Question #3, CFA Exam 2010

CFA Level III
#1

Would my answer get proper credit?

“Identify a factor that affect’s Apax pension plan’s ability to take risk, and whether it decreases or increases its ability and why.”

I wrote “A growing ratio of inactive to active plan members decreases ability to take risk because more outflows will be apparent without the necessary inflows from active participants.”

But: their answer is fancier: "** The higher the proportion of inactive to active members, the shorter the duration of the plan’s liabilities. Shorter duration liabilities imply lower risk tolerance."**

Is my answer still right? If not, how do I make better responses in the future?

#2

not sure HOW they will mark, but you are getting at the same point as them

#3

Yup it means the same thing. I would try to use as much CFA jargon as possible.

#4

If your answer doesn’t get full credit then it will get pretty close to it - losing a point, maybe. Since defined benefit pension plans (I’m assuming that this is a DB plan question) are typically managed using an asset-liability management (ALM) approach where duration of assets are matched to duration of liabilities, I think the answer you provide should have some mention of duration as short vs. long lengths of duration will undoubtedly have an impact on risk tolerance.