Tutorials 1: The behavioral finance perspective

Mimi Fong, CFA, a private wealth manager with an asset management firm, has been asked to
make a presentation to her colleagues comparing traditional and behavioral finance. She decides
to enliven her presentation with statements from colleagues and clients. These statements are
intended to demonstrate some key aspects of and differences between traditional and behavioral
finance.

Statement 1 “When new information on a company becomes available, I adjust my expectations

for that company’s stock based on past experiences with similar information.”
Statement 2 “When considering investments, I have always liked using long option positions. I
like their risk/return tradeoffs. My personal estimates of the probability of gains seem to be
higher than that implied by the market prices. I am not sure how to explain that, but to me long
options provide tremendous upside potential with little risk, given the low probability of limited
losses.”
Statement 3 “I have always followed a budget and have been a disciplined saver for decades.
Even in hard times when I had to reduce my usual discretionary spending, I always managed to
save.”
Statement 4 “While I try to make decisions analytically, I do believe the markets can be driven
by the emotions of others. So I have frequently used buy/sell signals when investing. Also, my
20 years of experience with managers who actively trade on such information makes me think
they are worth the fees they charge.”
Statement 5 “Most of my clients need a well-informed advisor to analyze investment choices
and to educate them on their opportunities. They prefer to be presented with three to six viable
strategies to achieve their goals. They like to be able to match their goals with specific
investment allocations or layers of their portfolio.”
Statement 6 “I follow a disciplined approach to investing. When a stock has appreciated by 15
percent, I sell it. Also, I sell a stock when its price has declined by 25 percent from my initial
purchase price.”
Statement 7 “Overall, I have always been willing to take a small chance of losing up to 8
percent of the portfolio annually. I can accept any asset classes to meet my financial goals if this
constraint is considered. In other words, an acceptable portfolio will satisfy the following
condition: Expected return – 1.645 x Expected standard deviation -8%.”

1. Which of the following statements is most consistent with expected utility theory?
a. Statement 1.
b. Statement 2.
c. Statement 3.
2. Which of the following statements most likely indicates a belief that technical anomalies
exist in the capital markets?
a. Statement 2.
b. Statement 4.
c. Statement 6.

3. Statement 4 is most consistent with:

a. The adaptive markets hypothesis.
b. A behavioral approach to asset pricing.
c. Savage’s subjective expected utility theory.

4. The clients of Statements 5 most likely exhibit:

a. Loss-aversion.
b. Bounded rationality.
c. Mental accounting bias.

5. The client of Statement 6 is most likely behaving consistently with:

a. Prospect theory.
b. Expected utility theory.
c. Behavioral portfolio theory.

6. The client of Statement 7 would most likely agree with which of the following statements?
a. I strive for a mean-variance efficient portfolio.
b. I construct my portfolio in layers to meet my goals.
c. I am loss-averse and have a value function that is steeper for losses than gains.
Tutorials 2: The behavioral biases of individuals

1. James Montier writes, “The stock market has a tendency to underreact to fundamental
information—be it dividend omissions, initiations or an earnings report.”3 When discussing
the behavior of security analysts, Montier explains, “People tend to cling tenaciously to a
view or a forecast. Once a position has been stated, most people find it very hard to move
away from that view. When movement does occur, it does so only very slowly. Psychologists
call this conservatism bias. The chart below shows conservatism in analysts’ forecasts. We
have taken a linear time trend out of both the operating earnings numbers, and the analysts’
forecasts. A cursory glance at the chart reveals that analysts are exceptionally good at telling
you what has just happened. They have invested too heavily in their view, and hence will
only change it when presented with indisputable evidence of its falsehood.”4 The chart
accompanying Montier’s analysis (2002b) appears as Exhibit 1. Discuss Montier’s analysis
in the context of biases of individuals.

Which of the following Belief Perseverance Biases explain the above?

a. Conservatism Bias
b. Confirmation Bias
c. Representatives Bias
d. Illusion of Control Bias
e. Hindsight Bias
2. APM Company is a large, 50-year old auto parts manufacturer having some business
difficulties. It has previously been classified as a value stock. Jacques Verte is evaluating the
future prospects of the company. Over the 50-year life of APM, there have been few failures
of large auto parts manufacturers even given periods of difficulty. There have been a number
of recent headlines about auto parts manufacturers having business and financial difficulty
and potentially going out of business. He is considering two possibilities:
A. APM will solve its difficulties, the company’s performance will revert to the mean, and
the
stock will again be a value stock.
B. APM will go out of business, and the stock will become valueless.
1. Is Scenario A or B more likely? Explain why.
2. If Verte is subject to representativeness bias, is he more likely to classify APM into A or
B? Explain why.

