clearlycanadian

The ending of a general business cycle may indicate the last rounds of increased firm profitability. With the prospects of lower profits on the horizons, a pension fund plan sponsor may wish to take which of the following actions? Shift pension assets into those that have a:

A) low correlation with pension liabilities and low correlation with the firm's operations.

B) high correlation with pension liabilities and low correlation with the firm's operations.

C) low correlation with pension liabilities and high correlation with the firm's operations.

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Pension assets that are highly correlated with pension liabilities and have a low correlation with the firm’s operations will have a greater probability of meeting pension fund obligations and lowering contributions in the event contributions are required during the upcoming business cycle downturn.

clearlycanadian

A portfolio manager at an endowment fund expects inflation to increase over the intermediate to long term. How should the return objective of the investment policy statement reflect these expectations?

A) An exclusive income oriented approach should be adopted so that spending requirements can be met in the impending inflationary environment.

B) An exclusive capital gain oriented approach should be followed so that purchasing power is preserved, while at the same time spending requirements must be reduced.

C) A total return objective should be pursued so that spending requirements are met, while at the same time purchasing power of fund assets is maintained.

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An endowment fund should adopt a total return objective, especially in an impending inflationary environment. In this way, not only are current spending requirements met, but the ability to meet future spending requirements is also increased.

clearlycanadian

The following statements concern differences between the investment policy statement for an institution and that for an individual. Which of these statements is least accurate? The institutional investment policy statement:

A) is likely to give more prominence to legal constraints.

B) has four main steps--planning, estimation, execution, and feedback--while the individual investment policy statement has three.

C) may have asset structure and liquidity requirements that are driven by the institution's liability structure.

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Both individual and institutional policy statements should have three main steps: planning, execution, and feedback. The institutional statement is more likely to include legal and regulatory constraints, and may have the asset structure and liquidity requirements driven by the institution’s liability structure.