Exam 29: Pension Plan Management

The performance measurement of stock portfolio managers must recognize the risk inherent in the investment portfolio.One way to incorporate risk into performance measurement is to examine the portfolio's alpha, which measures the vertical distance of the portfolio's return above or below the Security Market Line.

Arnold Rossiter is a 40-year-old employee of the Barrington Company who will retire at age 60 and expects to live to age 75.The firm has promised a retirement income of $20,000 at the end of each year following retirement until death.The firm's pension fund is expected to earn 7 percent annually on its assets and the firm uses 7% to discount pension benefits.What is Barrington's annual pension contribution to the nearest dollar for Mr.Rossiter? (Assume certainty and end-of-year cash flows.)

Under a defined contribution plan, employees agree to contribute some percentage of their salaries, up to 20 percent, to the firm's pension fund.

Which of the following statements about pension plans if any, is incorrect?

Which of the following statements about pension plan portfolio performance is incorrect?

Which of the following statements about defined contribution plans is incorrect?

From a pure cost standpoint, a firm with a defined contribution plan would be more likely to hire older workers than a firm with a defined benefit plan.

If employees have a right to receive pension benefits even if they leave the company prior to retirement, their pension rights are said to be vested.

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?

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?