FIN 540 Week 9 Homework Problems – Strayer NEW
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Week 9
Homework Problems Chapter 29
1. Which
of the following statements about pension plans if any, is incorrect?
a. Under a defined benefit plan, the
employer agrees to give retirees a specifically defined benefit.
b. If assets exceed the present value of
benefits, the pension plan is fully funded.
c. Such as $500 per month or 50 percent of
the employee’s final salary.
d. A portable pension plan is one that an
employee can carry from one employer to another
e. An employer’s obligation is satisfied
under a defined contribution plan when it makes the required contributions to
the plan. The risk of inadequate investment returns is borne by the employee.
f. A defined contribution plan is, in
effect, a savings plan that is funded by employers, although many plans also
permit additional contributions by employees.
2. Which
of the following statements about defined contribution plans is incorrect?
a. In general, employees can choose the
investment vehicle under a defined contribution plan. Thus, highly risk-averse
employees can choose low-risk investments, while more risk-tolerant employees
can choose high-risk investments.
b. In a defined contribution plan, the
employer must make larger-than-average contributions to the pension plan when
investment returns have been below expectations.
c. Defined benefit plans are used more
often by large corporations than by small companies.
d. The PBGC insures a portion of pension
benefits.
e. A defined contribution plan places the
risk of poor pension portfolio performance on the employee.
3. Which of the following statements about
pension plan portfolio performance is incorrect?
a. Alpha
analysis, which relies on the Capital Asset Pricing Model, considers the risk
of the portfolio when measuring performance.
b. Peer
comparison examines the relative performance of portfolio managers with similar
investment objectives.
c. A portfolio annual return of 12 percent
from one investment advisor is not necessarily better than a return of 10
percent from another advisor.
d. In managing the retiree portfolio, fund
managers often use immunization techniques such as alpha analysis to eliminate,
or at least significantly reduce, the risk associated with changing interest
rates.
e. Pension fund sponsors must evaluate the
performance of their portfolio managers periodically as a basis for future
asset allocations.
4. Ms. Lloyd, who is 25 and expects to
retire at age 60, has just been hired by the Chambers Corporation. Ms. Lloyd's
current salary is $30,000 per year, but her wages are expected to increase by 5
percent annually over the next 35 years. Chambers has a defined benefit pension
plan in which workers receive 2 percent of their final year's wages for each
year of employment. Assume a world of certainty. Further, assume that all
payments occur at year-end. What is Ms. Lloyd's expected annual retirement
benefit, rounded to the nearest thousands of dollars?
a.
$35,000
b.
$57,000
c.
$89,000
d.
$116,000
e.
$132,000
5. Kumar Consulting operates several stock
investment portfolios that are used by firms for investment of pension plan
assets. Last year, one portfolio had a realized return of 12.6 percent and a
beta coefficient of 1.15. The average T-bond rate was 7 percent and the
realized rate of return on the S&P 500 was 12 percent. What was the
portfolio's alpha?
a.
−0.75%
b.
−0.15%
c. 0%
d. 0.15%
e. 0.75%
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