What about pension beta?

Is it in the mock exam? Schweser seems to have only 1 question on it. Sounds like a good curve ball CFAI may throw

i completely forgot about that crap

yep, yep, it is nowhere to be found but… ON ACTUAL exam :slight_smile:

that review annoys me. its like 10 pages of formulas and then theyre like, oh, by the way, you dont have to calculate this. i am not really sure how much of that stuff i am accountable for.

i’m reading through schweser’s quicksheet and it’s in there so they must consider it important. equity allocation increases, pension beta increases. seems pretty simple…am i missing something?

i think there are so few testable questions because there isnt much to test if you cut away all the formulas.

Pension beta shows up in the session allocating shareholder captial to pension plans, there is an quantitative example about how to integrate DB plan into balance sheet.

Just remember what it does to WACC and leverage.

Yeah, that’s right. Basically you add the DB liabilities to the debt of the balance sheet, add the pension assets to the assets of the balance sheet and recalculate some stuff. Total equity isn’t affected, but total debt, wacc, and beta are. Basically, the liabilities show up as more debt on the balance sheet, driving up the Debt/Equity ratio. This will affect the Asset Beta of the company (the beta that comes from operational risk as opposed to operational+financial risk) and make it lower. More importantly, this will increase the amount of debt in the capital structure, and lower WACC. If a company isn’t careful about this, it might use a higher WACC in their decisions to pursue projects and therefore reject some potentially profitable projects that would be feasible under the lower WACC.

if the plan has a surplus is the opposite true?

I thought the surplus didn’t have anything to do with it but rather it has to do with percentage of equities. Equities through their beta are the risk element. Debt is considered to have a beta of zero. Am I right?