LOS a: Compare and contrast, with respect to investment objectives, the use of liabilities as a benchmark with the use of a bond index as a benchmark.

Q1. If a bond portfolio manager specifies liabilities as a benchmark, she is attempting to earn a return that is:

A)   as high as possible.

B)   equal to or higher than the return promised to the liability holders.

C)   the least risky.

Q2. Fixed-income investors whose objective is to replicate the performance of an index specify the benchmark:

A)   as a bond index.

B)   in terms of its duration and convexity.

C)   in terms of its duration.

Q3. Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If liabilities are chosen as a benchmark:

A)   a return higher than the liability has to be achieved by any means.

B)   the objective is only return oriented.

C)   the objective is to match the amount and timing of the liability payments.

Q4. Why should a pension fund manager NOT manage against a typical broad-based bond market index?

A)   The duration of a typical broad-based bond market index and the liabilities of a pension fund are not similar.

B)   The manager might outperform the index.

C)   This indexing strategy may produce tracking error risk.

Q5. If a bond portfolio manager has specified the benchmark in terms of a bond index, she is attempting to earn a return that is:

A)   less risky than the index.

B)   equal to or superior to the index.

C)   as high as possible.

Q6. Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If a bond index is chosen as a benchmark the:

A)   bond index has to be outperformed on a risk-adjusted basis.

B)   objective is only return oriented.

C)   objective will be less risk averse.

LOS a: Compare and contrast, with respect to investment objectives, the use of liabilities as a benchmark with the use of a bond index as a benchmark. fficeffice" />

Q1. If a bond portfolio manager specifies liabilities as a benchmark, she is attempting to earn a return that is:

A)   as high as possible.

B)   equal to or higher than the return promised to the liability holders.

C)   the least risky.

Correct answer is B)         

The manager that specifies liabilities as a benchmark must ensure that the rate of return earned in the portfolio satisfies the return promised to liability holders. (This objective may be accomplished by earning equal to or higher than the promised return.)

Q2. Fixed-income investors whose objective is to replicate the performance of an index specify the benchmark:

A)   as a bond index.

B)   in terms of its duration and convexity.

C)   in terms of its duration.

Correct answer is A)

Fixed-income investors whose objective is to replicate the performance of an index specify the benchmark in terms of a bond index.

Q3. Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If liabilities are chosen as a benchmark:

A)   a return higher than the liability has to be achieved by any means.

B)   the objective is only return oriented.

C)   the objective is to match the amount and timing of the liability payments.

Correct answer is C)

The objective when managing a portfolio against a liability is to maintain sufficient portfolio value to meet the liabilities.

Q4. Why should a pension fund manager NOT manage against a typical broad-based bond market index?

A)   The duration of a typical broad-based bond market index and the liabilities of a pension fund are not similar.

B)   The manager might outperform the index.

C)   This indexing strategy may produce tracking error risk.

Correct answer is A)

The pension fund manager should define the benchmark in terms of the pension liabilities that must be satisfied. Most broad-based bond market indexes have shorter durations. If the pension fund manager decides to use a bond index, then he should chose one that matches the duration of the pension plan.

Q5. If a bond portfolio manager has specified the benchmark in terms of a bond index, she is attempting to earn a return that is:

A)   less risky than the index.

B)   equal to or superior to the index.

C)   as high as possible.

Correct answer is B)

The manager that uses an index as a benchmark is attempting to earn a rate of return that is equal to or superior to the index.

Q6. Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If a bond index is chosen as a benchmark the:

A)   bond index has to be outperformed on a risk-adjusted basis.

B)   objective is only return oriented.

C)   objective will be less risk averse.

Correct answer is B)

Although you may wish to outperform an index, an index manager’s objective would not be to outperform the index, but only to match the index’s return results.

tt