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Study Session 6: Portfolio Management for Institutional Investors

Expected nominal return - operating cost

The following data was given:

Expected nominal return (700 bps)

inflation (400 bps)

management fee (30 bps)

operating costs (20 bps

The question: what is the maximum spending rate?

The solution used the following formula: (lets not talk about adding vs multiplying issue), 

Expected nominal return that preserves real value of portfolio = (1 + spending rate) × (1 + inflation) × (1 + management fee) – 1

Why not take into account the operating cost?  So why not used this formula: 

2012AM 1A

Does anyone know why the usd 30,000 support to local youth no need to be deducted from the usd 25,000 saying to calculate the PMT? Is it because the 25,000 saving already take it into account ?? Thanks!

Pre-/Post-Tax Return Requirement/IRR Questions

Granted this is some Level 1 material, I’m having trouble knowing when do have PV, PMT, and FV be positive or negative on any IRR-related questions that ask you to calculate pre-/post-tax return requirements…

Part of me thinks intuitively and says that the FV should always be positive because it’s a figure that we receive back to us at a later date and another part of me says that savings (PMT) are always positive and expenses are always negative, but I find that I’m still screwing up the proper sign usage. 

liquidity requirement edowment vs foundations

i am doing an old morning exam from 2013 and got tripped up on a question that asked about liquidity requirement for foundation when a yearly contribution stops occurring. i see that for a foundation the liquidity requirement is anticipated cash needs in excess of contributions made to the foundation. I am wondering if this same concept will apply to endowments? it does not say so in the reading but I can’t see why it would not be the same. if an endowment was receiving a yearly contribution and then it stopped would that increase its liquidity requirement just like a foundation?

Endowment return requirement - why inflation is not added?

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.

WHY they don’t add inflation rate to the total return expectation?

Primary Capital

In the below question in CFA Mock 1 Q #7,

Is MTL not included in the primary capital because it is Corp loan or because MTL is usually not included?

Why is CTA not included as an equity?

Q. Using the planning framework that Richards suggests, which person’s estimate of the after-tax primary capital is most accurate?

  1. Boshe
  2. Richards
  3. Adams


Pension plan time horizon and duration

Why the increase of the duration of the plan liabilities does not increase the time horizon of the plan?

(2017. AM exam Q 2.)

Discount rate effect on Pension fund and insurance company assets/liabilities

Hi all,

I’m confused about the discount rate effect on the assets and liabilities of pension fund, insurance company and endowment fund.

From the CFA official practice qns answers -

- A fall in discount rate increases the PV of pension benefit obligations but not the MV of assets.

- If interest rates rise, the MV of portfolio assets will decline for insurance companies.

Could someone explain the discount rate relationships for pension fund, insurance company and endowment funds?

Thank you.

Foundation Minimum Return - Add or Compound Tax?

To calculate minimum return for a foundation.

Tax on market value = 0.1%

Operating expense = 2.0%

Long term inflation = 1.4%

Annual distribution target = 3.0%

My answer was => (1+0.1%)(1+2.0%)(1+1.4%)(1+3.0%) - 1 = 6.637%

Liquidity Requirement for Defined Benefit Plan

One of the mock exams has a question about calculating the liquidity requirement of a defined benefit plan.

The employer will contribute $927M and expects to pay out $1,030M in benefit payments. The plan is currently underfunded (pension assets is 70% of PBO).

The liquidity requirement is thus $103M.

My question is the $103M will be coming from the current pension assets, correct?