CFA Level I · CFA Level I Exam · Portfolio Management: An Overview
A defined benefit pension plan has a large number of active employees who are far from retirement and a sponsor with strong finances. Compared with a plan whose members are mostly retired, this plan is most likely to have:
The plan with mostly young active employees and a financially strong sponsor most likely has a higher ability to take risk. Its liabilities fall due far in the future, so it has a long time horizon and a lower immediate liquidity need than a mature plan.
- Aa lower risk tolerance because liabilities are certain
- Ba higher ability to take risk because of its long time horizonCorrect
- Ca greater need for liquidity to pay current benefits
Explanation
A plan with young active members and a strong sponsor has long-dated liabilities and a time horizon that supports greater risk-taking. A mature plan with many retirees has a greater liquidity need, which is why option C describes the wrong plan.
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