Answer: From the plan sponsor's perspective, nominal pension obligations are similar to a short position in a long-term bond.

The correct answer is D. From the plan sponsor's perspective, nominal pension obligations are similar to a short position in a long-term bond. This is because liabilities at a pension fund are typically composed of accumulated benefit obligations, which are measured by the present value of all pension benefits owed to employees discounted by an approximate interest rate. When these liabilities consist mostly of nominal payments, their value generally behaves like a short position in a long-term bond. This means that the plan sponsor is obligated to pay a fixed nominal amount in the future, which is akin to being short a bond since the value of the obligation increases as interest rates fall. Option A is incorrect because the policy-mix Value-at-Risk (VaR) and active-management VaR do not always add up to the total-asset VaR. There is a slightly negative correlation between the two, which leads to a lower overall asset VaR. Option B is incorrect as pension funds always benchmark their performance to a portfolio of index funds, which means they do consider performance relative to a benchmark. Option C is incorrect because if the assets of a pension fund are not sufficient to cover the liabilities, the shortfall will indeed create a risk for the plan sponsor, who will have to make up for the difference.

Author: LeetQuiz Editorial Team