LEVEL III, QUESTION 1
Topic: Portfolio Management -Institutional Investor
Minutes: 18
Reading References:
1. “Managing Institutional Investor Portfolios,” Charles R. Tschampion, Laurence B.
Siegel, Dean J. Takahashi, and John L. Maginn, Managing Investment Portfolios: A
Dynamic Process, 3rd edition (CFA Institute)
Purpose:
To test the candidate’s ability to formulate an investment policy statement for a defined benefit
pension plan.
LOS: The candidate should be able to
1. “Managing Institutional Investor Portfolios” (Study Session 10)
b) discuss investment objectives and constraints for defined benefit plans;
c) appraise pension fund risk tolerance when risk is considered from the perspective of
the 1) plan surplus, 2) sponsor financial status and profitability, 3) sponsor and
pension fund common risk exposures, 4) plan features, and 5) workforce
characteristics;
d) formulate an investment policy statement for a defined benefit plan;
e) evaluate the potential effects of a corporate pension fund investment policy on plan
surplus, the corporation’s valuation, and the corporation’s constituents.
Guideline Answer:
Part A
BC Plc has below average risk tolerance, compared to the average FTSE 350 company pension
plan, for any four of the following reasons:
• BC Plc’s pension plan is more under-funded. The ratio of plan assets to plan liabilities at
0.83 is less than 1.0 and below the FTSE 350 average of 0.97.
• BC Plc’s workforce has a higher average age.
• BC Plc’s workforce has a higher ratio of retired lives to active lives.
• BC Plc’s workforce has higher years of service.
• BC Plc has lower profitability.
• BC Plc has a higher debt ratio.

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