AN ANALYST REPORTS THE FOLLOWING FUND INFORMATION TO THE ADVISOR OF...

5.

An analyst reports the following fund information to the advisor of a pension fund that currently invests in

government and corporate bonds and carries a surplus of USD 10 million:

Pension Assets

Pension

Liabilities

Amount (in USD million)

100

90

Expected Annual Growth

6%

7%

Modified Duration

12

10

Annual Volatility of Growth

10%

5%

To evaluate the sufficiency of the fund's surplus, the advisor estimates the possible surplus values at the end

of one year. The advisor assumes that annual returns on assets and the annual growth of the liabilities are

jointly normally distributed and their correlation coefficient is 0.8. The advisor can report that, with a

confidence level of 95%, the surplus value will be greater than or equal to:

a.

USD -11.4 million

b.

USD -8.3 million

c.

USD -1.7 million

d.

USD 0 million