Problem:

Pension plans provide a savings plan for employees that can be used for retirement. The amount of money in the fund grows in four ways: (1) new contributions by the employee, (2) new contributions by the employer on behalf of the employee, (3) dividends or interest earned by the fund due to its investment in equity or debt securities, and (4) appreciation in the values (capital gains) of the securities in which the fund has invested. In aggregate, most of the contributions come from the employer. Pension funds are major investors in stocks, bonds, and various types of loan packages such as mortgage-backed securities.

Required:

Question 1: What role do you think insurance companies play when it comes to pension funds and financial planning?

Question 2: Explain the differences between diversification and asset allocation.

Question 3: Which is more important in portfolio management?

Note: Please show how you came up with the solution.