Question 3 in 2010 AM Actual Exam
The problem asked you to determine which potential trade is most appropriate for a Pension company. Justify each response with one reason.
The guideline answer responded that you should buy equity because it best mimicked future real wage growth. It also added that real rate bonds should be retained because of its high correlation on the inflation component of future real wage growth.
Doesn’t it sound two justifications already? or should I provide one reason for the buy equity and sell nominal bonds?
Balancing the time pressure and the thoroughness of your response is really challenging.
CFA typically adds some color to the most appropriate answer . I think the color should not fetch any additional points :
If you have the primary answer wrong the color is useless.
If you have the primary answer right , the color is explaining some things the examiner doesn’t need.
For example 2012 derivates ( q 9 b ). They add some color on how to correct for convexity of delta by using gamma adjustments . This is TOTALLY not asked in the question . Never asks how to correct for anything. it is useless color.
In regard to your question , however , you can give some leeway to the examiner to give you slam dunk full marks . If you explain which trade is preferable AND also why the other(s) is not , ( and of course don’t mess it up incorrectly ), and do so in 5 words or less each , you are golden