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2016 PM Q35

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What is value added return? The calculations shown seem to be something like:

(Total portfolio return) - (Total Benchmark return) - (Trading Costs)

Fairly straightforward, but I do not see any mention of this in the equity section.

EDIT - I found it in the curriculum. It is literally the last EOC in the performance evaluation reading.


2009 AM Q7 C

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As reasons for choosing the contrarian strategy I’ve put:

1. The portfolio chooses to buy companies with lower market cap than the benchmark.

2. The portfolio includes companies with lower than average growth projections.

Why is this wrong?

Often just not understanding what the heck is said

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Hi,

English is not my native tongue but I usually do not have any issue with it, other than CFA questions that confuse the hell out of me.

Just as this one here “The credit risk on currency swaps is bilateral and isolated to the contracts between company x and y”.

What they want as an answer is that this is not true because if any of the two companies defaults to another party, the swap agreement defaults as well (cross default).

You see, I am perfectly aware of this concept and I see no difficulty in this question other than that I really do not understand what is meant with “credit risk is isolated to the contracts between company x and y”. 

I get really mad about stuff like this. Losing points for this kind of stuff is just frustrating. 

Am I the only one?
 

Reading 26, Example 5 Adding real estate to SAA

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Hey guys I have a stupid question:

There is a foundation with SAA 50/50. 12% of the common stock allocation (6% of total portfolio) is in REITs

The Risk free rate is 2.5%

Forecasted inflation rate is 2%

Foundation’s investment objective is to preserve real value of assets after spending. It’s spending rate is 5% of 12 month average asset value.

The foundation’s cost of earning returns is 20 basis points a year.

______________________________________________________________________________________________

I’m trying to get the required return:

The curriculum has it as 1.02 (Forecasted inflation rate) * 1.05 (spending rate) * 1.002 (management fee) = 7.31%

I would have added the risk free rate too. Since we are trying to preserve our real value of the assets, don’t we need to take the nominal interest rate in our spending requirement i.e either 1.045 or (1.02 * 1.025) = 9.99 or 10%?

Adjustments for this year, next year, in two years etc

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Based on Schweser practice exam AM1 Q 7A

A person is 85 years old and estimates he will need X to support his lifestyle this year. After this year, he wants to increase their real spending by 3% per year. 

A mortality table is given that is structured as followes

Year 1: age 86

Year 2: age 87

You are asked to compute the core and excess capital of year 2. What will be the relevant living expenses before incorporating mortality?

X*(1+0.03)1

X*(1+0.03)2

​​​​​​How many years do you need to include in discounting the expenses back to PV?

To me it seems quite random how many years are used for each in different examples. In this one year to calculate future expenses and two years (as I would expect for both) to discount to PV

Wiley Question Of The Week: Behavioral Finance and Investment Processes (Sponsored)

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The following is paid post from Wiley.

Question

George Seconda, CFA, makes the following statement about his investments: “I use my pension plan to give me broad market exposure across many different asset classes. Contributions to the plan fulfill my savings needs; hence, any other assets that I have left each month, I use to speculate in highly levered contracts for differences (CFDs) and spread bets. It is reassuring to know that even if I lose all my CFDs and spread-betting funds, I will still have enough savings to provide for my retirement.”

Seconda is most likely:

A. using mental accounting and is likely to have an inefficient portfolio.

B. acting rationally by making sure his retirement needs are met before speculating in high-risk products.

C. suffering from inertia linked to status quo bias.

Answer: A

In viewing his pension contribution as savings toward retirement and using surplus funds to speculate in risky investments, Seconda is viewing his portfolio in layers with different risk objectives. This is due to mental accounting bias and is likely to lead to an inefficient portfolio versus what he could achieve if he viewed his assets as a single portfolio. Choice B is incorrect since a rational investor would view the portfolio as a whole. Choice C is incorrect since inertia leads investors to stick to initial allocations over the life of a fund. There is no indication that this is an issue here.

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Amount of Calculations on (Mock) Exam

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Hi there,

I just finished my fourth Schweser mock and I am quite surprised at the amount of calculations that are still required. Originally I thought that Level 3 is mostly about qualitative concepts and less about calculations. Seems I need to put in a couple more hours to memorize formulas. 

Anyone has a feeling on whether it is just Schweser that doesn’t reflect the LOS’s (i.e. putting in a calculate question for when it is actually only explain) or whether there are still quite a few instances where you do need to do the math?

Cheers!

Schweser Secret Sauce Worth $100 for few days of review?

