Investment Policy & Planning Flashcards

Which factor most increases a defined benefit pension plan's ability to take risk?

Answer: A large funding surplus

A surplus gives the plan a cushion to absorb losses, which raises its risk capacity.

Why do many endowments apply their spending rate to a rolling average of past market values?

Answer: To smooth spending and reduce year-to-year budget volatility

Smoothing rules dampen the effect of market swings on the institution's operating budget.

What is the approximate minimum annual payout requirement for a US private non-operating foundation?

Answer: 5% of net investment assets

Under IRS rules, private foundations must distribute about 5% of their net investment assets each year.

When interest rates rise sharply, a life insurer is most exposed to which liquidity risk?

Answer: Disintermediation, as policyholders surrender policies or take policy loans

Rising rates encourage policyholders to withdraw cash value and seek higher yields elsewhere.

What is the main role of a commercial bank's securities portfolio?

Answer: Managing liquidity and interest rate risk alongside the loan book

Bank securities portfolios support asset-liability management by providing liquidity and balancing the rate exposure of loans and deposits.

Under ERISA, what standard of care applies to a private pension plan fiduciary?

Answer: The prudent expert standard

ERISA requires fiduciaries to act with the care, skill, and diligence of a prudent person familiar with such matters.

A key technique in liability-driven investing for a pension plan is:

Answer: Matching the duration of plan assets to the duration of plan liabilities

Duration matching protects funded status from changes in interest rates.