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Chapter 5 homework

Problem 1: A. An indexed investment represents a high diversified type of securities without the risk of systematic market exposure. This form of risk cannot be diversified within the company because it represents that one company’s fragility within the market itself. B. a. An active approach toward rebalancing the policy brings competent flexibility to multiple time periods and a more favorable strategic asset allocation. b. Indexing to asset increases the portfolios time frame and returns will not beat the market. The Index will mirror the value but won’t duplicate an independents stocks deficiency. c. Adopting a policy portfolio different from your peers can be viewed as aggressive and will differentiate RFM’s returns. Policy should reflect the companies risk willingness and asset allocation should be represented as cross-sectional. C. The type of investment program being suggested is tactical asset allocation because it involves making short-term adjustments to asset-class weights. This is primarily based on short term predictions among asset classes of performance. D. The asset-only approach ignores the investor’s liabilities while the ALM approach adopts the asset allocation that is best to support the liabilities. A dynamic approach to asset allocation benefits between multiple active periods. On the other hand, a major disadvantage to this approach is that is costly and quite complex. E. ALM establishes a process that constantly improves the quality of the portfolio. RFM can minimize risk by investing in long-term bonds due to its pension liabilities.
Problem 5: A. U.S equities are too broad of an asset-class specification. U.S equities are connected to world equities. Therefore to be considered nonhomogeneous asset classes asset classes. B.

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