FIN 455 Exam 1 Turtle || All Answers Are Correct 100%.
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FIN 455
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FIN 455
Individual correct answers Life cycle return requirement
Life cycle risk tolerance (younger are more risk tolerant)
Variable liquidty, life cycle time horizon, no regulations, variable taxes
Mutual Funds correct answers Variable return requirement
Variable risk tolerance
High liquidity, long...
FIN 455 Exam 1 Turtle || All Answers Are Correct 100%.
Individual correct answers Life cycle return requirement
Life cycle risk tolerance (younger are more risk tolerant)
Variable liquidty, life cycle time horizon, no regulations, variable taxes
Mutual Funds correct answers Variable return requirement
Variable risk tolerance
High liquidity, long time horizon, few regulations, no taxes
Pension funds correct answers Return requirement: assumed actuarial rate
Risk tolerance depends on proximity of payouts
Liquidity: low for young ages, high for mature ages, long time horizon, ERISA regulations, no
taxes
Endowment funds correct answers Return requirement is determined by current income needs
and need for asset growth to maintain real value
Conservative risk
Low liquidity, long horizon, few regulations, no taxes
Life insurance company correct answers Return should exceed new money rate by sufficient
margin to meet expenses and profit objectives
Conservative risk
low liquidity, long horizon, complex regulations, yes taxes
Non-life insurance companies correct answers no minimum return requirement
conservative risk tolerance
high liquidity, short time horizon, changing regulations, yes taxes
Banks correct answers Returns should cover interest-rate spread
Variable risk
High liquidity, short horizon, changing regulations, yes taxes
Pension Fund: defined contribution plan correct answers tax-deferred retirement savings
accounts established by the firm in trust for its employees, with the employee bearing all risk and
receiving all return from plan's assets
Defined benefit plan correct answers pension plan that guarantees a specified level of retirement
income
Pension investment strats correct answers tax status of pension funds make them favor assets
with the largest spread between pretax and after-tax ROR
Make use of immunization (match duration of assets and liabilities, mitigates interest rate risk)
Constraints... correct answers
, Liquidity correct answers ease and speed at which an asset can be sold and converted to cash
Investment horizon correct answers planned liquidation date of the investment
Regulations correct answers ERISA (Employee retirement security act of 1974)
Work in best interest of clients
non-discriminatory...
Tax considerations correct answers Central to investment decisions
Performance of strategy evaluated based on yields after taxes
Some securities offer advantages to high income individuals (municipal bonds)
Estate taxation
Unique needs correct answers Random stuff that causes constraint on portfolio/strategy (social
responsibility, health concerns, dependents)
Investment policy statement (IPS) correct answers serves as a strategic guide to the planning and
implementation of an investment program
Components of IPS... correct answers client description
establish policies
Investment responsibilities
Statement of goals, objectives, constraints
Schedule for review of performance/revisions
Performance measures
considerations in developing asset allocation strategy
Investment strategies/styles
rebalancing guidelines
A specific return objective correct answers Total or relative to a benchmark
Real or nominal
Before or after tax
Absolute return (annual rate of return in excess of 6% after tax
Specific risk tolerances correct answers measurements by variance, standard deviation, downside
risk, tracking error
Investor appetite for risk (sleeping point)
Investor ability to take risk due to spending needs, wealth targets, obligations
How should risk be allocated?
Asset Allocation... correct answers allocation of an investment portfolio across broad asset
classes
By far most important part of strategy
Steps in asset allocation decision correct answers Specify asset classes
Specify capital market expectation
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