CFAI Exam 2014, Question #5

CFA Level III
#1

Determine, for each category below, which company’s pension plan most likely has the lowest risk tolerance:

i. Sponsor financial status/profitability

Company QYDL supposedly has the lowest risk tolerance because it has the lowest Net Income/Sales ratio and highest debt-to-equity ratio. However, it has a plan funded status surplus and has the highest number of active-to-retired lives. So isn’t it arbitrary how CFA chooses “most-likely” for risk tolerance, and how do I prepare for a question like this on this year’s test?

#2

the question speaks only to the financial status and profitability, for which it has the worst traits in both categories.

consider thesein isolation of the other characteristics, as the problem suggests

not trying to be a jerk, but reading the quesetion carefully will help a lot…i have been guilty of it many times

#3

Yup - I got tricked on this one, too.

Anyone know where to find which metrics are typically used for sponsor financial status/profitability, workforce characteristics, etc. in the CFAI text? I feel like this would definitely be helpful. Thanks!

#4

Piggy-backing on this one.

I understand that QYDL has a the lowest net income margin. However, the way I looked at it was QYDL has the best coverage (net income of $120M vs PBO of $201M). The pension asset will need to decrease in value SIGNIFICANTLY before QYDL to be unable to make a sufficient contribution back to the plan.

How is my way of looking at it wrong?

#5

Yes, it did not ask about pension surplus status. If it said “Which company has the highest risk tolerance based on surplus status…” then OK.

It is asking, based on corporate profitability which pension plan has the highest risk tolerance. Plan surplus is not a corporate profitability metric.