As a consultant to an insurance company, you have been asked to assess the asset composition of the company.

a.The insurance company has recently sold a large amount of bonds and invested the proceeds in real estate. Its logic was that this would reduce the exposure of its assets to interest rate risk. Do you agree? Explain.

b.This insurance company currently has a small amount of stock. The company expects that it will need to liquidate some of its assets soon to make payments to beneficiaries. Should it shift its bond holdings (withshort terms remaining until maturity) into stock in order to strive for a higher rate of return before it needs to liquidate this investment?

c.The insurance company maintains a higher proportionof junk bonds than most other insurance companies. In recent years, junk bonds have performed very well during a period of strong economic growth, as the yields paid by junk bonds have been well above those of high-quality corporate bonds. There have been very few defaults over this period. Consequently, the insurance company has proposed that it invest more heavily in junk bonds, as it believes that the concerns about junk bonds are unjustified. Do you agree? Explain.