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Exam 16: Investors and the Investment Process

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Question 1

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An employee has an average wage of $60 000 and they have worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive ________ per year upon retirement.

A) $18 000
B) $37 500
C) $45 325
D) $55 250

E) B) and C)
F) All of the above

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Question 2

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The possibility that you are too conservative and your money doesn't grow fast enough to keep pace with inflation is called ________.

A) purchasing power risk
B) liquidity risk
C) timing risk
D) market risk

E) All of the above
F) A) and C)

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Question 3

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A pension fund will owe $10 million to retirees in 6 years. An actuary assumes an 8% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay to fully fund the pension liability?

Which one of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return?

Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in ________.

The amount of risk an individual should take depends on his or her ________. I. return requirements II. risk tolerance III. time horizon

At the early stage of an individual's working career their retirement portfolio should probably consist mostly of ________.

Many defined benefit pension plans have a target rate of return on investment equal to ________.

The two most important factors in describing the investment objectives of an individual or organisation are ________.

Under a 'passive core' portfolio management strategy, a manager would ________.

Suppose that the pre-tax holding period returns on two shares are the same. Share A has a high dividend payout policy and share B has a low dividend payout policy. If you are a high tax rate individual and do not intend to sell the shares during the holding period, ________.

A passive asset allocation strategy involves ________.

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.

The risk that a downturn in the market may substantially reduce your investment principal is called ________.

The price of your investment increases 20% one month after you buy it. You do not believe that the share's prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion?

A clearly understood investment policy statement is not critical for which one of the following? I. Mutual funds II. Individuals III. Defined benefit pension funds

If an investor wishes to invest 100% of her portfolio in safe assets but does not wish to manage her portfolio, she should invest in ________.

In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organisation. Such organisations are typically called ________.

Your sister, an avid outdoors person, works in the airline industry and she has come to you (the financial guru) for investment advice. She is looking at purchasing shares she knows something about. She is considering purchasing stock in Boeing, Lockheed Martin, United Technologies (maker of aircraft engines) and Cabela's Sporting Goods. Based only on the information given which stock should you recommend for her?

Which one of the following would be considered to be a 'cash equivalent' investment?