Study Session 5: Portfolio Management for Institutional Investors

There is one concept I am missed in.

It is about including pensions into balance sheet which modifies beta and WACC.

Let’s assume they give such data:

                                  | Market value | Beta

Operating assets  | 800                 | ?

Pension assets     | 200                | 0,5

Total assets           | 1000              | 0,4

Now, the question is “calculate estimated overall WACC, which include operating and pension assets”.

Now, for me overall WACC means total assets WACC which is: Rf + 0,4 * RiskPremium Continue reading

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Can anyone explain me what is underwriting or profitability cycle in Non life insurance companies? The explanations in both CFAI and schweser books are not clear. Thanks. Continue reading

I don’t understand this part- ” some companies have expiremented with using total return rather than interest rate spread to measure thier investment portfolio’s performance and thier products’ profitability. When only the asset side of the balance sheet reflects market volatility, it is difficult to use total return measures. ” CFAI Volume 2 page 414

Can someone explain please? Thanks. Continue reading

In the 2012 morning session from the CFA website, in Question 1, part A, why does the required return calculation use +$25,000 for the annual PMT to rather than -$5,000 which would incorporate the $30,000 annual support to local youth sporting leagues??  Really confused as to why REQUIRED RETURN does not incorporate annual expenses.  Any thoughts?  Thanks. Continue reading

p. 16 of book 2, SS 5, LOS 15. Regarding employees participating in an ESOP. We know employees should avoid high concentration of investments in company stock because it’s highly correlating retirement funds with current/future employment income. But, Schweser makes a statement, which is not explained as far as I can tell:

“An ESOP is an exception to the general aversion to holding the sponsor’s securities in a retirement plan. It does not expose the participant to high correlation between plan return and future job income.”

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Study Session 5, Reading 15, Question 4, Part C

The answer says: “Based on the consensus forecasts for long-term Treasury bonds and inflation shown in Exhibit 4, a discount rate of 6 to 7 percent would be reasonable.”

According to the exhibit, long-term bonds have a consensus forecast of 6% and inflation has a consensus forecast of 3%.  Why is the answer 6-7% rather than 9%? Continue reading

I am trying to figure out a valuation analysis for a jumbo bank loan and was given the following information:

$1,000,000 loan amount, 3.125%, fully amortizing

Expense assuptions are: cost of funds 50bps, option cost 36 bps, servicing 25 bps, origination and loss 20  bps, spread of 2.3%.

Disc rate 5%

36 month life of loan

I am missing something as I am trying to determine the NPV and ROE…suggestions Continue reading

I am looking for study buddies to prepare for Level 3. I am in the San Jose area of San Francisco Bay Area, and can meet flexibly anywhere around the Bay Area Continue reading

Every text book will tell you that liability side of non-life insurance companies has shorter duration than life insurance. Perhaps any one can give a further explanation why it is so? Is that just because ppl expect a cargo ship to sink every 1 or 2 years or hurricanes created hudge damages every year? Or short duration is another way of saying the liability side is insensitive to interest rate risk. So here short duration = modified duration?  

Thanks!

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