Examining Retirement Plans, Annuities, and Stock Market Behavior

This document provides solutions to an online finance exam, addressing key concepts in retirement planning, annuities, and stock market behavior. It discusses the importance of retirement savings, reasons for low contributions, and policies to encourage saving, including tax benefits and government schemes. The exam also explores annuities, their types, and models for encouraging their use, emphasizing safety, long-term growth, and income surety. Furthermore, it delves into the disposition effect, explaining investor reluctance to sell losing assets and the overconfidence bias, which leads to aggressive trading. Finally, the document compares growth and value stocks, assessing their performance and risk factors. Desklib offers a variety of study resources, including past papers and solved assignments, to support students in their academic endeavors.

Online Exam

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
QUESTION 2...................................................................................................................................3
QUESTION 3..................................................................................................................................4
QUESTION 4...................................................................................................................................5
QUESTION 5...................................................................................................................................6
REFERENCES................................................................................................................................7

QUESTION 1
Savings in the retirement plan is one of the crucial activity that is required to be taken into
consideration for having significant life style. From the evaluation it can be specified that
contribution in saving for the retirement plan is less. There are many reasons which are needed to
be emphasized as these are the causes which lead to impact low contribution (But and et.al.,
2018). Low Financial literacy h& lack of planning, causal behaviour for unforeseen
circumstances, finding optimal saving is complex process, inclining life expectancy & medical
expenses, etc. There are several benefits which are required to be highlighted in order to
understand the significance of retirement plan. It leads to deduction to tax, particular level of
income for financial backup cost savings, peace of mind etc.
There are several policies which can be applied in order to encourage saving for
retirement plan. There are number of actions which can be executed by employee on his level in
respect to incline contribution towards effective retirement plan (Gale and John, 2018). The one
of the significant method that can b used for this purpose comprises setting goal for reducing the
expenses, enhancing the greater knowledge respect to financial literacy, understanding tax
benefits, coordinating with method which are implemented by government of UK, etc. Using
IRAs h instrument which helps in cope up with uncertain condition. Rising employer
contributions to make proper investment option so that higher liquidity for potential requirement
after retirement can be done. Inflation is rising due to various factors which forces individual to
concentrate on having optimum knowledge respect to have investment which can aid in inclining
financial position so that higher profitability can be achieved. On the basis of this, it can be
recognized that formulating such retirement plan can help employee to get stable uture.
QUESTION 2
It is the process of converting the annual investment into number of periodical income
payments in particular order. It allows getting away from the market based value change s so
that uncertainties can be avoided. The three ways of encouraging the people to annuities more
are crucial to be understood in depth manner. There are two types of annuities which can be
exerted by people involve systematic and asymmetric (Ramsay and Oguledo, , 2018). There are
four models which can be used to ascertain annuities such as game, life cycle, consumption of
CAPM and rational expectations' equilibrium theory. This theory largely help in achieving

the objective of encouraging people to understand significant and related factors of
annuitising. With help of such information people can pay attention on having proper
information that there is bequest or no bequest motive (Sewnath, 2018). There are
possibilities of lower moral hazards issues and does not hamper the optimal savings of an
individual.
There are several components which can be used to encourage the particular person to
encourage people. It involves providing safety, long term growth and surety of specific income,
etc. it basically stands for the premium protection, income for life, legacy & long term care,. In
addition to this, it is the way of managing risk with the possessing income according the
persons comfort ability. It allows saving money which is tax deferred until receiving h retirement
income. Current interest in the annuity can help the individual to pay attention on having
significant ability to coordinate with prevailing circumstances. On the basis of this it can be
mentioned that these are the methods which can be used to encourage the higher profitability
and stability via conducting successful annuitizing procedure. These benefits will be helpful in
making strong ability to deal with unforeseen situation which can enable the individual to
understand significance of annuitizing.
QUESTION 3
Disposition effect is being referred to as the reluctance of investor in selling the asset
which have lost value and have more likelihood in selling the asset which have made gains. In
simpler terms it means that disposition effect involves the tendency of investor wherein they sell
the asset which have increase in value and keep the asset that is having decrease in asset. This
theory was proposed because of the reason that people dislike to loss and gets happy while
winning (Trejos and et.al., 2019). This disposition effect is also called as prospect theory which
states that when a person is provided with two options one of gain and other of loss then they
will select option providing gain. With respect to the stock market as well the disposition effect
follows. The person will sell the stock which is providing more of the gain rather than the stock
which is giving loss or less profit. This is supported by the fact that in case the current market
price is more than the purchase price then person will definitely sell the stock. On the other hand,
in case the current market price is less than the purchase price then they will not be selling the
stock. This is pertaining to the fact that investor will think that this market price may increase in
future.

