Question

1. Which of the following statements is least likely to be correct?

A. Banks have high liquidity needs to meet depositors' withdrawals.

B. Foundations and endowments typically have long investment horizons and high-risk tolerance.

C. Defined benefit pension plans typically have short time horizon due to need to distribute the proceeds from the plan to the beneficiaries.

2. Which of the following is least likely to be correct?

A. Gross return is the return before investment and administration fees.

B. Leverage return is the percentage gain or loss on the investor's cash investment.

C. The arithmetic mean return is a biased estimator of true mean of the underlying returns.

Answer 1

1) The answer is C. Defined benefit pension has long time horizon as they have to pay pension for employees who have served them over the years. Usually pensions are paid to employees who have served 25-30 years in the firm.

2) The answer is B. Leverage return is the percentage gain or loss on the investor's cash + borrowed investment. As leverage means that we have borrowed funds to invest.