bkmsol_ch26 - CHAPTER 26: THE PROCESS OF PORTFOLIO...

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Unformatted text preview: CHAPTER 26: THE PROCESS OF PORTFOLIO MANAGEMENT 1. a.i. Return Requirement: IPS Y has the appropriate language. Since the Plan is currently under-funded, the primary objective should be to make the pension fund financially stronger. The risk inherent in attempting to maximize total returns would be inappropriate. ii. Risk Tolerance: IPS Y has the appropriate language. Because of the funds under-funded status, the Plan has limited risk tolerance; should the fund incur a substantial loss, payments to beneficiaries could be jeopardized. iii. Time Horizon: IPS Y has the appropriate language. Although going concern pension plans usually have a long time horizon, the Acme plan has a shorter time horizon because of the reduced retirement age and the relatively high median age of the workforce. iv. Liquidity: IPS X has the appropriate language. Because of the early retirement feature starting next month and the age of the work force (which indicates an increasing number of retirees in the near future), the Plan needs a moderate level of liquidity in order to fund monthly benefit payments. b. The current portfolio is the most appropriate choice for the pension plans asset allocation. The current portfolio offers: i. An expected return that exceeds the Plans return requirement; ii. An expected standard deviation that only slightly exceeds the Plans target; and, iii. A level of liquidity that should be sufficient for future needs. The higher expected return will help the Plans under-funded status somewhat, and the change in the funds risk profile will be minimal. The portfolio has significant allocations to U.K. bonds (42 percent) and large-cap equities (13 percent), in addition to cash (5 percent). The availability of these highly liquid assets should be sufficient, particularly in view of the stable income flows from these investments, to fund monthly benefit payments when the early retirement feature takes effect next month. The Graham portfolio offers: i. An expected return that is slightly below the Plans requirement; ii. An expected standard deviation that is substantially below the Plans target; and, iii. A level of liquidity that should be more than sufficient for future needs. Given the Plans under-funded status, the portfolios level of risk is unacceptable. 26-1 The Michael portfolio offers: i. An expected return that is substantially above the Plans requirement; ii. An expected standard deviation that far exceeds the Plans target; and iii. A level of liquidity that should be sufficient for future needs. Given the Plans under-funded status, the portfolios level of risk is unacceptable. 2. c.Liquidity 3. b. Organizing the management process itself....
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bkmsol_ch26 - CHAPTER 26: THE PROCESS OF PORTFOLIO...

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