Another explanation with supports the disposition effect is the concept of mean reversion.
This concept states that within the stock market, in case the price of one stock have gone up the it
will come down again and vice versa. Hence, on the basis of the principle of mean reversion the
investor sells the stock which is high in price and wait for the other stock to rise in case the price
is low.
This disposition effect is also applicable on the housing market as well. the reason
underlying this fact is that in case the person is not aware of the price history then they can face
loss. This is pertaining to the fact that the purchase price of house is high then the person will sell
it. But the high and low is based on the average of past performance and this will affect the
working to a great extent. in support of Pelster and Hofmann (2018) states the disposition effect
is applicable in case to stock market and in housing market as well. this is because the house is
also sold in case they rate are higher and person is earning profit as similar to stock market.
QUESTION 4
The overconfidence is being referred to as the capability of the person to invest within the
stock market. In case, the investor is overconfident then they will be trading more aggressively.
The overconfidence bias can also be referred to as the fact that people overestimate the
understanding relating to financial market and the specific investment. The overconfident
investor tries to exhibit the higher trading volume and as a result of this there is changes in
demand which in turn result in increase in prices (Huang, 2021). Here the investor feels that they
are having more knowledge then the expert investor or even the past information analysis. Thus,
as a result of this, the overall large volume of trade is affected. Along with this, the
overconfidence may also lead to avoiding conclusion that no- trade theorem cannot lead to trade.
In particular, the no- trade theorem states that market is in state of efficient equilibrium,
also there is no noise traders or other non- rational interferences with prices. Moreover, this
theorem also involves the structure by which traders or the potential trader will try to acquire
information by their own common knowledge. This is particularly because of the reason that
some trader may be having private information but no person will be in position of profit by
using that information. The theory of no- trade is correct that even when the person is having
private information then also they will not be in position to earn profit. The reason underlying
this fact is that whole trade is based on the concept of demand and supply and in case even when
person is having information then also they may suffer loss (Alsabban and Alarfaj, 2020).

Further it can be stated that overconfidence stock market bubble could occur. This is particularly
because of the reason that increase in trade volume and excessive risk taking behaviour,
feedback trading and others are all result of overconfident behaviour. Hence, as a result of this
overconfidence result in stock market bubble.
QUESTION 5
The growth stock is being defined as the companies which are considered as having
potential of outperforming the overall market for a period of time. On the other hand, the value
stock includes the companies which are performing below the current trading level but they are
worth and will be providing superior return. From the evaluation it can be specified that both
the growth & value stock that are performing well. It can be interpreted that growth stock are
considered to be highly performed due to its ability to offer higher market share price as
compared to the value share. In respect to value share there are number of inefficiencies to
perform in market (Bellone and de Carvalho, 2021). Price of underlying equity may not match
the company's performance that h can provide misleading information. On the other side
growth sock are considered to highly effective due to outer perform the overall market for
the potential period. With respect this, it can be identified that growth stock are considered to be
good performing as compared to value stock.
From the analysis of both the stock it can be articulated that value stocks are riskier
than growth shares (Zaher,2019). The main reason behind this is that there is sceptical attitude
the market has towards it. In addition to this, market regarding value stock has the perception
that company can alter the profitability which can be riskier than growth entity developing.
The key characteristics of value share involves lower priced h than broader market, priced
below similar companies in industry, etc. growth stock more volatile than broader market,
higher earnings' growth,e tc which are found to be less risky. Growth stocks have potential to
perform as the interest rates declines and have ability to rise the earning of company. On the
other side, value stock are considered to be cyclical industrial stock which can be lag in the
sustained market.

REFERENCES
Books and Journals
Alsabban, S. and Alarfaj, O., 2020. An empirical analysis of behavioral finance in the Saudi
stock market: evidence of overconfidence behavior. International Journal of Economics
and Financial Issues. 10(1). p.73.
Bellone, B. and de Carvalho, R. L., 2021. Value versus Glamour Stocks: The Return of Irrational
Exuberance?. The Journal of Investing.
Butt, A. and et.al., 2018. One size fits all? Tailoring retirement plan defaults. Journal of
Economic Behavior & Organization. 145. pp.546-566.
Gale, W. G. and John, D. C., 2018. State Sponsored Retirement Savings Plans: New Approaches
to Boost Retirement Plan Coverage. How Persistent Low Returns Will Shape Saving and
Retirement. 173.
Huang, C., 2021. Does CEO overconfidence matter for shareholders' wealth? Evidence from the
UK takeover market. International Journal of Banking, Accounting and Finance. 12(3).
pp.266-284.
Pelster, M. and Hofmann, A., 2018. About the fear of reputational loss: Social trading and the
disposition effect. Journal of Banking & Finance. 94. pp.75-88.
Ramsay, C.M. and Oguledo, V.I., 2018. The annuity puzzle and an outline of its solution. North
American Actuarial Journal. 22(4). pp.623-645.
Sewnath, S., 2018. New ways of approaching the living annuity
conundrum. MoneyMarketing. 2018(11). pp.22-22.
Trejos, C., van Deemen, A., Rodríguez, Y.E. and Gómez, J.M., 2019. Overconfidence and
disposition effect in the stock market: A micro world based setting. Journal of behavioral
and experimental finance. 21. pp.61-69.
Zaher, F., 2019. Equity Factor Investing: Value Stocks. In Index Fund Management (pp. 47-75).
Palgrave Macmillan, Cham.