“The GIPS general provisions for real estate and for private equity require that both income and capital gains are included in the calculation and presentation of returns."

“The GIPS general provisions for real estate and for private equity require that both income and capital gains are included in the calculation and presentation of returns."

From the data provided in Figure 1, determine the firm or firms that probably have the greatest risk arising from pension plan assets.

A. Firm A.

B. Firms B and C.

C. Firm D.

Answer: C

Explanation:

Firm B and Firm C both have a plan surplus. Both Firm A and Firm D are underfunded by $160 million, which represents 11% for A and over 18% for D.

Pension plan liabilities are similar to debt securities in that their present values fluctuate with interest rates. Plan D has only 25% of assets invested in fixed income securities. (75% in equities), so the plan assets of Firm D are sensitive to the systematic risk of equity markets to a greater degree than those of the other firms. (Study Session 5, LOS 22.a)