fin540 week 9 homework

Fin540 week 9 homework

Directions: Answer the following five questions on a separate document. Explain how you reached the

answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using

the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points

for this homework assignment.

1. Which of the following statements about pension plans if any, is incorrect?

a. Under a defined benefit plan, the employer agrees to give retirees a specifically defined

benefit, such as $500 per month or 50 percent of the employee's final salary.

b. A portable pension plan is one that an employee can carry from one employer to another.

c. An employer's obligation is satisfied under a defined contribution plan when it makes the

required contributions to the plan. The risk of inadequate investment returns is borne by

the employee.

d. If assets exceed the present value of benefits, the pension plan is fully funded.

e. A defined contribution plan is, in effect, a savings plan that is funded by employers,

although many plans also permit additional contributions by employees.

2. Which of the following statements about defined contribution plans is incorrect?

a. In general, employees can choose the investment vehicle under a defined contribution

plan. Thus, highly risk-averse employees can choose low-risk investments, while more

risk-tolerant employees can choose high-risk investments.

b. In a defined contribution plan, the employer must make larger-than-average contributions

to the pension plan when investment returns have been below expectations.

c. Defined benefit plans are used more often by large corporations than by small

companies.

d. The PBGC insures a portion of pension benefits.

e. A defined contribution plan places the risk of poor pension portfolio performance on the

employee.

3. Which of the following statements about pension plan portfolio performance is incorrect?

a. Alpha analysis, which relies on the Capital Asset Pricing Model, considers the risk of the

portfolio when measuring performance.

b. Peer comparison examines the relative performance of portfolio managers with similar

investment objectives.

c. A portfolio annual return of 12 percent from one investment advisor is not necessarily

better than a return of 10 percent from another advisor.

d. In managing the retiree portfolio, fund managers often use immunization techniques such

as alpha analysis to eliminate, or at least significantly reduce, the risk associated with

changing interest rates.

e. Pension fund sponsors must evaluate the performance of their portfolio managers

periodically as a basis for future asset allocations.

4. Ms. Lloyd, who is 25 and expects to retire at age 60, has just been hired by the Chambers

Corporation. Ms. Lloyd's current salary is $30,000 per year, but her wages are expected to

increase by 5 percent annually over the next 35 years. Chambers has a defined benefit pension

plan in which workers receive 2 percent of their final year's wages for each year of employment.

Assume a world of certainty. Further, assume that all payments occur at year-end. What is Ms.

Lloyd's expected annual retirement benefit, rounded to the nearest thousands of dollars?

a. $35,000

b. $57,000

c. $89,000

d. $116,000

e. $132,000

5. Kumar Consulting operates several stock investment portfolios that are used by firms for

investment of pension plan assets. Last year, one portfolio had a realized return of 12.6 percent

and a beta coefficient of 1.15. The average T-bond rate was 7 percent and the realized rate of

return on the S&P 500 was 12 percent. What was the portfolio's alpha?

a. ?0.75%

b. ?0.15%

c. 0%

d. 0.15%

e. 0.75%