3. Decision-making frames are quite prevalent in the context of investor behavior. Risk
tolerance questionnaires can demonstrate how framing bias may occur in practice and how
FMPs should be aware of its effects. Suppose an investor is to take a risk tolerance
questionnaire for the purpose of determining which “risk category” he or she is in. The risk
category will determine asset allocations and the appropriate types of investments. The
following information is provided to each questionnaire taker:
Over a 10-year period, Portfolio ABC has averaged an annual return of 10 percent with an
annual standard deviation of 16 percent. Assuming a normal return distribution, in a given
year there is a 67 percent probability that the return will fall within one standard deviation of
the mean, a 95 percent probability that the return will fall within two standard deviations of
the mean, and a 99.7 percent probability that the return will fall within three standard
deviations of the mean. Thus, there is a 67 percent chance that the return earned by Portfolio
ABC will be between –6 percent and 26 percent, a 95 percent chance that the return will be
between –22 percent and 42 percent, and a 99.7 percent chance that the return will be
between –38 percent and 58 percent.

Which of the following Information-Processing Biases explain the above?

a. Anchoring and Adjustment Bias
b. Mental Accounting Bias
 c. Framing Bias
d. Availability Bias

4. Based on the chart below, which investment portfolio fits your risk tolerance and desire for
long-term return?
A Portfolio XYZ.
B Portfolio DEF.
C Portfolio ABC.

5. Based on the chart below, which investment portfolio fits your risk tolerance and desire for
long-term return?
A Portfolio XYZ.
B Portfolio DEF.
C Portfolio ABC.
6. An investor opens the monthly account statement and scans the individual investments for
winners and losers. Seeing that some investments have lost money and others have gained.
Discuss how the investor is likely to respond.

Which of the following Emotional Biases explain the above?

a. Loss-aversion bias
b. Overconfidence bias
c. Self-Control bias
d. Status Quo bias
e. Endowment bias
f. Regret-aversion bias
Tutorial 3

Ian Wang, CFA, is a financial advisor at Garnier Brothers, a US money management firm. He
became a financial advisor several years ago after receiving his CFA charter and currently has
three high-net-worth individuals as clients. Wang is conducting his annual review of each
client’s investment policy statement along with their recently completed risk tolerance
questionnaires. He is reflecting on their varying psychographic characteristics:

 Michael Perez is a successful 45-year-old investment banker. Wang describes Perez as a

passive investor who is sensible and secure. Perez exhibits low to medium risk tolerance but
often overestimates his risk tolerance. His biases include hindsight, framing, and regret
aversion. On his questionnaire, Perez indicated a desire for wealth preservation while
wanting to invest a significant portion of his assets in his employer’s stock.

 Sarah Johnson is an independent-minded 45-year-old real estate developer who has

historically utilized significant amounts of financial leverage. Prior to becoming a Garnier
client, Johnson managed her own investment portfolio, which was concentrated in just a few
stocks. Johnson exhibits a great deal of confidence and high risk tolerance. Johnson’s biases
include illusion of control and overconfidence. On her questionnaire, Johnson indicated a
desire for wealth accumulation and aversion to investing in non-US equities. In addition, she
indicated that her risk tolerance toward a stock investment would increase significantly if she
knew that more that one of Garnier’s research analysts supported it.

 Neal Patel is a 66-year-old billionaire who accumulated his wealth by starting a successful
retail business. Wang describes Patel as cautious and concerned about the future. Patel is
concerned about protecting his assets and often seeks advice from those he perceives as being
more knowledgeable than himself. Patel exhibits low risk tolerance. Patel’s biases include
endowment, loss aversion, and status quo. Patel indicated that his risk tolerance would
increase significantly if he knew that an investment had the unanimous support of Garnier’s
Private Wealth Investment Committee.

There was one common observation that Wang noted in all three questionnaires:
All three clients indicated that they would perceive a company with a good growth record and
good previous share price performance as a good investment.

