Just Venting… I am doing 2000 CFA exam afternoon section, question #23, Part B. It was comparing Endowments and Life Insurance company’s investment potfolio: “Both the life insurance and endowment portfolios are currently invested exclusively in domestic securities. In order to increse returns, Leighton(character in the question) plan to invest 5% of the asset of each portfolio in emerging market equities” Critique Leighton’s plan with the respect to its appropriate for the: i. Life insurance portfolio ii. endowment portfolio. Answer: ii. Endwoment portolio===>appropriate (no problem) i. Life insurance==> Investing a substantial portion of an insurance company’s total portfolio in enermging market equity securites would be inappropriate. The proposed 5% allocation to emerging market equities is excessive because it likely represent a large portion of portfoilo’s total equity allocation. Because most states limit equity investments to a low percentage of a life insurance company’s portfolio, the even smaller portion allowed for international equities would mean that the allocation for emermging market would be even samller…" WHAT? 5% is excessive? This is why I am not going to well on the essary section.
i know what you mean, there is never a clear cut answer, i guess as long as you give a reasonable explanation to your selection, we can aim for part marks.
I see where you coming from. Question for everyone based on this. Do you think the answer response from the CFAI would be different today than it was for this particular question back in 2000? In other words, do you need to take some of the really old practice exam questions/exam answers with a grain of salt in that the material being taught today might be slightly different that in years past. I ask this question as I have yet to touch the old exams and wonder how much value there is in the ones that date back more than 5 years. Thoughts anyone?
^Good one…I didn’t even think about that. Hopefully, some of the old staff have retired.
yes, take old questions with a grain of salt. The world has changed some and the curriculum has changed some.
5% of total portfolio, not 5% of equity portion of portfolio. Since insurance companies generally have regulatory cap on % of portfolio devoted to equities, they’re assuming equities only make up 10-20% of total portfolio. Therefore emerging markets would be 25-50% of equity portfolio, which is too high for insurance company.
I was looking at this question today and I got it wrong too. SteelerFan, you are correct it would constitute a major portion of portfolio and for that reason it’s excessive, BUT I got it wrong because I was thinking that if the Insurance Co. was operating with a surplus then being aggressive and grow the surplus was appropriate.
I took that exam and I have absolutely no recollection of that question. However, that must be my answer up there as I’m told they just used my exam as the answer sheet. Anyway…I agree with Steelerfan and I don’t see why the answer would change now. In 2000, we were all still convinced that equities always went up and investing in equities seemed like a better idea than it does now. Of course, investing in emerging markets was rather useless as you could just buy CSCO and be guaranteed a 25% annual return.
JoeyDVivre Wrote: ------------------------------------------------------- > I took that exam and I have absolutely no > recollection of that question. However, that must > be my answer up there as I’m told they just used > my exam as the answer sheet. Wow, they used your WHOLE friggin exam as an answer key??? I would be in disbelief if they used an answer or two of mine, but the whole exam? That’s good!
Uh, maybe not the whole thing…