2. “If the efficient-market hypothesis is true, the pension fund manager might as well select a portfolio with a pin.” Explain why this is not the case.
1. Depicting the factors that should be considered while making defined benefit plan or investment choice plan and identifying the issue relating to time value of money in making adequate decision making.
There are relevant factors, which needs to be considered, while tertiary sector employees make adequate decisions regarding choosing between defined benefit plan or investment choice plan. This certain concepts should be considered, while conducting time value of money, which allows investors to improve their overall financial condition. In addition, the use of superannuation mainly allows the overall individuals to effectively save and generate higher income from investment. Moreover, the use of superannuation mainly allows investors to provide relevant income during the retirement years. In addition, part employees and other employers for effectively investing in relevant funds in superannuation mainly conduct the superannuation fund. Nofsinger (2016) mentioned that superannuation funds are mainly conducted after effectively evaluating and researching, as without adequate research investment decisions could not be taken adequately. Thus, the superannuation funds and mutual funds are major investors in the overall financial market within its equity sector.
Adequate factors need to be evaluated before conducting investment in defined benefit plan or investment choice plan, as it needs to provide adequate return from investment. The defined benefit plan mainly provides an effective layout where the superannuation fund is mainly paid to the employees at the time of retirement with an adequate formula. In addition, the factors that need to be evaluated by the defined benefit scheme are final average salary, number of years of employment and age. With the help of these factors overall retirement’s benefits of the individual employees is mainly calculated.
Lump-sum factor * Average service fraction * Benefit salary * Length of membership
The above equation mainly depicts the relevant factors that need to be accommodated by superannuation funds before calculating the benefits that needs to be provided to individuals (Romiszowski 2016). The defined benefit plans mainly calculate with an adequate formulation and identifies relevant reimbursement that might be provided to an individual beforehand. In addition, the tertiary employees mainly include individuals with conducting services and provide relevant input to the overall companies. Thus, adequate return mainly needs to be provided by the superannuation fund to effectively increase the return from investment.
Factors that need to be considered while conducting relevant investment in Defined Benefit Plan or the Investment Choice Plan are depicted as follows.
The major factors that needs to be conducted while selecting the overall superfund for retirement is the retirement goal of individuals. If the retirement fund needed by the individual is relatively to provide a constant income from its fund or to increase and growth the retirement fund top gain higher income from investment. These two factors are the major concerns, which need to be addressed before selecting an adequate Defined Benefit Plan or the Investment Choice Plan for the superannuation fund. Shiller (2015) mentioned that definition for the overall return needed from fund mainly allow portfolio manager to adequately utilise their overall allocated funds. The Defined Benefit Plan mainly provides a constant income to the person up to its life. However, the Investment Choice Plan mainly provides different forms of investment layout, which could help in generating higher revenue from investment (Hammond, Keeney and Raiffa 2015).
Control over investment decisions:
The second major factors that need to be conducted before selecting adequate investment decision is the overall control that might be conducted in fund investment. This control over the decision of funds is mainly provided in Investment Choice Plan of the retirements, which allows individuals to make adequate decision for their return in retirement funds. However, the funds are not a self-managed superfund, but include relevant decisions that might be provided by the individuals, which conducting adequate investment. Investment Choice Plan mainly provides different type of decisions such as growth, balanced, and conservative. The individuals to increase their return from investment could effectively conduct this different type of investment scheme. Kerzner (2013) mentioned that different investment scheme deals with diversified risk, which is associated with investment.
Consistency in retirement funds:
The consistency in the retirement funds is another factor, which needs to the addressed while choosing adequate investment options for superfund. The consistency in the retirement fund is mainly needed by different types of individuals for effectively maintain a required rate of return form investment. Defined Benefit Plan is mainly identified, as the most viable option, for consistency in the retirement funds. Moreover, the Investment Choice Plan does not provide any kind of consistency in the requirement funds, due t the different type of risk associated with the investment. Sialm, Starks and Zhang (2015) stated that majority of the tertiary employee need a consistent retirement fund and mainly opt for a defined benefit plan, which identifies a constant fund that needs to be provided to individual.
Performance of the funds:
The fourth major factor that needs to be considered while making adequate investment decision of the superannuation fund of the performance of the fund. Defined Benefit Plan mainly provides a consistent income and does not need a constant performance measures. However, the Investment Choice Plan mainly needs an effective performance of the funds with adequate measures that needs to be evaluated. Anantharaman and Lee (2014) mentioned that identification of performance mainly allow superannuation fund to effectively improve the overall financial condition of fund.
Worst case scenario that could be provided by the funds:
The overall worst-case scenario could also be evaluated while investing in adequate funds like Defined Benefit Plan or the Investment Choice Plan. The evaluation of worst-case scenario could eventually help in identifying the overall risk that is associated with investment in different retirement funds. Thus, after the evaluation adequate steps could be taken to consider, which stock is needed to be adopted by the company. However, the Defined Benefit Plan performance could not be evaluated, as for the worst-case scenario, as it needs to provide a constant income from investment. Herman et al. (2015) mentioned that evaluation of worst-case scenario mainly allows investors to opt for the best possible investment scenario.
Furthermore, time value of money is also needed to be considered, while making adequate investment decision. Overall, five variable mainly needs to be considered, while making adequate investment decision regarding the choice of superannuation fund. Variables such as present value, future value, number of periods, interest rate and payment amount needs to be calculated before making adequate investment decisions. Furthermore, the overall valuation of the funds mainly needs to be evaluated based on the item value of money, as the amount that is derived for the individual should complement its expenses. In addition, the time value of money is mainly identified, as the critical aspect for investment, which needs to be compared. Then overall funds also need to be considered the time value of money needs to be evaluated for effectively identifying the return that is provided by the funds. Andonov, Bauer and Cremers (2016) mentioned that evolution of time value of money mainly allows investors to identify the viability of the future cash inflows that might be generated from investment. The use of time value of money mainly allows supper funds to identify the most viable option for investment, which could help in compensating the rising inflation rate of the economy. Thus, the overall uncertainty, risk, inflation, and opportunity risk needs to be conducted for efficiently compensating the time value of money. On the other hand, Ward (2016) criticises that time value of money without adequate valuation might portray wrong valuation and hamper overall return from investment.
Defined benefit plan and Investment choice plan mainly needs to be evaluated under time value of money, as it helps in identifying the adequate investment option for the retired individual. The overall evaluation of time value mainly helps in depicting adequate financial performance of investment funds. Retirement funds mainly needs to identify the relevant cash inflow that might be conducted from investment, as it helps in identifying relevancy of the cash inflow with time value. Defined benefit plan mainly portrays a fixed return, which needs to be provided by the individual. This overall valuation of money could mainly help in depicting the relevant fixed income that needs to be provided form investment. Kerzner (2013) mentioned that fixed return is mainly discounted with time value of money to identify the actual value on the present date. This derivation of the actual value on present data mainly helps identifying investors to pin point viability of the investment that needs to be conducted on the present data.
However, the investment conducted in Investment choice plan could eventually help in detecting a different return from investment to the retired person. This is mainly due different types of investment schemes that accommodate time value of money. Thus, the choice of adequate superannuation fund for the retirement plans needs to be considered and evaluation of the above factors. In addition, the overall time value of money also needs to be used in pinpointing viability of the investment scope (Sialm, Starks and Zhang 2015).
2. Explaining why pension fund manager does not select a portfolio with a pin:
Efficient market hypothesis mainly identifies all the relevant price actions that are conducted in the overall market to comprehend the news related to the company. This mainly indicates that efficient market hypothesis discounts all the relevant news that is portrayed by the company. In addition, the overall prices of stock effectively reacts with the financial issues that is been conducted by the company. This adequate reaction to the overall financial condition and news mainly portrays efficiency of the market hypothesis to accommodate all the relevant news and discount the overall stock price. Suliman (2017) argued that due to the efficient market hypothesis during 2008 crisis, investors were reluctant to believe about the bubble in housing market. On the other hand, Burton and Shah (2017) stated that with the use of market hypothesis the abnormal gains made by some investors could be reduced.
Moreover, the market hypothesis mainly deals with the information that needs to be discounted with the stock to derive its adequate prices. Therefore, a pension fund manager could not choose or select a portfolio with a pin, as it might land on highly correlated stocks, which in turn could increase the overall unique risk for investment. In addition, the increment in risk could be conducted, as efficient market hypothesis only aims in portraying adequate share price of the company and does not depict relevant risk associated with investment. Thus, stocks comprised in the portfolio selection could not be conducted based on a pin, as it might increase the overall risk from investment and hamper returns. The main aim of the portfolio is to identify relevant stocks that are undervalued band are expected to grow in value, which in turn could increase return from investment and grow portfolio value. Fievet and Sornette (2016) mentioned that portfolio stock is mainly chosen based on high return and reduced risk from investment, which are mainly performed after conducting adequate research. In this context, Pan (2016) stated that equilibrium process mainly allows asses to earn surplus because of their higher taxability.
The overall complications that might arise from using a pin for selecting the stock for portfolio, is due to the systematic risk associated with each stock. In addition, the systemic risk mainly increases if stock is used by using a pin, as portfolio risk might drastically increase, which is added without adequate research. Furthermore, the third factor, which might nullify the use of a pin in selecting the stock for portfolio is the tax bracket. The tax position of the investors is also needed to be analysed, which could reduce overall return from investment and hamper projected profits. Wójcik, Kreston and McGill (2013) mentioned that use of analysis mainly allows investors to accommodate the tax bracket in the portfolio, which could help in increasing overall profitability. In this context, Crampton (2015) further stated that tax consideration is one of the most viable variables, which needs to be accommodate while preparing an effective portfolio.
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