Once Wang completes his annual review, he revises the investment policy statement for the
client’s approval. After the client approves the revised policy statement, the portfolio for the
client will be reviewed to determine any necessary reallocations. Wang is limited by Garnier as
to the specific investment options that can be placed in a client’s portfolio; only securities that
are covered by Garnier’s research analysts and approved by the Private Wealth Investment
Committee can be placed in a client’s portfolio. Garnier is confident that its analysts provide
superior forecasts and ratings because they use a Bayesian approach. Garnier is also proud of its
investment approval process. The Private Wealth Investment Committee regularly meets to
discuss and debate each security and then votes on which will be approved.
Wang is scheduled to meet with his supervisor next week to discuss the results of his annual
review and recommended portfolio reallocations.

1. When advising his clients, Wang is least likely to:

a. Educate Perez on the benefits on portfolio diversification.
b. Limit Johnson’s role in the investment decision-making process.
c. Provide Patel with details like standard deviations and Sharpe ratios.

2. A traditional risk tolerance questionnaire is most likely to be effective as a diagnostic tool

for:
a. Patel.
b. Perez.
c. Johnson.

3. Which of the following behavioral biases would be most relevant in constructing a portfolio
for Johnson?
a. Home bias.
b. Overconfidence.
c. Inertia and default.

4. Which investment portfolio is least likely to deviate from the mean-variance portfolio?
a. Patel.
b. Perez.
c. Johnson.

5. With regard to Johnson’s comment relating to Garnier’s research analysts, which of the
following biases is most likely to be present in the analysts’ data?
a. Confirmation bias.
b. Availability bias.
c. Self-attribution bias.

6. Patel’s comment in his risk tolerance questionnaire regarding the Private Wealth Investment
Committee fails to recognize which bias?
a. Social proof.
b. Confirmation bias.
c. Gambler’s fallacy.

7. The clients’ common observation in their risk tolerance questionnaires is least likely
indicative of:
a. Herding.
b. Home bias.
c. Halo effect.
Tutorial 4 & 5

Father (Peter), mother (Hilda), son (Hans), and daughter (Christa) and her child (Jurgen). Peter is
the founder and majority owner of IngerMarine.

Christa estimates that her revised annual living expenses, including a new studio and apartment,
will average RM132,500 (excluding Jurgen’s educational costs). If necessary, she could combine
her apartment and studio to reduce spending by RM32,500. She does not want her financial
security to be dependent on further gifting from her parents and is pleased that, after the sale of
IngerMarine, she will be able to meet her new living expenses with proceeds from art sales
(RM50,000) and the expected total return of the proposed investment portfolio (RM82,500).
Because of the uncertainty of art sales, Christa plans to establish an emergency reserve equal to
one year’s living expenses. Her after-tax proceeds from the sale of IngerMarine are expected to
be RM1,200,000 * (1 – 0.15) = RM1,020,000. She also holds RM75,000 in balanced mutual
funds and RM25,000 in a money market fund. Christa intends to reevaluate her policy statement
and asset allocation guidelines every three years.

1. Discuss Christa’s liquidity requirements.

2. Determine Christa’s return requirement and evaluate whether her portfolio can be expected to
satisfy that requirement if inflation averages 3 percent annually and she reduces her annual
living expenses to RM100,000 by combining her apartment and studio.

3. Explain why an analysis of Christa’s investment policy statement might become necessary
before the next three-year review.

Hans’ increasingly irresponsible lifestyle has become a burden to his parents. Hans was recently
arrested for reckless driving – he crashed his car into a restaurant, causing considerable damage
and injuring a patron. As a result of Hans’ behavior, Peter has placed him on probationary leave
of absence form IngerMarine but will allow him to retain his annual salary of RM100,000. The
restaurant patron is suing Hans for RM700,000 in damages, and the restaurant owner estimates
that it will take RM500,000 to repair damages to his building. Hans’ insurance will cover costs to
a maximum of only RM200,000.

4. Assess the impact of these events on Hans’ liquidity and his personal financial statement.
What course of action should he pursue?

5. Assess Hans’ probable future ability to assume risk, based on information about his
background and current living situation.

