Question 1-B: The IPS case with the Ingrams. How the fluff was I supposed to assume that these people may reconsider not donating the house to charity or elimanating the planned gifts or the possibility of seeking reemployment. I thought their ability to take risk was below average because: 1. They expect to live 35 more years 2. Income is funded from portfolio. No other sources of income. 3. They wish to make a donation, etc.
35 year time horizon would indicate above average portfolio size is large relative to needs = above average donation is a secondary goal = above average.
#1 is interesting… on the one hand, the long life of 35 years would indicate a risk of superannuation, but on the other hand, given it’s a long term time horizon, it would increase their ability to take risk. I would have to assume that the CFAI would view the long term time horizon an overriding factor over superannuation because it’s the job of the portfolio manager to ensure a margin of safety.
strikershank Wrote: ------------------------------------------------------- > 35 year time horizon would indicate above average > portfolio size is large relative to needs = above > average > donation is a secondary goal = above average. Eventhough I haven’t even seen the case, agree with the above based on what I see so far regarding the client’s situation.
look at it that way: these people have 4 million dollars as an asset base and their only goal is retirement income, that’s it. The son is grown and independent, yes they wish to donate stuff at their death, but as PJStyles suggested that’s a secondary goal. <> ok and that stuff above is not your assumption, it’s more your recommendation as an alternate route. As an investment advisor, you are telling them that if their investments value goes down they can always go back to work (they are 50) and they don’t have to donate the house. We don’t have to make an assumption that their goals are always realistic right?
long time horizon + significant cap base. Dont trust schweser as i said before
got it. I think I will do more cfai past exams.
yea this was a really tough question, after I read it I guess it makes sense. But I have a few questions. I thought having a highly undiversified risky portfolio would be a unique constraint and they didnt really mention gifting in either legal/reg or unique?
But what about willingness. Ingrams’s profiles seem to indicate that they have below average willingness to accept risk.
to be honest the way this material is tested is complete bullocks…‘average’…‘above avg’…‘below avg’…come on whats avg anyway… my avg could be someone elses above or below avg…but there is a RIGHT answer nonetheless unfortunately…I thought the answer was ‘Avg’ in this case considering also that they had a huge position in company stock position / plus low basis stock… that should have a bearing on the decision… I know I know tax and liquidity etc etc…but if you have a large concentrated portfolio with low cost basis u are not as free to invest around as someone else with a diversified liquid portfolio?.. so time horizon = long term… above avg risk tolerance large port size = above avg risk tolerance concentrated low basis portfolio = significant constraint resulting in reduced ability to take risk?..no? overall = AVERAGE… CFAI = 0 marks…the correct answer was _________.
i want to know what the willingness was? based on the investor profile in the question, the ingrams have below average risk tolerance. anyone?
i agree the discussion did suggest below average willingness…one of them was cautious…and the other one methodical investor …(although i believe sporadic reading about investments does not make you methodical)…but again… who cares abt what we think…the RIGHT answer was ABOVE AVG…so not a lot of ppl scored well last year on this particular question!
this is my take on this: i think they want us to isloate each question asked in the set. the investor pofile was a different question in the set. they wanted us to discard that info to answer the risk tolerance. weird.
Yeah, I completely missed this problem. I gave them below-average risk tolerance based on 1) their willingness as discussed in the problem, 2) their concentrated equity holdings, and 3) the fact that the portfolio is their only source of income…which I see now that I should have looked at the flip side - they could have other opportunities for income given their long time horizon. Did anyone actually calculate the return requirement using the PV of an annuity calc the way they did? I didn’t even consider the charitable gifts in my calc since they were far into the future. I thought I remembered doing a problem in the CFAI books which approached far-off liquidity requirements in this way. I agree with needhelp…it seems they ask their questions isolation…so I’ve also found it’s a good idea to read through all the parts of a problem first. Like on the equity collar question…I had to switch my “reasons for the equity collar” to go under the next question “reasons for not picking the other ones”…
Like many of the actual takers from last year, I got sub-50 on the first question. I was on the right track by using TVM to try to calculate the return, but didn’t get the inputs right. I wasn’t too far off with the final number. Still, I have zero confidence in getting the return calculation right on the real thing. I’ll give it a good shot but I’m not going to spend 30 minutes on it. Now, as to the risk tolerance… I really should have gotten that right. I think Schweser’s messing with my brain. The CFA exams from 2005 through 2007 all had above average ability to take risk as the right answer, with a long time horizon being the primary support in each case, as well as the relative size of the portfolio. In both the 2006 and 2007 cases, they also mention that the individuals have other options that could increase their risk tolerance (the gift, the house, or getting endorsement income in the case of the soccer player). I am taking this info into account and adjusting my risk-ability calibration accordingly. I do think it’s interesting that the correct answer in terms of risk-ability has been “above average” for the past three years. Of course, should I bother trying to anticipate the fall of a fair coin? BTW, the exam has not asked explicitly for willingness since 2005. The willingness question has had more to do with ancillary effects. One more thing: no GIPS and not a single Correct / Incorrect & Explain question on the 2007 essay.
Pimp When some one states that they are not going to give away their residence to charity then you have to necessarily discount it. (1) 35 yrs long TH cannot be but aid you in taking more risk. You have long time to make up. Just dont over think (2) 200K out of 4Mn is not a large portion. It is Just 5%. You have to see the spending need in relation to asset base. (3) They have clearly stated their obj to give 1Mn to charity and 2 Mn to charity and those are the only main concerns. Always try to think the IPS in terms of what is the primary goal and what is secondary. Secondary ones are good to have but not a must. You have to think this way(CFA way) to answer those. the one thing that I would agree is that the portfolio has too much risky, concentrated position and it would reduce the ability to take risk. I could argue that it reduces the ability somewhat and hence the risk tolerance is avg. I am hoping that I wont be left to make a guess on those…
How do we define a “substantial asset base relative to spending needs”? A 7% real spending rate? 5%? 3%?
as with frisian (and almost everyone else sitting the exam), I flunked this question but I still managed to pass with 71% on the 40/60/80 basis. I actually got <50 for three of the AM sets but destroyed the PM session with >80 in all sections. Moral of the story, just because you think you’ve screwed up the morning, don’t let it get you down as you can still nail the afternoon and pass. Good luck guys!
duncs Wrote: ------------------------------------------------------- > as with frisian (and almost everyone else sitting > the exam), I flunked this question but I still > managed to pass with 71% on the 40/60/80 basis. I > actually got <50 for three of the AM sets but > destroyed the PM session with >80 in all > sections. > > Moral of the story, just because you think you’ve > screwed up the morning, don’t let it get you down > as you can still nail the afternoon and pass. > > Good luck guys! that’s encouraging