2008 CFAI Old Exam Questions

CFA Level III
#1

Got some questions when reading guildline answers. Need help!!

Issue #1:

Q3-D iii: “The early retirement feature increases the present value of TEPP’s benefit payments compared to the airline industry.” “The lump-sum option increases the present value of TEPP’s benefit payments compared to the airline industry.”

Why increase? I think the PV of the early retirement package or the PV of lump-sum payout should be equal to the PV of life annuitiesif the options are not available.

Issue #2:

Q3-G: What is actuarial discount rate? Is it 9.5% or 7.5%?

Issue #3:

Q4-A i: "1. is consistent with Thurlow’s risk tolerance of a maximum portfolio standard deviation of 10%,

  1. will result in the highest Sharpe ratio among the all portfolio combinations that meet Thurlow’s return requirement. [Sharpe ratio = (.25 x .46) + (.75 x .51) = .4975]"

How do you know it’s consistent with risk tolerance of a max std of 10% without calculation? How do you know this is the highest Sharpe Ratio?

Issue #4:

Q7-C Swap: “The PV(fixed-leg) = ((1+(0.055*(180/360)*0.9911)+((1+(0.055*(180/360)))*0.9649)=1.0187”

How do you get 1.0187? The calculation seems to be wrong here.

Issue #5:

Q8-B DPF: “Size of trade relative to average daily volume: The size of the order represents a very high percentage of average daily volume and the VWAP algorithm would not have high likelihood of success.”

What is the rule of thumb for “a high pct”?

Much appreciated!!

#2

Any thoughts?

#3

  1. early retirement & lump sum option increases the amount they will owe compared to rest of industry

  2. don’t have it in front of me but i think it was 7.5%, it was given in the text.

  3. you calculate the Sharpe ratio right??

  4. Good catch, for the 1st payment you don’t discount the $1 principal back since that payment happens at 6 months, so thats an error there. 1.0187 is still correct.

  5. No rule but it will be pretty clear…

#4

Thanks Andrew