Peter and Hilda are considering an investment of RM1,000,000 in one of the following
investment funds. Their tax rates on income and capital gains are 25 percent and 15 percent,
respectively.
 Investment Projected Income Projected Price Projected Turnover
(%) Appreciation (%) (%)
High-growth stock 2.0 12 75
fund
Equity value fund 2.5 10 25
Municipal bond fund 5.0 (tax free) 2 15

6. Evaluate each investment fund based only on its after-tax-return.

Note: Capital gains tax = Price appreciation * 15% *Turnover rate.

IngerMarine has experienced a catastrophic event from which it cannot recover. Damage claims
resulting from a design flaw are expected to leave IngerMarine bankrupt and its stock worthless.
Peter’s Pension is also lost.

7. Assess the probable impact on Peter’s and Hilda’s return requirement.

8. Assess the probable impact on Peter’s and Hilda’s portfolio constraints.

Tutorial 6 & 7

Alan Jackson has a new client, Aldo Motelli, who expects taxable ordinary income (excluding
investments) of RM200,000 this tax year. Motelli currently has RM250,000 in a taxable investment
account for which his main objective is retirement in 15 years. He is considering making the maximum
investment of RM10,000 in a new type of tax deferred account permitted in his country of residence. The
contribution would be deductible and distributions are expected to be taxed at a 20 percent rate when
withdrawn. The income tax structure of his country is:

Taxable Income (RM) Taxable Income (RM) Tax on Column 1 (RM) Percentage on Excess
Over Column 1

0 20,000 - 10

20,000 40,000 2,000 15

40,000 60,000 5,000 20

60,000 80,000 9,000 25

80,000 100,000 14,000 30

100,000 - 20,000 35

Taxes on Investment Income

Interest 10% flat rate
Dividends 10% flat rate
Realized capital gains 10% flat rate

1. Calculate Motelli’s average tax rate on ordinary income.

2. Calculate Motelli’s expected tax accumulation in 15 years, if his investment account of RM250,000
invested in an asset which earn him 6.5 percent annual interest.

3. Calculate the accrual equivalent return assuming the facts in (b) above.

4. If Motelli’s current investment account of RM250,000 is invested in an investment which is expected

to earn a return of 7.5 percent, all of which are deferred capital gains, what is his expected after tax
accumulation in 15 years? The account’s market value is equal to its cost basis.

5. If Motelli’s current investment account of RM250,000, has a cost basis of RM175,000, and is
invested in an investment which is expected to earn a return of 7.5 percent, all of which are deferred
capital gains, what is his expected after tax accumulation in 15 years?
6. How much after - tax wealth would Motelli accumulate assuming the same facts as in Question 4
except that 50 percent of all capital gains are recognized each year?

7. Assuming an annual return of 7.5 percent, what would be the after – tax wealth accumulated in 15
years for a single current contribution to the TDA? Assume the contribution would be deductible but
taxed at the end of 15 years at a 20 percent tax rate.

8. Sam Nakusi is managing a balanced portfolio of fixed income and equity securities worth
RM1,000,000. The portfolio’s pretax expected return is 6.0 percent. The percentage of return
composed of interest, dividends and realized capital gain as well as the associated tax rates are listed
below. Assume the portfolio’s cost basis equals market value.

Tax Profile Annual Distribution Rate (p) Tax Rate (T)

Interest (i) 20% 35%
Dividends (d) 30% 15%
Capital gain (cg) 40% 25%

What is the expected future accumulation in 15 years assuming these parameters hold for that time
period?
9. In the previous question, recalculate the expected accumulation assuming the portfolio’s cost basis is
equal to RM700,000.

10. Gloria Vander is pursuing a buy – and – hold equity strategy on non – dividend paying stocks. She
expects her RM400,000 portfolio to experience no turnover over the next 10 years but expects to
liquidate it at that time. The cost basis is currently equal to market value. If Vander expects an 8
percent pretax return and capital gains are taxed at 20 percent, what is her accrual equivalent return
over that time period?

11. What is the accrual equivalent tax rate in the previous question?

12. Peter Cavuto lives in a country that imposes a wealth tax of 0.5 percent on financial assets each year.
His RM500,000 portfolio is expected to return 5 percent per year over the next twenty years.
Assuming no other taxes, what is Cavuto’s expected wealth at the end of twenty years?