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Hi Everyone

Just wondering if the Schweser Secret Sauce is worth the $100 for a review in the last few days?
Just doing practice exams next 4-5 days an planning on reviewing key concepts and formulas last 2-3 days…and wondering if it is worth to use the secrete Sauce instead of other multiple items?
Also is Secrete Sauce practically the Key Concepts put together? by my calculation KC at end of Schweser readings are about 134 pages which would be a good review of big concepts I guess!
Thanks


CFAI Mock Score Change

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Took the mock yesterday and got a 75% on the PM. Was gonna look through my wrong answers today when I saw my scored changed to a 73%. Anyone else have this issue?

2008 Q4 B ii

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Someone please remind me how sharpe ratio changes when we add leverage?

2015 essay #11a.

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Hey,

Went through this mock today and was confused on this question. For client 1 and equity uno how is it not buy additional shares? To avoid regret of missing further price increase wouldn’t he buy more? 

Thanks  

Any good Level 3 notes?

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hi all, 

a while ago, maybe in March a very generous OP posted his notes to the CFA level 3 curriculum. they were very good. can anyone re-post them here?

(i have gone far back in this thread but cant find them)

Future Value: Why relevant for equitizing / synthectic positions but not adjusting asset allocation or modifying portfolio beta?

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Hey all,

why do we not need to calculate future of the investment value when we adjust the asset allocation (or do any of the other forward tricks)?

If we want to create a synthetic position, bond or equity, we need to use the FV of the amount to modifiy:

Nf = 1*cash*(1+RFR)t / (Pf * multiplier)

And I think I understand why we need to do this to create the exact dollar amount of equity or cash that we want.

But: When we, let’s say, want to decrease portfolio allocation for equity from 50% to 40% on a 1.000.000 USD portfolio, we resort to

Nf = [(0-BP) / (Bf)] * [Vp / (Pf * multiplier)]

This is also true for a lot of other formulas but here it is most astonishing since we are essentially creating a synthetic cash position by decreasing one asset class and then use it by equitizing it to gain exposure to the desired exposure in the other asset class… or not?

My questions would be

a) Is the creation of synthetic cash / equity / bond as described abolve the only occasion were we need to specifically calculate FV? (ignoring preinvesting which is already based on the FV that we expect to receive at the time when the forwards mature)

b) Why do we not need to use future value for all the other oocasions, e.g. adjusting asset allocation or beta / duration?

Conflicting expected utility formula

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Formula in equity market valuations is E(U) = E(R)m - (0.5*lambda*variance of market)

Formula in Chapter 25 Equity investments is the same except the last term is not multiplied by 0.5

Is there any logic behind what and why those are different?

CFAI Online Practice Questions Clarifications | No Cosensus

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Hi,

The below is from the online CFAI question bank. My 2 questions are similar to what many have asked on the CFAI website but there’s no consensus.

-Does the return objective have to include the 1% liquidity need for the pension plan? Or is that already accounted for in the discount rate?

-For the endowment, is 1% inflation already a part of the operating expenses growth rate of 2.5%? Or do we have to add inflation on top of the expense growth rate when calculating our return objective?

Thank you

—————-

EXHIBIT 1

SELECTED PENSION PLAN INFORMATION FOR CGI PRODUCTS

Funded status, excess or (deficit)
$25 million

Liability discount rate
5.00%

Annual liquidity need as percentage of plan assets
1.00%

Zola asks Zubov, “Based on the information provided, could you give us some preliminary guidance on an appropriate return objective?” Zubov responds, “In this instance, a return objective of up to 100 bps higher than the liability discount rate would be appropriate. This return objective could potentially minimize future pension contributions and maintain or increase future pension income.

Hoven University (HU) has asked Greenhill to manage the university’s endowment. The endowment’s spending rule dictates that it make an annual contribution of 4% of its year-end portfolio market value to support HU’s operating budget. The annual endowment contribution represents 25% of HU’s annual operating budget. The university’s operating expenses are expected to grow at a rate of 2.5% annually, and the rate of inflation in the economy is expected to be 1% a year. Investment management expenses are estimated to be 0.65% of the endowment’s market value. The investment committee has asked Zubov to present his views on the risk and return objectives and liquidity constraints for the endowment. Zubov responds with the following statements:


Schweser Practice exams book 2 - scores

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Did anyone else feel the second book is very difficult? Just took Exam 1 from Book 2/PM and got killed on it. 52%. didn’t score less than 62 on anything else before. 

Liability driven investing

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RD 22- example 7 page 87, problem # 2- i do not understand the logic behind this at all.

Can anyone explain this to me?

2008 IPS Q1D

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Why have they not added inflation to the return when it asks for after tax Nominal?

Mocks prior 2007

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How relevant are they? Is there a file out there specifying if each question is relevant? 

Risk premium approach 2015 AM mock Q 10C

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The formula as per Schweser is : risk free rate + inflation premium + maturity premium + default premium + illiquidity premium + tax premium. This question also included call risk spread, which was added in the answer. Is it a part of default premium cause it’s not in the formula given in Schweser

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