Just did exam 3 AM from Schweser 2009. I have a few questions/doubts. 1) Q4. talks about Max Loss Optimization. Specifically, it says “this tool is especially valuable for assets with non-normal return distributions because this method does not assume normally distributed returns”. I couldn’t find this statement anywhere. Vol. 5 on pg. 249 just provides the basic definition of this method. Anyone know where this explanation is provided? 2) Q5. talks about alpha-beta separation. Specifically, it says “Alpha-beta separation works best in efficient markets and difficult to generate an alpha from. A limitation of Ab separation is that it may be difficult or costly to implement short positions in markets such as emerging markets or small-cap markets.” I understand why it may be costly or difficult in emerging markets, but why does it work best in an efficient market? I didn’t understand the logic. 3) Q6. deals with GIPS. For point 5 in the answer, it says “Footnote 9 concerning the percentage of the firm assets represented by discretionary accounts is not in compliance.” [Footnote 9 in the question says: Percentage of total assets is calculated using discretionary accounts]. The explanation provided says: total firm assets must include the market values of all discretionary and non-discretionary accounts under management. My issue is, what was wrong with the footnote in the question? I thought only discretionary accounts would be presented anyway, and that should be shown as a percentage of the total assets (which would include discretionary and non-discretionary) Explanations would be appreciated.
- Q5. it works best in effecient markets becoz one can get cheaper access to systematic risk exposure eg one can easily have beta exposure of an effecient market like S&P 500 quite cheap. and for the alpha exposure, he can look to other in-effecient markets. 3) Q6. Total firm asets should be calculated using both discretionary and non-discretionary accounts. suppose firm has 90 mn discretionary a/c and 10 mn non-discret. A/cs. then total firm assets should equal 100 mn for purposes of calculating % of various asset classes and so on. like total fee paying A/cs as a % should be calculated on 100 mn (and not just 90 mn).
L3, just for clarifications: 2) I didn’t quite get what you said here. You say in ABS, we get the beta from an efficient market (S&P for ex). This part is ok with you I hope. For the second part, you are saying he will get the Alpha from an inefficient market? So wouldn’t that be a combination of efficient AND inefficient market? This is what I had in mind originally. BUT, from my initial post, what I understood is that they are trying to tell us ABS works best only in efficient markets. They don’t mentioned inefficient markets at all. This is the confusion I am having. 3) I understand what you said here because thats what I had written initially. Total assets contain BOTH discretionary AND non-discretionary. The issue I have with the problem is that in the question they give us a statement that says “Percentage of total assets is calculated using discretionary accounts”. This is anyway correct, so I don’t understand why they point this statement out as a violation of GIPS. In the answer, it says “Footnote 9 concerning the percentage of the firm assets represented by discretionary accounts is not in compliance”. Whats the issue here?
I’ll take a stab at #1… just grabbed my 2009 Schweser Exams, and they asked the exact same freaking question last year. You mean, they couldn’t think up new questions to ask? They’re comfortable re-selling the same s**t that they hawked a year ago! Sorry, venting. Anyway, I’m looking at my notes from R39. The CFA institute says nothing about Max Loss Optimization being useful for non-normal distritutions. Their descriptions ays that you optimize mathematically the risk variable producing the max loss… maybe you could infer from that it’s a non-statistical method, i.e. non-normality doesn’t matter, but it’s a stretch. So, I think Schweser is full of it. Good thing I didn’t shell out again for these cr*pola study tests. p.s. As can tell from my tone, I used the Schweser tests extensively to study last year and failed…
schweser knows they only have us on the ropes this last time, they don’t care about us poor souls at level III.
Also chiming in on #2… I think they’re saying that, for small caps, it’s easier to earn alpha with going long-short than with a straight long position - because you’re earning alpha from 2 sources. I guess, the supposition is that a manager has an easier time earning long-only alpha for small caps - because there’s less institutional coverage, etc. Really though, my theory above is completely debatable. I wouldn’t waste a lot of time trying to wrap head around this silly Schweser answer key. I know a lot of others will disagree, but I would spend the time understanding the past CFA test answers - not the answers for these garbage Schweser tests.
jut111 - amen brother ; )
Thanks guys. I used Schewser last year and look what has happened to me too…this year, I have been relying exlcusively on the texts…just using schweser for practicing few questions. We’ll see what happens.