13. A client has funds in a tax deferred account and a taxable account. Which of the following assets
would be most appropriate in a taxable account in a Flat and Heavy Tax Regime, in which dividends
and capital gains are taxed at ordinary rates and interest income is tax exempt? Assume that all assets
are held in a client’s overall portfolio.

a. Bonds
b. Actively traded stocks
c. High dividend paying stocks.
14. John Kaplan and Anna Forest both have RM100,000 each split evenly between a tax deferred account
and a taxable account. Kaplan chooses to put stock with an expected return of 7 percent in the tax –
deferred account and bonds yielding in 4 percent in the taxable account. Forest chooses the reverse,
putting stock in the taxable account and bonds in the deferred account. When held in taxable account,
equity returns will be taxed entirely as deferred capital gains at a 20 percent rate, while interest
income is taxed annually at 40 percent. The tax rate applicable to withdrawals from the tax deferred
account will be 40 percent. Cost basis is equal to market value in asset held in taxable account.

Tax Profile Kaplan (RM) Forest (RM)

Taxable account 50,000 bonds 50,000 stock
Tax deferred account 50,000 stock 50,000 bonds
Total (Before tax) 100,000 100,000

What is Kaplan’s after – tax accumulation after 20 years?

15. In the previous question, what is Forest’s after – tax accumulation after 20 years?

16. What is the after – tax asset allocation for the following portfolio if withdrawals from the TDA will
be taxed at 40 percent?

Account Pretax Market Value (RM) Asset Class

TDA 200,000 Bonds
Tax - exempt 80,000 Stocks
Total 280,000

17. Lorraine Newman is evaluating whether to save for retirement using a TDA or a tax –exempt account.
The TDA permits tax – deductible contributions but withdrawals will be taxed at 30 percent. The tax
exempt account permits tax – free accumulation and withdrawals but contributions are taxable at a 40
percent tax rate. Assuming contribution limits do not affect Newman’s choice of accounts, which
account should she choose?
a. TDA
b. Tax exempt
c. The choices are the same

18. Which of the following assets would be most appropriate to locate in a tax deferred account in a
Heavy Interest Tax Regime assuming all assets are held in a client’s overall portfolio?
a. Low dividend paying stock
b. Tax exempt bonds
c. Taxable bonds

19. Consider a portfolio that is generally appreciating in value. Active trading is most likely to be least
attractive in a:
a. Taxable account
b. Tax deferred account
c. Tax exempt account
20. Jose DiCenzo has some securities worth RM50,000 that have a cost basis of RM75,000. If he sells
those securities and can use the realized losses to offset other realized gains, how much can DiCenzo
reduce his taxes in the current tax year assuming capital gains are taxed at 30 percent?

21. In the previous question, suppose DiCenzo sells the securities in the current tax year and replaces
them with securities having the same returns. He will then sell the new securities in the next tax year.
What is the total tax savings assuming DiCenzo does not reinvest the tax savings?

22. Tax loss harvesting is most effective when:

a. There are few similar investment opportunities for the security with the loss
b. The taxpayer is currently in a relatively high tax environment
c. The taxpayer is currently in a relatively low tax environmeny
Tutorial 8 & 9

1. The drawing up of a will is an area of estate planning that requires an individual to have a clear
understanding of the tax and succession (or inheritance) laws of any jurisdiction of relevance to the
testator. Although an individual may elect to draw up will, the validity of the will could be subject to
various challenges in the probate process. In addition, probate may create sizeable court fees as well
as unwelcome publicity and a delay in the distribution of assets. Describe how an individual can
attempt to reduce or even avoid the impact of:
a. Probate.
b. Forced heirship.

2. After a lengthy career as a metallurgical engineer, Greg Pearsall recently retired at age 70 and is
looking forward to spending retirement with his wife Christine, who is 75 years old. Although both
Greg and Christine are now retired, they would prefer to maintain their present lifestyle which
currently requires annual spending of RM75,000 in real terms. Inflation is expected to be 6 percent,
and the nominal risk – free rate is 10 percent. The Pearsalls’ survival probabilities for the next five
years based on their current age are listed in the table below.

Greg Christine
Year Age p(Survival) Age p(Survival)
1 71 0.9660 76 0.8235
2 72 0.9371 77 0.7996
3 73 0.9152 78 0.7727
4 74 0.8883 79 0.7208
5 75 0.8544 80 0.6919

a. What is the probability that either Greg or Christine will survive over each of the next five years?
b. Is it appropriate to use the expected return of the assets used to fund their spending needs when
calculating the capitalized value of the Pearsalls’ core capital spending needs? Why or why not?
c. What is the capitalized value of the Pearsalls’ core capital spending needs over the next five
years?

