1. Prepare a memo for Mr. van Wie explaining how RA would invest to minimize both risk and exposure to changing interest rates. Give an example of a portfolio that would accomplish this objective. Explain how the portfolio would be managed as time passes and interest rates change. Also explain why SPX's proposal is not advisable for a conservative company like Madison.

RA manages several fixed-income portfolios. For simplicity, you decide to propose a mix of the following three portfolios:

A portfolio of long-term Treasury bonds with an average duration of 14 years.

A portfolio of Treasury notes with an average duration of 7 years.

A portfolio of short-term Treasury bills and notes with an average duration of 1 year. The term structure is flat, and the yield on all three portfolios is 5%.

Please fill in the information below (iiv) and evaluate the portfolio (v):

Duration	Two years	Eight years
Investment (millions)	i	ii
Fraction of portfolio	iii	iv
Portfolio duration	v

swap curves as in Figure 26.3. J.com. Pick ou can find spot and futures prices for a variety of equity indexes on w to do some detective work to find the is fairly priced. You wi one and check whether dividend yield on the index and the interest rate MINI-CASE Rensselaer Advisers institutional You are a president of Rensselaer Advisers (RA), which manages portfolios for had about vice mid-2017 RA investors (primarily corporate pension plans) and wealthy individuals. In and fixed-income port billion under management, invested in a wide range of common-stock will be folios. Its nagement fees average 55 basis points (55%), so RA's total revenue for 20 ma about .0055 x billion S6.05 million You are attempting to land a new client. Madison Mills, a conservative, long-established manufacturer of papermaking felt. Madison has established a defined-benefit pension plan its employees. RA would manage the pension assets that Madison has set aside to cover defined benefit obligations for retired employees. Defined benefit means that an employer is committed to pay retirement income according to a ncome could equal 40% of the employee's average salary formula. For example, annual retiremen ncome does not depend in the five years prior to retirement. In a defined-benefit plan, retiremen on the performance of the pension assets. If the assets in the fund are not sufficient to cover pen sion benefits, the company is required to contribute enough additional cash to cover the shortfal us the PV of promised retirement benefits is a debt-equivalent obligation of the company. Table 26.6 shows Madison's obligations to its already retired employees from 2018 to 2036 Each of these employees receives a fixed dollar amount each month. Total dollar payments decline as the employees die off The PV of the obligations in Table 26.6 is about $89 million at the cur rent (2017) 5% long-term interest rate. Table 26.6 also calculates the duration of the obligations at 787 years. Madison has set aside $90 m on in pension assets to cover the obligations in Table 26.6, so his part of its pension plan is fully funded. The pension assets are now invested in a diversified portfolio of common stocks, corporate bonds, and notes After reviewing Madison's existing portfolio, you schedule a meeting with Hendrik van Wie Madison's CFo. Mr. van Wie stresses Madison's conservative management philosophy and warns against speculation." He complains about the performance of the previous manager of the pen sion assets. He suggests that you propose a plan of investing in safe assets in a way that minimizes exposure to equity markets and changing interest rates. You promise to prepare an illustration of how this goal could be achieved. "Indfined contribution plans, the corporation contributes to the pension fund on behalf ofits employees. Each employee has a claim on part of the fund, just de bell stares in a fund Employees' benefits depend their in the fund at If the benefits fall short of an employee's plans or expectations, he or she has no recourse to the company. Madison must also set pension assets aside for current employees. For this miri case, we only on retired empl swap curves as in Figure 26.3. J.com. Pick ou can find spot and futures prices for a variety of equity indexes on w to do some detective work to find the is fairly priced. You wi one and check whether dividend yield on the index and the interest rate MINI-CASE Rensselaer Advisers institutional You are a president of Rensselaer Advisers (RA), which manages portfolios for had about vice mid-2017 RA investors (primarily corporate pension plans) and wealthy individuals. In and fixed-income port billion under management, invested in a wide range of common-stock will be folios. Its nagement fees average 55 basis points (55%), so RA's total revenue for 20 ma about .0055 x billion S6.05 million You are attempting to land a new client. Madison Mills, a conservative, long-established manufacturer of papermaking felt. Madison has established a defined-benefit pension plan its employees. RA would manage the pension assets that Madison has set aside to cover defined benefit obligations for retired employees. Defined benefit means that an employer is committed to pay retirement income according to a ncome could equal 40% of the employee's average salary formula. For example, annual retiremen ncome does not depend in the five years prior to retirement. In a defined-benefit plan, retiremen on the performance of the pension assets. If the assets in the fund are not sufficient to cover pen sion benefits, the company is required to contribute enough additional cash to cover the shortfal us the PV of promised retirement benefits is a debt-equivalent obligation of the company. Table 26.6 shows Madison's obligations to its already retired employees from 2018 to 2036 Each of these employees receives a fixed dollar amount each month. Total dollar payments decline as the employees die off The PV of the obligations in Table 26.6 is about $89 million at the cur rent (2017) 5% long-term interest rate. Table 26.6 also calculates the duration of the obligations at 787 years. Madison has set aside $90 m on in pension assets to cover the obligations in Table 26.6, so his part of its pension plan is fully funded. The pension assets are now invested in a diversified portfolio of common stocks, corporate bonds, and notes After reviewing Madison's existing portfolio, you schedule a meeting with Hendrik van Wie Madison's CFo. Mr. van Wie stresses Madison's conservative management philosophy and warns against speculation." He complains about the performance of the previous manager of the pen sion assets. He suggests that you propose a plan of investing in safe assets in a way that minimizes exposure to equity markets and changing interest rates. You promise to prepare an illustration of how this goal could be achieved. "Indfined contribution plans, the corporation contributes to the pension fund on behalf ofits employees. Each employee has a claim on part of the fund, just de bell stares in a fund Employees' benefits depend their in the fund at If the benefits fall short of an employee's plans or expectations, he or she has no recourse to the company. Madison must also set pension assets aside for current employees. For this miri case, we only on retired empl