Reading 28:Managing Institutional Investor Portfolios- LO

name, versus, investment, regulatory, statements

LOS i:

Compare and contrast the investment objectives and constraints of foundations, endowments, insurance companies, and banks.

Q1. Which of the following statements best compares the legal and regulatory constraints when managing a pension plan versus managing an endowment fund?

A) Endowment funds are managed according to the "prudent expert" rule while benefit plans are managed under the "prudent investor" rule.

B) State pension laws generally supersede Federal pension laws regarding pension plans whereas endowment funds are primarily regulated at the Federal level.

C) Pension plans are managed by the Employee Retirement Income Security Act while endowment funds are governed by the Uniform Management Institutional Funds Act.

Q2. Which of the descriptions in the table below most accurately describes the liquidity requirements for life and non-life insurance companies?

Liquidity Requirements for Insurance Companies
	Life Insurance Companies		Non-life insurance Companies
Description	Fixed income segment	Surplus segment	Fixed income segment	Surplus segment
I	Relatively high	Very low	Relatively high	Very low
II	Relatively low	Moderate	Relatively low	Very low
III	Relatively high	Very low	Relatively high	Relatively high

A) Description II.

B) Description I.

C) Description III.

Q3. Which of the following are characteristics of public foundations’ and endowments’ liquidity needs, respectively?

A) Moderate; moderate.

B) Low; varies.

C) Varies; low.

Q4. Ed Simon, CFA, has been assigned the arduous task of assessing the slight nuances concerning the investment objectives and constraints for foundations and endowments. Simon’s supervisor has requested a full report on these differences and how they affect the investment policy statements.

Simon thought it best to first look at differences in return objectives between foundations and endowments. Which of the following best indicates differences between the return objectives of foundations and of endowments?

A) Endowment returns usually are dictated by a rule-of-thumb of "5.3% + inflation," whereas foundation return objectives are dictated by spending rules.

B) Foundation return objectives depend on the time horizon of the foundation, whereas endowment return objectives are to provide a permanent base of funding.

C) Foundation return objectives are to provide a permanent base of funding whereas endowment return objectives depend on the time horizon of the endowment.

Q5. Simon next turned his attention to the differences in risk objectives between foundation and endowment investment policy statements. Which of the following best describes the main difference between foundation and endowment risk objectives?

A) Endowment risk tolerance is not dictated by the relationship between the current income requirement and maintenance of purchasing power, whereas this is a crucial factor for foundations.

B) Foundation risk tolerance is dependent on the importance of foundation funds in the sponsor's overall budget picture, while endowment risk tolerance is dependent on the time horizon of the endowment.

C) Foundation risk tolerance is dependent on the time horizon of the foundation, whereas endowment risk tolerance is dependent on the importance of the endowment fund in the sponsor's overall budget picture.

Q6. Foundations and endowments often have differential liquidity constraints. Simon found which of the following to be a difference between the liquidity constraints of a foundation and an endowment?

A) Private foundations are required to have a minimum spending rate whereas endowments rarely have minimum spending rates.

B) An endowment's spending rule will have less of an effect on liquidity requirements than a foundation's liquidity requirement due to a minimum spending rate.

C) Endowments are required to have a minimum spending rate whereas private foundations rarely have minimum spending rates.

Q7. Simon discovered tax laws seem to differentially impact foundations and endowments. Which of the following most accurately depicts the differential tax treatment between foundations and endowments?

A) Operating foundation investment income is taxable, whereas endowment investment income is not.

B) Endowment investment income is taxable, whereas private foundation investment income is not.

C) Private foundation investment income is taxable, whereas endowment investment income is not.

Q8. Assessing the capital risk position is relevant to the investment management process at a bank because it indicates the appropriate amount of:

A) liquidity weighted assets.

B) risk weighted assets.

C) credit weighted assets.

Q9. Banks tend to use their investment portfolios for all of the following objectives EXCEPT:

A) decreasing credit exposure.

B) providing liquidity.

C) creating off balance sheet opportunities.

Q10. Which of the following is a potential shortcoming of a bank’s propensity to invest in low risk securities? Not enough funds invested in: