wait a minute, perhaps i also don’t get something. why do we consider the business environment of this company and its correlation with the industry? i thought the risk ability is given by the correlation between company’s business and the return on its invested assets. i mean it could get worse for the company, but its contributions might not get higher if the assets are invested in countercyclicals. please enlighten me.
Just to keep track, where is this question from? It is funny how when you see a q on AF there is some deep seeded force that draws you to the unexpected answer option. I mean at second pass this kind of screamed average. A couple above avg. and a couple below avg. the above avg stuff was obvious and the below avg was certainly in there. I guess the lesson here for me is don’t get caught up counting how many above ave vs. how many below… if there are a couple of both then it is just average… re: the business environment stuff - I think the objective to minimize future contributions is important there. I remember reading that in the text and saying “duh” isn’t that every plans objective? Anyway, I think that if firm profits are positively correlated with the stock market in general, and in this case they are and further the business is highly leveraged, then there is less ability to take risk in the plan by investing in stocks. I think the rationale goes like this: If we invest with above ave risk and plan assets decline due to a declining stock market => we need to increase contributions, however, our profits are down at that exact time and therefore we can’t really afford to make a big contribution So… we have less ability to take risk in the plan. If the opposite is true: plan assets have declined but our profits are up, then it is not difficult to make a large contribution and therefore the ability to take risk in the plan is higher. In this question I thought that was the whole deal so I chose below ave. They take care to describe the firm as producing components for cars, silver is critical, highly leveraged, oh and we want to maintain the surplus and minimize the need for contributions… Those imply below avg and I incorrectly assumed their importance trump the time frame stuff like active/retired and no early retire/lump sums. Again, I suppose you have to consider everything and not decide what is most important. *Edit: PM, I also hate you.