QUESTION 4 OPTIONAL Conventional investment advice is that people saving for retirement should hold more stocks if they are young and risk-tolerant, and should hold more bonds and cash if they are older and more risk-averse. This advice has mo- tivated reforms in retirement benefits systems including investment of retire- ment savings in life-cycle funds, with a declining allocation to equities and an increasing allocation to bonds as employees approach retirement. (a) Explain the circumstances under which the age of the client should influ- ence portfolio choice. How, if at all, can you justify the advice that older people should hold more bonds and less stocks? [12 marks] (b) Explain how risk-aversion should influence portfolio choice. How, if at all, can you justify the advice that more risk-averse people should hold more bonds? [8 marks) A useful starting point to responding to the issues above is Mehra (2012) - Consumption-Based Asset Pricing Models and Breeden (2015) Consumption- Based Asset Pricing, Part 1: Classic Theory and Tests, Measurement Issues, and Limited Participation. Total for Question 4: 20 marks