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What is the underlying rationale of the life-cycle fund approach?

Investment risk can be minimized in a fund that owns shares in thousands of companies.

The greater the number of years you have until retirement, the more willing and able you are to tolerate risk.

The closer your retirement date is, the more willing you should be to undertake risk to meet your financial goals.

The greater the number of years you have until retirement, the more willing and able you are to tolerate risk. For a given risk level and time horizon, there is an optimal mix of stock, bond and cash-equivalent funds that provides the highest expected return.

Which is an advantage of life-cycle funds?

Since they are much bigger than an ordinary mutual fund, investment risk is minimized

The certainty of a specific target date automatically increases the reward / risk ratio

They eliminate the need to adjust the asset allocation within your portfolio on your own as you progress toward retirement.

They eliminate the need to adjust the asset allocation within your portfolio on your own as you progress toward retirement. They automatically become more appropriately conservative as the years go by as you approach and enter retirement.

A life-cycle fund is ___________.

A fund "basket" composed of other mutual funds

A mutual fund that owns shares in virtually all publicly traded companies

A marketing term used to describe an extremely large mutual fund

A fund "basket" composed of other mutual funds. The mix of funds is designed to be suited to the retirement target date you have chosen.

Which is a disadvantage of life-cycle funds?

Many of the individual funds that comprise a life-cycle fund are likely to contain holdings in a number of the same companies.

Since they are much bigger than an ordinary mutual fund, investment risk is increased.

Life-cycle funds are so large that they become extremely difficult to manage effectively.

Many of the individual funds that comprise a life-cycle fund are likely to contain holdings in a number of the same companies. Therefore, the diversification you might be aiming for is not really there.

The huge number of stocks held in the mutual funds held by a life-cycle funds spreads the associated expenses and thereby reduces the overall cost.

True

False

False. There are a large number of funds involved in the "fund of funds" approach. Each of those underlying funds has an expense ratio, which tends to increase the overall cost of managing them.