Q8. Assuming Ward uses the fixed planning horizon method to fund her wish for a condo, what will be her approximate allocation to equity?

A)   49%.

B)   80%.

C)   20%.

Q9. Are the statements of Lee and Weatherford comparing the lifestyle protection strategy to the fixed planning horizon method as investment policies correct?

          Lee                                       Weatherford

A)   Correct                                  Incorrect

B)   Correct                                  Correct

C)   Incorrect                                Incorrect

答案和详解如下：

Q8. Assuming Ward uses the fixed planning horizon method to fund her wish for a condo, what will be her approximate allocation to equity?

A)   49%.

B)   80%.

C)   20%.

Correct answer is C)

If she is using the fixed planning horizon method to fund a condo, Ward will need to invest an amount in zero coupon bonds so that when the bonds mature, she will have the funds necessary to buy the less expensive condo. She will thus invest $550,000/1.05¹³ = $291,677. This represents approximately 80% ($291,677/$365,000) of the amount she has now to invest in the condo. What she doesn’t invest in zero coupon bonds she will invest in equity, so 20% is invested in equity.

Q9. Are the statements of Lee and Weatherford comparing the lifestyle protection strategy to the fixed planning horizon method as investment policies correct?

          Lee                                       Weatherford

A)   Correct                                  Incorrect

B)   Correct                                  Correct

C)   Incorrect                                Incorrect

Correct answer is C)

Lee is incorrect. If it were important to Ward to retain the possibility of buying the gulf view condo, she would be better off utilizing the lifestyle protection strategy as her investment policy. The lifestyle protection strategy allocates amounts to equity and debt in order to minimize shortfall risk (the risk that the objective is not funded). It allows for more upside potential than the fixed planning horizon method. The fixed planning horizon method dedicates an amount to zero coupon bonds that when mature will fund the minimum objective. It is less likely to fund the more expensive objective. Weatherford is incorrect. If she is not sure if she will be buying the condo in 13 years, she would be better off using the lifestyle protection strategy as her investment policy. With an uncertain time horizon, the zero coupon bonds in the fixed planning horizon method may have to be liquidated at less than their par value if the time horizon falls short of the maturity of the bonds.

Thank you!