3. As part of their estate, Tony and Eleanor Hall currently own a RM2.5 million portfolio of equities and
bonds that has an average annual pretax return of 10 percent. The Halls’ after – tax return on the
portfolio is 7 percent (the tax rate is 30 percent). Due to the rapid deterioration in their health, the
Halls are considering transferring the RM2.5 million portfolio to their eldest grandchild, Joe, during
the current financial year. By transferring their investment portfolio directly to their grandson, the
Halls are attempting to reduce the transfer taxation effect to their inheritance. Although RM1.5
million can be transferred tax free, local jurisdiction requires that the remaining RM1 million transfer
be subject to a 30 percent tax rate, which is Joe’s responsibility as donee. The Halls have consulted
with their financial planner as they are uncertain whether the 30 percent tax rate would also apply if
their gift to their grandson is delayed and transferred as a bequest five year from today. Their
grandson currently pays a marginal tax rate of 25 percent.
a. Discuss the effectiveness of the Halls’ generation skipping strategy.
 b. Calculate the relative after – tax value of the Hall’s RM1 million gift (above and beyond the
RM1.5 million exclusion) to their grandson. Assume the RM1 million transfer is subject to 30
percent tax whether it takes place today or is delayed and transferred as a bequest in five years.
c. Given that the RM1 million transfer is subject to 30 percent tax whether it takes place today or is
delayed and transferred as a bequest in five years, is there any advantage in delaying payment of
the gift by five years?

4. After five decades of living in Country A, a wealthy entrepreneur, Andrew Lloyd, has recently retired
and taken up residency in Country B. Although he now lives in Country B, Lloyd has retained a
number of investment properties in Country A. The investment income tax rate is 45 percent and 30
percent in Country A and Country B, respectively.
a. Define source and residence tax as two possible primary tax systems of Country A and Country
B.
b. Discuss three potential double taxation conflicts that could arise due to Lloyd’s new residency in
Country B.
c. Calculate Lloyd’s tax rate liability under the following three methods providing for double
taxation relief, assuming scenarios where either country claims source or residence jurisdiction:
i. Credit method.
ii. Exemption method.
iii. Deduction method.
Tutorial 10

John C. Hill, sole owner of JCH Equipment Leasing Co. (JCH), is evaluating a future
sale of his company and approaches Mary Keller, a wealth adviser, for advice. Three
discussions from their most recent meeting are shown in Exhibit 1.

Exhibit 1 Selected Discussions from Hill–Keller Meeting

Discussion
Number Speaker Discussion
Discussion 1
Hill: I would like to sell JCH in three to five years and use the proceeds to fund my retirement.
Up to this point, I have reinvested the majority of the profits back into the business and have not
accumulated any meaningful wealth outside the business.
Keller: The first thing we need to consider is the cyclical nature of the equipment leasing
industry. Although the economy is expanding today, the stage of the business cycle three years
from now is uncertain.

Discussion 2
Hill: I have several good employees, but I make all of the strategic operating decisions for the
company. I take great pride in the stellar reputation of the company and have been reluctant to
cede any meaningful control. I have started the process of looking for a person to assist with the
day-to-day operations of the company.
Keller: Because you are the sole owner and chief operator of the business, you are exposed to the
consequences of a negative corporate event that may result in essentially permanent losses in
wealth.

Discussion 3
Hill: I believe the operating enterprise is worth $45 million. There is a good chance that a large
acquirer would not want the real estate associated with it.
Keller: I am concerned about the rural location, size, tailored nature of the structure, and the old
fuel tanks located behind the warehouse.

1. For each discussion, identify what type of investment risk (Systematic or Non-Systematic) is
being discussed by Hill and Keller. Justify each choice.

2. What are the Investment Risks of Concentrated Positions

3. Among the four stages of equity holding of individual investor, which one considered the
best in eliminated the specific risk? Explain
4. Among the four stages of equity holding of individual investor, which one earn the most to
the investor? Explain.

Tutorial 11&12

1. Contrast a defined-benefit plan to a defined-contribution plan and discuss the advantages and
disadvantages of each from the perspective of the employee and employer.

2. Discuss investment objectives and constraints for defined-benefit plans.

3. Prepare an investment policy statement for a defined-benefit plan.