2008 Morning IPS (#1A)

How do we know not to include the second half of trust assets in the denominator? Although It isn’t part of her investible assets, it is part of her total net worth. I went back and forth on this, and finally settled on including it, and now I’m wrong and not certain why. What’s the logic?

From the vignette:

Since she does not have access to the remaining balance for ten years, this balance is not considered a part of the Carvalhos’ investable assets, but is part of their total net worth.

It is not gained yet. There’s almost 10 years difference. The things you actually own and have “in your hands” are the ones you should account for. You can’t count an inheritance you “expect” to receive 30 years from now in your “current” investible assets.

Ordinarily I would be fine not counting external assets much in the way we cannot consider the inheritance. What threw me are the words, “part of their total worth.” To me, that seems not all that different from an asset of the client managed by someone other than the investment advisor.

Yep they did that to try to throw you off. If they don’t have it yet, it cannot be considered part of their asset base. Stick to the rules on these IPS questions and you will be fine. Don’t over think them.

What confused me even more with that question is that the Inheritance 10 years down the road wasn’t mentioned as a positive liquidity event or as an event constituting a new stage in the time horizon.

Inherating that much money would definitely require a re-assessment of the portfolio and allocation. But they don’t even mention it?

IPS makes me shiver with fright

Based on the Ingers material in book 2, the expected inheritance should have been included as a positive liquidity event. Moreover, the down payment on the home should be there as well. Any disagreements?

individual return requirements are complete garbage. I just did 2004-2008 cfa exam questions on this and missed all but two. They are inconsistent in the way they solve these and it is a crapshoot everytime I have done one. I hope they are generous with partial credit on this…

guys, I am worreid. Please help me urgently.

I did this exam today and solved for the return objective and got it correct.

This is my issue. Why was the 55,000 not bososted back up to the pre tax amount , that is 55,000/0.8.

In the 2011 exam the expense that would come out the investable assets was boosted back up by 1- tax rate but not in the 2008 exam.

That really confuses me.

I got it wrong too.

The case states that the 55k is after tax, and now that you bring it up, I’m not certain why you don’t divide by .80.

From the case:

The after-tax mortgage cost will be fixed at BRL 55,000 (principal and interest) annually for 30 years, with the first annual payment due one year from now.

the 55k is after tax. you are looking for the after tax return… problem solved.

Oh boy. I missed that.

Has anyone seen an instance where the CFA marking scheme had “emergency cash reserves” in the liquidity constraint?

It’s mentioned in the CFA books and Schweser that generally you should allocate enough cash to emergency reserves in case shit hits the fan. I guess we should only include it if the investor explicitly says they want some emergency cash around?

I included the down payment is well but after reading the guidelines I um tend to think since it already been paid out from the current year, its not a liquidity requirement in the next year.

Yes any significant cash inflow should have been mentioned in it as well.

In time horizon, they included tha tution fees which I didnt include. Mine was two stage - pre & post retirement?

Do we get partial credit if our return calculation is wrong? I have no hopes of getting it right. I have never got it correct so far. Do I still have a chance of making it through this year???

No man. Licoln, CP HELP.

In the 2011 exam we were calculating the after tax return and we bossted the expenses back up by (1-tax rate). I am sure of this.

Why is this not done in this question

RS, you are quite good., can you shed some clarity on this after tax return calc please

CP, RS a response please

jeffsick - what exactly is your question?

can you restate…

Great cpk.

Let me try to be clear. In the 2008 exam I calculated the after tax return objective by dividing the after tax expense by the investable asset.

The question clearly stated tp calculate the after tax return, the question also stated that the tax rate was 20%.

Why in the calculation should you have not calculated the pre tax expense as 55,000/(1-0.20)

The reason I ask this is that i am sure( I do not have the paper in front of me ) that on the 2011 exam they asked to calculate the after tax return objective.

To determine this I had to subtract the pre tax expense from the after tax income. and then divide this amount by the investable asset.

I guess my question is when do I boost up the expense back to the pre tax expense, How is the question framed so that I know when to do this.

Thanks cp