2007 Morning Essay (CFAI)

Question 1.B) Few questions on this one… I got duped by the IPS return calc which i thought was kinda screwy, i see how they got their answer but i found it akward. However, risk tolerance is confusing to me. I have been thinking that if the portfolio is the sole source of income, that reduces risk you can take (as it is for the Ingrams), and also the Ingrams openly state a desire for low risk, yet the answer is above average due to flexibility and an “above average port size relative to expenses”. Two questions… 1.) how are we suppose to know what is large relative to liquidity needs, it seems far too arbitrary. In my mind a 7.5% nominal return is far from deminimis. 2.) the text preaches over and over how you have to balance ability and willingness, yet they pay no attention the the Ingram’s desire for low risk in the answer? Question 2A) Why does a private exchange fund provide upside, yet a public does not? The text didn’t give me a clear answer. Additionally, they require “no leverage”. Don’t derivatives (collar) constitute leverage? Question 2C) 13% cash allocation is deemed “too high relative to liquidity needs” – however text preaches having 3 months or more net living expenses set aside, this is barely over 3 months GROSS, so how is it too high? Question 9) I don’t understand much of this… I get the market return portion, but as far as currency return, it appears they only use the difference between the domestic SECURITY return and local SECURITY return. Shouldn’t the currency effect be the difference in TOTAL return, which should include the benchmark (index) difference [which cannot be calculated because no base index return is given]. I found the format of this question overall to be different than the traditionally applied global portfolio attribution formula would suggest, which is particularly annoying since i took the time to memorize the entire thing stone cold and still missed both currency and security selection. Market return is suppose to be (Wjp-wjpb)(rjb) but no weighting for the benchmark is given, so i just used wp and got it right, but this again, is inconsistent with the LoS formula.

markCFAIL Wrote: ------------------------------------------------------- > > Two questions… 1.) how are we suppose to know > what is large relative to liquidity needs, it > seems far too arbitrary. In my mind a 7.5% > nominal return is far from deminimis. There is no number, rely on your professional judgment. Welcome to L3.

Ayuda me, por favor.

I got rocked on the return calc here. I just assumed you don’t eat into principal, but I guess there’s nothing in this questions that suggests you can’t. Plus, I had below average risk because I thought it was a high return requirement (Again, wasn’t eating into the principal, therefore higher return needed), retired, etc. So there’s 19 pts. out the door right off the bat.

I just think the 1.B in guideline answer in nonsense. one of the “valid” reason they gave is opportunities for additional income exist. How I am supposed to know that if they explicitly want to take a pay free job??? And Jack is Methodical, Ruth is Cautious, are their willingness to take risk is above average to be titled Methodical and Cautious? This is so inconsistent.

jinstudy Wrote: ------------------------------------------------------- > I just think the 1.B in guideline answer in > nonsense. one of the “valid” reason they gave is > opportunities for additional income exist. How I > am supposed to know that if they explicitly want > to take a pay free job??? > > And Jack is Methodical, Ruth is Cautious, are > their willingness to take risk is above average to > be titled Methodical and Cautious? This is so > inconsistent. You didn’t have to include that, they gave you 5 reasons. You only needed 3. The investor personality types are pretty straightforward, it’s right out of the book.

Can a Cautious personality have “above average” in willingness to take risk? I don’t think the answer will be YES because Cautious type are conservative. But if the answer is NO, how can the couple have an “above average” risk tolerance when Ruth’s willingness to take risk is definitely a “below average”? Isn’t that we must honor the willingness of client for the most of the time?

jinstudy Wrote: ------------------------------------------------------- > Can a Cautious personality have “above average” in > willingness to take risk? > > I don’t think the answer will be YES because > Cautious type are conservative. > > But if the answer is NO, how can the couple have > an “above average” risk tolerance when Ruth’s > willingness to take risk is definitely a “below > average”? Isn’t that we must honor the willingness > of client for the most of the time? What does this have to do with the question? They are asking for ability only.

oops, sorry my bad. I didn’t read the question carefully. Geeeeee