Roth comments: “We believe the addition of asset classes to your existing equity portfolio should be done with the goal of achieving a mean–variance improvement when including the new asset class. The Foundation should invest a major portion of the portfolio internationally, diversified across asset classes . As an example, our ECU Global Tactical Allocation Fund invests in non–US dollar (USD) equities, fixed income, and real estate, as well as in real return assets, such as commodities . The primary inputs to our tactical asset allocation decisions are a long-term outlook for the next three to five years and a six-month short-term forecast for each asset class . The weighted foreign currency exposure of our equities and fixed income mirrors the US Dollar Index, and we value our real estate and real return assets in USD. Exhibit 2 shows our fund’s strategic asset allocation weightings plus investment return and currency forecasts.”
Exhibit 2
Asset class/ asset weightings/ LT Outlook/ ST Forecast
Developed market equities/ 55%/ 9%/ 12%
Developed market fixerd Income/ 25%/ 3%/ 0%
International real estate/ 10%/ 11%/ 12%
Real return assets/ 15%/ 4%/ 7%
Note: Short-term US Dollar Index forecast versus weighted currencies in portfolio: +3%.
Based on the return and currency forecasts in Exhibit 2, ECU’s tactical asset allocation shifts would most likely increase weightings in:
real estate and real return assets and decrease equities and fixed income.
fixed income and real return assets and decrease equities and real estate.
equities and real return assets and decrease fixed income.
Tactical asset allocation involves making short-term adjustments to asset class weights based on short-term predictions of relative performance among asset classes. Equities are forecast to perform 3% above their long-term outlook in the next six months; however, the weighted currencies are forecast to drop 3% (a gain of 3% in USD). Fixed income is forecast to return 3% less than the long-term outlook and is also forecast to be exposed to a 3% currency loss (a gain of 3% in USD). Real estate and real return assets are both forecast to perform above their long-term expected returns and are not exposed to a weakening in the currencies.
I thought this question was bullshit also for a couple reasons, but the biggest one was this - why the hell would the international real estate not be vulnerable to a drop in its currency relative to the USD? If I own an apartment in Germany, and then the euro tanks, all else equal, I don’t get to sell it for the the same number of USD as I would have gotten before the euro tanked, I have to take my currency loss lumps, just like any other asset class… screw this question.
also, why the hell didn’t the table specify if the forecasted returns were in USD, or local currency units. also, how the hell would it work if it aggregates the local returns of many “developed” countries - it would make no sense when you’re trying to translate it back to USD, unless you knew the composition of the local returns. total horsecrap, I have no idea how this question slipped into the mock, it’s a piece of crap, just my opinion, sorry to any CFA admin reading this, but seriously tho, what u expect with this crap…
Seems that the first 2 asset classes were denomitated in average foreign currency vs USD (cf dollar index) => DM Equities and DM FI.
I then have a problem with something and will not probably will be the only one : if one convert all ST forecasts in USD, that leads to :
DM EQ : 1.12*0.97-1= 8.64%
DM FI : 1*0.97-1=-3%
INT Real Estate : 12% (already in USD)
Real Return Assets : 7% (already in USD)
So for me :
increasing fixed income and real return assets and decrease equities and real estate. : KO because equities and RE have better ST - forecasts thant FI
Increasing : real estate and real return assets and decrease equities and fixed income. : KO because equities have higher ST forecast than real return assets (8.64%>7%)
increasing : equities and real return assets and decrease fixed income. OK fine