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CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction

An IPS for a defined benefit pension plan with a sponsor in a cyclical industry and many retirees nearing payout is most likely to specify:

The IPS would most likely specify below-average risk capacity, because the sponsor's financial health in a cyclical industry is positively correlated with plan assets. Poor markets would coincide with weaker sponsor support, and many near-retirees add liquidity needs, which undermines the other statements.

  1. Aa high risk tolerance because the plan has a perpetual time horizon
  2. Ba low liquidity requirement because benefits are funded by the sponsor
  3. Ca below-average risk capacity because sponsor and plan performance are positively correlatedCorrect

Explanation

If the sponsor's finances are tied to the same cycle, poor markets coincide with weak sponsor support, lowering risk capacity. Many retirees also raise liquidity needs, so the second option is wrong, and a long horizon does not justify high tolerance here.

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