A few questions (IPS and Economics)

CFA Level III
#1

Hi every one

When doing the practice exams, I have noted a few questions that are quite confused.

I would really appreciate if you could enlighten me on these:

1.Normally does the exam ask you to calculate PRETAX or AFTER TAX required return?

2. If it asks for pretax nominal return, is this the correct way?

Real after tax return -> pretax return -> add inflation = pretax nominal return

3.In past exam 2011, to calculate next year required return

They add inflation to living expense next year to calculate total expense -> required real return. After that they add inflation to this return to get nominal. Is inflation double included in this calculation?

4. Economics: Can you see the common sense why Y(gov) > Y(equity) , equity is overvalued? Im usually confused with this one.

5. In asset allocation , when you have different judgment than the answers (like 40-60% to equity, 20-30% to bonds…), how does it be fair to candidates?

Thanks a lot

#2

Neither.

Sometimes it’s one, sometimes the other.

Neither one is “normal” (and the other one “abnormal”).

Sometimes it is; sometimes it isn’t.

I wrote an article on this that may be of some help: http://financialexamhelp123.com/inflation-in-required-rate-of-return-to-tax-or-not-to-tax/

No.

Adding inflation at the end is intended to grow the asset base so that next year the (inflated) living expenses will be the same percentage of assets as they are this year.

Equity is riskier than government bonds, so it should earn a higher return. If not, then equity is too expensive.

If they require all of the candidates to use the same judgment, how is it unfair?

My pleasure.

#3

That’s very lovely of you. Thank you very much!

#4

maxmeomeo wrote: 5. In asset allocation , when you have different judgment than the answers (like 40-60% to equity, 20-30% to bonds…), how does it be fair to candidates?

If they require all of the candidates to use the same judgment, how is it unfair?

My point is, the asset allocation is quite subjective based on the view of the portfolio managers. Therefore I think it’s not really reasonable to expect every single candidate to have same view.

Of course I do understand that’s there requirement.

#5

You’re quite welcome.

#6

I heard that they do give us partial marks if we are able to correctly judge why you chose a particular allocation. Magician pls correct me if I am wrong here… I did read this somewhere, but dont exactly remember where!

Asset allocation again is asked in ranges and hence we do tend to come up with similar answers.

#7

in the asset allocation questions - they are looking at what you would pick up from the case - and hence arrive at an asset allocation distribution. E.g. It is your method of reasoning rather than the actual number that you come up with. and most often the consistency of your approach and answer choice.