CFA Mock: doubts / errata?

Thanks for the response S2000magician, your a lifesaver on this forum.
However, I’m not sure that it is possible, even with leverage. Because borrowing (even at a very short duration) would provide negative duration to the portfolio, and then investing long with the borrowed principle in a bond (longer duration) would provide positive duration. However, the maximum positive duration possible would be the duration of the bond invested long would it not?

You’re very kind.

Think bond futures.


(Note: I put in the light bulb only to see whether it would work.)

any comments on this ? i have the same doubt

ste79 is correct.

If that were the worst of the errors on the exam, it would be OK.

It isn’t.

By a long shot.

Absolutely. Several errors. Thanks for the reply.
Where can I find more robust mocks to prepare for the exam please?

(Full disclosure: these are my exams, and I charge for them.)

I have just sent my comments to CFAI…that’s a very weird situation…it seems they have published a not revised version :joy::joy:

Not sure if it’s just me, but the style of questions in the mock seemed very open-ended and vague compared to the previous CFA exams?

An example is Q8C on the AM portion - I had no idea how to even start answering that question when I was taking the mock…

I’ve seen this sort of question on the real exam many times, but this one has atypical wording and vague justifications. For example, on what basis is 30% JPY bonds too low, but 45% JPY bonds not too low? How is the dividing line incontrovertibly established as being between those two numbers?

Agree with Q5 C on Tax Deferred Calculation, also should we deduct the from tax-exempt account first because it is not deductible at the beginning of the investment period?

How about Q5-F? It’s too broad. I didn’t know what to write. Is it possible to see such type of general questions in the real exam?
I’ve lost my motivation after taking this mock exam :-s


Q7 D: I had the same doubt, so I go ahead and checked the cirriculum, it states: Yield income = coupon payments AND REINVESTMENT INCOME, however, the formula it gives is annual coupon payment/current bond price. So it is confusing since in this question they give out a “yield” that’s different from coupon payment.

No idea why it is calculated with a deferred capital gain formula myself. It is a tax deferred with cost-basis of 1, and thus the return should be calculated with (1+r)^n(1-t).

I cannot fully answer the first half, but for the bold part, they assume that out of the 3M portfolio, 2M of which will be given as a gift. The other, remaining 1M is reserved as a fund to pay the tax of the 2M gift. Recall that the tax rate is 50%, and thus the tax of the 2M gift will be 1M = the fund reserved. She receives 2M, vs bequeathing 3M (of which 50% will have to be paid as tax), leaving her with only 1.5M.

That said, when I calculate using the relative value formula, we can cancel the first part (after-tax return on the asset), leaving us with (1-Tg+TeTg)/(1-Tg) = (1-0.5+0.5*0.5)/(1-0.5) = 1.5, implying that the niece will receive 1.5 times more gift from gifting as opposed to bequeathing. Since she receives 1.5M through bequeathing, she should have received 1.5M * 1.5 = 2.25M (750k incremental, as opposed to 500k). The method described in the paragraph above makes intuitive sense, but I cannot seem to reconcile the differences when using the formula, so perhaps there is something inherent in the formula that works weirdly when you start canceling terms… or I fail basic algebra.

I think inherent in their assumption (which is not explained) is that Franco wants to maximize his return, and that Franco sees this as a more important objective than risk reduction, and that risk reduction is a “bonus” point. Return on fund 2 is lower than current return, and therefore should not be selected. The (implied) assumption of Franco wanting to maximize his return, however, contrasts to the second paragraph, where he is interested in EMN strategy. If I recall properly, EMN’s main selling point is risk-reduction through diversification and lower volatility, so I guess we (or at least I) implied that risk-reduction is the goal here, and not so much return maximization.

Because they did not read what they wrote. It should be 4.5% per the question.

In my opinion (and I answered buy and hold strategy as well), it is appropriate. It does not use foreign currency, relies on coupon and roll-down yield (income), does not rely on price appreciation, and does not use derivatives.

In fact, one (read: I) can take it one step further and argue that buy and hold is more suitable than selling convexity. Recall that “NorthWake prefers to keep their investment strategies simple.” I don’t know about you, but implementing buy-and-hold strategy sounds a lot simpler to me than buying (and managing) bonds with embedded options. In addition, we are not given any indication if these embedded option securities are suitable for the company. Recall that the client is an insurance company, and thus may have reservations on holding these bonds as it has downstream ramifications to their equity duration (and thus equity volatility).

I give myself a full mark for choosing buy-and-hold. Change my mind. :stuck_out_tongue:

Agreed. This should be 2% and not 2.5%

Note: Will add more thoughts as I go through this messy mock.

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Thanks! And please feel free to add other contributions!

Can someone please direct me where to find 2020 mock exam? I was searching of the official website, but the only thing I managed to find were the old ones from 2016-2018.

What about the Tax-exempt account? Should we deduct tax from tax-exempt account in the first year as it is not deductible at the beginning of the investment period?

The case does not write how the funds came to be into the TEA. All we know is that he has $1m, already in the TEA, on which we need to calculate its after-tax return and volatility. I would tend to agree with you if the question is worded such that he is to receive some money before tax (call it “award X”), which he wants to place into his TEA, and we need to calculate the return on award X.

Hi Toto_11,

Did you manage to find it?

Yes i did… Actually, I couldn’t believe I didn’t see the message right in front of my eyes.