
28–27
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.
Difficulty: Moderate
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.
Difficulty: Moderate
28–28
70. The principle of duration matching is
Difficulty: Moderate
71. The principle of duration matching is not
Difficulty: Moderate
72. Target-date retirement funds
Difficulty: Moderate
28–29
73. Target-date retirement funds are not
Difficulty: Moderate
74. Target-date retirement funds
Difficulty: Moderate
75. Target-date retirement funds are not
Difficulty: Moderate
Chapter 28 – Investment Policy and the Framework of the CFA Institute
28–30
Short Answer Questions
76. Discuss the relationships between investor objectives, constraints, and policies.
Difficulty: Moderate
77. Discuss the tax status of the major categories of institutional investors described in the
text.
Difficulty: Moderate
28–31
78. Discuss investments as a hedge against inflation
Difficulty: Moderate
79. Discuss four factors you would need to include if you were constructing a retirement
planning worksheet.
Difficulty: Easy
28–32
80. Discuss some of the advantages “personal funds” have over mutual funds.
Difficulty: Moderate