Economics Homework Help

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Managing Your Financial Assets. Read the questions in 21.16 regarding the Light Speed Connections (LSC) pension plan.

Your firm has been hired to manage the LSC pension plan. In your post, select and justify the portfolio that is most appropriate for LSC’s pension plan from the choices (Portfolio A, B, C, or current) on exhibit 21-1 (attached).

In your initial post, include the following:

• Your recommended portfolio
• An explanation of the pension plan’s risk tolerance and return requirement
• A weakness of the current portfolio asset allocation

“21.16 Hugh Donovan is chief financial officer (CFO) of Light Speed Connections (LSC), a rapidly growing U.S. technology company with a traditional defined-benefit pension plan. Because of LSC’s young workforce, Donovan believes the pension plan has no liquidity needs and can thus invest aggressively to maximize pension assets. He also believes that T-bills and bonds, yielding 5.4 percent and 6.1 percent, respectively, have no place in a portfolio with such a long time horizon. His strategy, which has produced excellent returns for the past two years, is to invest the portfolio as follows:

50 percent in a concentrated pool (15–20 stocks) of technology companies, managed internally by Donovan

25 percent in a small-cap growth fund

10 percent in a venture capital fund

10 percent in an S&P 500 Index fund

5 percent in an international equity fund

Working with LSC’s Investment Committee, the firm’s president, Eileen Jeffries, produced an investment policy statement, which reads as follows: The LSC Pension Plan’s return objective should focus on real total returns that will fund its long-term obligations on an inflation-adjusted basis. The “time-to-maturity” is a key element for any defined pension plan; given our young workforce, LSC’s Plan has a long investment horizon and more time available for wealth compounding. Therefore, the Plan can pursue an aggressive investment course and focus on capital growth. Under U.S. tax laws, pension portfolio income and capital gains are not taxed. The portfolio should focus on investments in businesses directly related to our main business to leverage our knowledge base.

Jeffries takes an asset-only approach to strategic asset allocation. She is considering three alternative allocations, shown in Exhibit 21.1 along with the portfolio’s current asset allocation.