Reading 28:Managing Institutional Investor Portfolios- LO

书

Q11. Which of the following most appropriately addresses the funds allocation to international bonds? The Carraway Fund’s allocation to international bonds is:

A) too low. A 10-15% allocation to international bonds is more appropriate.

B) appropriate. There is no reason to include an allocation to international bonds.

C) too low. A 25-30% allocation to international bonds is more appropriate.

Q12. Which of the following most appropriately addresses the funds allocation to U.S. bonds? The Carraway Fund’s allocation to U.S. bonds is:

A) too high. A 20-25% allocation to U.S. bonds is more appropriate.

B) appropriate.

C) too low. A 70% allocation to U.S. bonds is more appropriate.

Q13. World Wide Telecom (WWT), a troubled internet service provider recently filed Chapter 11 bankruptcy after seven unsuccessful years of operations. It was a plan sponsor in WWT Pension Plan for the benefit of its employees. The following information was available at the time of its bankruptcy filing:

Employees: 500
Plan assets: $15 million
Plan liabilities: $19 million
Average age of workforce: 30
1% of plan assets are being paid out to retirees and no more participants are expected to retire over the next five years.
Due to the company’s financial condition, the plan was under-funded.
The duration of the plan liabilities is 25 years.
Inflation is expected to be approximately 1% over the next five years.

The bankruptcy trustee appointed Eric Geecu, CFA, as the portfolio manager overseeing the WWT Pension Plan to develop guidelines for its investment policy statement and the ultimate distribution of the proceeds of the plan upon fully funded status. Geecu believes that fully funded status could be achieved within the next five years, assuming the plan earns an expected rate of return in excess of its plan liabilities. The plan liabilities are expected to increase at the rate of inflation.

In developing an investment policy statement (IPS) for WWT Pension Plan, which constraints should Geecu consider?

A) A long time horizon, unique circumstances associated with the Chapter 11 bankruptcy, with no current taxes to be considered for the pension plan.

B) A short time horizon, low liquidity needs, with assets managed according to the "prudent expert" rule.

C) The pension plan is governed under ERISA, unique circumstances that the plan cannot provide any funds to meet the plan's underfunded status, and a long time horizon.

Q14. In developing an IPS for WWT Pension Plan, what must Geecu consider with respect to the return objective and risk tolerance for the plan?

A) Return requirement = 6.84%, risk tolerance = low or below average.

B) Return requirement = 7.33%, risk tolerance = low to average.

C) Return requirement = 7.89%, risk tolerance = moderate to high.

Q15. Based on the information presented in the case above and the IPS, which of the following portfolios would be the most appropriate for WWT:

	Expected Return	Portfolio A	Portfolio B	Portfolio C
U.S. Treasury Bills	1%	5%	5%	5%
U.S. Treasury 10-Year Bonds	5%	5%	25%	10%
U.S. Corp. 5-Year Bonds	5%	20%	35%	35%
U.S. Corp. 10-Year Bonds	8%	5%	25%	10%
U.S. Stocks - S& 500	9%	25%	5%	15%
U.S. Stocks - Small Cap	12%	15%	0%	5%
U.S. Stocks – Mid Cap	10%	20%	5%	10%
Real Estate Investment Trusts	12%	5%	0%	10%

Total Return		8.35%	6.00%	7.25%

Yield		1.67%	2.50%	2.10%

Sharpe Ratio		0.35	0.40	0.38