Chapter 28, Investment Policy and the Framework of the CFA Institute Video Solutions, Investments

Problem 1

Your neighbor has heard that you successfully completed a course in investments and has come to seek your advice. She and her husband are both 50 years old. They just finished making their last payments for their condominium and their children's college education and are planning for retirement. What advice on investing their retirement savings would you give them? If they are very risk averse, what would you advise?

Christine Anacker

Numerade Educator

Problem 2

What is the least-risky asset for each of the following investors?
a. A person investing for her 3-year-old child's college tuition.
b. A defined bencfit pension fund with benefit obligations that have an average duration of 10 years. The benefits are not inflation-protected.
c. A defined benefit pension fund with benefit obligations that have an average duration of 10 years. The benefits are inflation-protected.

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04:14

Problem 3

George More is a participant in a defined contribution pension plan that offers a fixed-income fund and a common stock fund as imvestment choices. He is 40 years old and has an accumulation of $$\$ 100,000$$ in each of the funds. He currently contributes $$\$ 1.500$$ per year to each. He plans to retire at age 65 , and his life expectancy is age 80 .
a. Assuming a $3 \%$ per year real earnings rate for the fixed-income fund and $6 \%$ per year for common stocks, what will be George's expected accumulation in each account at age 65?
b. What will be the expected real retirement annuity from each account, assuming these same real earnings rates?
c. If George wanted a retirement annuity of $$\$ 30,000$$ per year from the fixed-income fund, by how much would he have to increase his annual contributions?

Abby Kennedy

Numerade Educator

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Problem 4

The difference between a Roth IRA and a traditional IRA is that in a Roth IRA taxes are paid on the income that is contributed, but the withdrawals at retirement are tax-free. In a traditional IRA. however, the contributions reduce your taxable income, but the withdrawals at retirement are taxable. Assume you plan to devote $$\$ 5,000$$ to retirement savings in each year. You will retire in 30 years and expect to live for an additional 20 years after retirement.
a. Assume the before-tax interest rate is $5 \%$. Whar will be your after-tax 20 -year retirement consumption stream if you choose to save in a traditional IRA? Assume your tax rate is fixed at $30 \%$.
b. What will be your 20 -year retirement consumption stream if you choose to save in a Roth IRA?
c. Which provides better expected resuls if you expect your tax rate on wage as well as all imestment income to decrease from 30 foday to $25 \%$ at retirement?

Kratika Bhadauria

Numerade Educator