2011 L3 discussion

Hi, I have some questions regarding 2011 morning essay questions:

Q1A: why revocable trust will be faced with legal claim, which kind of legal claim and under which circumstance it will have a legal risk?

Q1B: I agree that discusssion 4 is loss aversion, but why loss aversion is framing, they are totally different, so why the answer says discussion 4 is framing, I can’t see any frame

Q3B, when expected inflation increases, it demand a higher norminal return, how can it derive a higher real return, they are totally different, so how risk tolerance increase?, the second explanation also confusing, inflation increases, why they use cash to hedge, they can use real estate or commodity to hedge, why cash?

Q3D, why action 1 is not chosen, decresing spend rate also can make endownment can’t meet the goal, isn’t it?

Q5c, the lady is equity analyst and the answer says she is young and higher human capital, thus can’t invest more in the equity, so young people can’t invest more stock in portfolio?

Q3D, why action 1 is not chosen, decresing spend rate also can make endownment can’t meet the goal, isn’t it?

if it decreases spending rate - it’s portfolio will be higher - since much less is spent out of the portfolio.

Q5c, the lady is equity analyst and the answer says she is young and higher human capital, thus can’t invest more in the equity, so young people can’t invest more stock in portfolio?

she has 70% equity, and her portfolio performance has HIGH CORRELATION with her equity job. Hence the need to reduce equity in her portfolio.

Q1B: I agree that discusssion 4 is loss aversion, but why loss aversion is framing, they are totally different, so why the answer says discussion 4 is framing, I can’t see any frame

person is saying that the original cost of the investment is used to determine profit / loss -> this is the frame. That the original cost is being used.

Q1A: why revocable trust will be faced with legal claim, which kind of legal claim and under which circumstance it will have a legal risk?

If the grantor revokes the trust - the trust funds go back to the grantor. That entire amount then goes back to the Trust and can be claimed against by anyone with a legal claim on the grantor. (Say he gets bankrupt - then all the money in the trust (which has been revoked) can be claimed against, legally).

Q3D: I don’t mind portfolio goes bigger, the key thing here is this way ca’t meet the goal, the goal is give school money. if less spend, gives school less money, can’t meet the goal. if adjusting the allocation, the return is less, also can’t meet the goal, this i agree, my opinion is choose two answers

Q5C, I’m asking human capital and equity allocation, this is the second reason the question asking for, pls answer me why young equity anlayst can’t invest many stock from human capital point of view

Q1B, according to you, this is anchoring, anchore the original cost of purchase, I’m asking framing, basically framing is regarding different ways to ask question, I can’t see any different ways from the question itemset, pls explain

Q3D - what is the primary goal of the endowment? Please read carefully - their primary goal is the maintain the real value of the portfolio. Their 2ndary goal is spending…

Q5C -> The equity allocation is inappropriate because though young - she is losing her job / already has lost it. She cannot take as much risk on her financial portfolio. [I guess the way the answer is written in the guideline - that she is young - is not enough, but am not sure about it].

I would have written the answer as (though I did not last year …)

  1. High correlation with equity on her employment.
  2. Though young, she has lost her job - and given the below average risk tolerance she should not take as much risk on her financial portfolio.

framing is also present in that part. because his original frame is the price at which he purchased. The behavioral finance authors and reading has changed considerably - so possibly this part is not present in this year’s reading. so do not read too much into the behavioral finance question from any previous year.

ok agree, except Q5C, again, the answer explanation is saying young, high human capital, can’t invest more in stock, I 'm asking why.

furtheron, if high human capital, is life insurance a better choice?

[I guess the way the answer is written in the guideline - that she is young - is not enough, but am not sure about it

did they ask about life insurance? Please stick to what they are asking… and not volunteer answers - this is just a suggestion.