2008 Q questions --Spoilers--

First off I put --spoiler-- in there just in case people haven’t done this yet…but god help the guy who is holding off on doing the 08 for next Thursday closer to test day. If I did this test with only a few days to go to recover, it would have scared the shit out of me… Couple of questions. The corner portfolio question. The return objective provided was something like: target 8.70% plus management fee of 0.70%. I interpreted “plus” as “and” and calc’ed the return target as (1.087)(1.007)-1 = 9.46%. The guideline answer did it literally plus = add… and then the additive…8.7+0.7 = 9.4%. Isn’t this a multi period return target? Shouldn’t it be geometrically linked? Did they not link it just because the objective given said “plus” The difference did not result in a different set of corner portfolios but it did result in different weights for both the “no short” and the “short” optimal portfolios and those were not in the guideline answers. I took points off but dude… wouldn’t they include both the geo and additive in guidelines? Or do you need to parse words like this? In hindsight it said add and I guess I should have just added but really… The institutional IPS question. What was up with the excess return target? I could not recall seeing that stuff. The RR was 9.5 and we are changing the actuarial PBO rate to 6.5 so instead of a 2.5 excess target we have a 3.0 excess target return? Was that it? I was calc’ing beginning pd assets, plus contributions, minus expected pmts, the ending port value goal is 65% of PBO so the RR is blank… that ate up some time. That 65% PBO thing reminds me… the risk objective. I put below avg and bs’d for a minute about the plan shortfall. They went specific with the statement of the board member about min value of 65% of PBO and no mention about level of appropriate risk? I can see that including the specific statement about the value not falling below 65% of the PBO, but no level of risk? When I read it originally I thought the 65% of PBO was a distractor, a statement by a board member to persuade you. The return goal should be to fund plan liabilities and the risk obj should be below avg due to plan characteristics, etc. Right? I mean, obviously not right, but I got thrown off there. The behavioral question burned me. I had it then I changed it. The third one was representativeness but in the blurb the smart-ass day trader said something like “this investment can’t fail.” That is pretty darn confident if you ask me… The derivative question. You had to determine the position and then the number of contracts to hedge a portfolio of 900 million and 500 million Euros. So short the Yen/ and short the Yen/Euro. And to calc the # they gave the contract multiple as 100,000 and the Yen/$ of say 115… I am confused. They just said 900/0.1 = short 9000 contracts to fully hedge. I thought the price of the contract was in there? Is that for commodities?.. 900/(0.1*115) short 78 contracts.

Agree with the point on the corner ports. I think I realized they needed to be added instead of multiplied when the portfolio stdev was greater than the limit of 10%.

I must have mis-calc’ed that then because I attempted to test the linear approx and came up w/ it < 10. I just double checked and I think I used the E® for port 3 as its stdev. So: 70/30 was E® = 9.46% and stdev ~ 10.18, and 75/25 E® = 9.40% and stdev ~ 10.00 that “plus” vs. multi period geo linked 0.06% return blows that up. that is a schweser-type parse one word in a haystack Q imo. weak.

Yeah, and so you can imagine what it felt like doing that asset allocation question in the real 2008 exam… The difference between adding and multiplying those returns made all the difference in how to answer the question. I wasted at least 10 minutes going down the multiplication road and getting frustrated, then decided I had to move on to the other questions. When I saw the billions of yen futures in question 11, I decided to punt that and go back to asset allocation. Still only hit the middle score, not sure why.