CFAI 2008 - Portfolio management - Individual

Was looking at the CFAI institute 2008 exam with regards to Portfolio Management – Individual. Question has to do with liquidity constraints. Given that there’s a mortgage down payment required now of 30% of 850 000 = 255 000. Ongoing mortgage payments starting next year will be 55 000. The Down payment will be covered by a trust(Inheritance received by the parents). The individuals Income needs just cover expenses.

I said the liquidity constraint is 255 000(Down payment). The answer provides a solution that they need their investment portfolio to cover the 55 000 the following year.

The inheritance covers the down payment but the rest of the money is also contributed to the Investment portfolio. Why is this not included in the liquidity constraint - the 255 000? Isn’t that still a liquidity requirement?

So the answer provides for NEXT years liquidity constraint from the portfolio but not for it NOW. I would’ve got this answer wrong as I would’ve put 255000 and not the 55000 AS THE LIQUIDITY CONSTRAINT..

Any advice?

The wife received a “distribution” from the trust of half it’s 1,500,000 value; in my eyes that implies that she received cash to the value of 750,000. The word “distribution” says to me she receives cash rather than the actual securities held in the trust.

If they owe 255,000 for the down payment and they have 750,000 sat there in cash then the 255,000 is not a “liquidity requirement” as they already have 750,000 in cash sat there to immediately fund the deposit on the home and cover it in full - nothing needs to be liquidated.

The portfolio doesn’t have to be managed in terms of liquidity to provide this - it has already been provided for.

I have to respectfully disagree. The trust is a seperate entity and, from I understand of the problem, will be covering the initial down paymnet. This would be a liquidity requirement for the trust and not the individual.

all numbers below are in 1000s.

750K gets added to net investable assets.

out of net investable assets - you need to remove 255K for the mortgage down payment.

so it is as S666 said NOT a liquidity requirement … because it is removed from available money - and will be reducing the Net investable assets IMMEDIATELY.



If the 750 000 is added to the NIA and then removed it would be a liquidity requirement. My thinking now is that it was never added to the portfolio value and immediately removed we’re a net saver at the moment.

It’s an odd one. I think if you explain it you would get marks regardless. There’s been other questions where you pay for your kids tuitiont IMMEDIATELY from the portfolio value (Net investale assets) and it has been a liquidity requirement.

CFAI 2012 exams with Alonso. He funds his kids tuition immediately of 250 000 and thats included in the liquidity requirement.

Let me look at the question once I get home.

I seem to recall that there is a timing difference between when they receive the money, establish their investment portfolio and when they are making their decisions about the actual use of the portfolio.

Appreciate it. Thanks.

It clearly says the deposit it provided for by the distribution from the trust. I answered this question a couple of weeks ago and it was that phrase that made it clear it was not to be added to the liquidity requirement…because it’s already been covered by the fund distribution. I think you’re over thinking it…

Hows the logic below sound for liquidity requirement?

For me in a questino how I’ve approached it - Does anything need to be liquidated from the NIA? If yes, then a liquidity requirement

In 2012 with Alonso

Income > Expenses but all extra income(savings) is contributed to PORTFOLIO. Immediate need for Education trust for kid so must dip into Net Investable Assets. Therefor, Liquidity requirement

For above example – 2008 — One we’re originally talking about

I’m assuming the Inheritance hasn’t been included in the net investable assets initially. Pay off the mortgage then add it into NIA. Portfolio value was NOT dipped into so there’s no liquidity requirement.

Now CFAI Exam 2006 - With Rodolpho SIerra.

Wants ot maintain a real value of his portofolio. Equity portion produces 3.4M in after tax capital gains and FI produces 100 000 and makes 5 million in income pretax and 3 million after tax.

Buys a house for 4.5 million and other X = 2 million. Therefor all X’s = 6.5 million. This example we dip into our NIA again so it’s a liquidity requirement.

Above I got confused as well cause we’re trying to maintain a real value of portfolio. I thought cause of that, the 3.4 million we take out of Equity would not be considered as something to go towards Liquidity requirement.

But - I think Liquidity requirements JUST means. Do we dip into our Net investable assets to get money? If yes, liquidity requirement.

How’s that for logic? CPK - do you agree or anybody else?

I think if you follow this logic, you won’t go too far wrong. The whole idea of the liquidity constraint is to basically outline to the money manager in charge of investing the portfolio assets that he has to be careful in his selection of which assets to invest in, as the beneficial owners of the assets have need for liquidity at some point in the (near) future.

There’s no point in seeking higher returns by locking the assets up for 5 years if 80% of the portfolio has to be liquidated in 6 months to pay some legal charges or buy a house or even cover normal living expenses. It’s the fact that those expenses need to be covered by liquidating assets in the portfolio that means it’s a liquidity contraint.

The money manager has no control over salary income until it is part of the investment portfolio…so if an expense can be covered by something outside of the “investment portfolio” e.g. Salary, cash distribution from trust etc, then it is not a liquidity requirement of the portfolio as it is already covered and no liquidation of portfolio assets needs to happen.

Thats how I see it anyway, and I’ve never looked at a liquidity constraint answer from an AM exam and disagreed with it so I think my logic stands up.

Thanks, Much appreciated. It’s little things like this that annoy me. Finished my actuarial exams and there so specific. I need to get out of the habit for these exams for that. I spent so much time on this one type of logic.

Does help with confidence though so maybe it’s a good.

agian thanks