Can anyone advise how to answer to the LOS c & d ? I am very much confused by the answers in Schweser’s study note and I can not find the exact answers to the 2 LOSs in CFAI’s text too.
Here are some thoughts on LOS C for this reading and how I studied it: Justifying absolute performance: 1) Investor specifies a desired min spending level during retirement. 2) PM creastes a min. required return and provides various asset allocations 3) Each allocation is presented to the investor with possible max and min return that can be translated into a sustainable lifestyle. 4) Gives the investor a hard dollar figure to work with and build expectations. Justifying cash flow matching 1) If a client’s individual goals can be stated in exact amounts, cash flow matching can be preferred utilizing a laddered bond strategy 2) Bonds are purchased w/maturities matching the target dates scuh that the maturity of one bond combined with cash flows from laonger-term bonds meet each cash flow. This is a start at least.
Hi, FastEd : Thank you very much for your immediate response. Do you think that both the absolute performance (a strategy ?) and cash flow matching (a strategy ?) are the two strategies of Lifestyle Protection Strategies (as stated on P.303~P304) ? What is the “Asset Allocation Approach” as stated in Schweser’s study note ? Is it one of the “Lifestyle Protection Strategies” or one of the “Fixed Horizon Strategies” ? Your further advice will be appreciated !
AMC - I don’t have my books in front of me or my notes. I’ll get back to you on this one in a few days. FYI - I took the exam last year and it appears that the LOS is virtually the same as 2009 so keep that in mind. My page references will be a little different as well. But I’ll be in touch.
AMC Wrote: ------------------------------------------------------- > Hi, FastEd : > > Thank you very much for your immediate response. > > Do you think that both the absolute performance (a > strategy ?) and cash flow matching > (a strategy ?) are the two strategies of Lifestyle > Protection Strategies (as stated on P.303~P304) ? Yes. > What is the “Asset Allocation Approach” as stated > in Schweser’s study note ? Is it one of the > “Lifestyle Protection Strategies” or one of the > “Fixed Horizon Strategies” ? The Asset Allocation Approach is a lifestyle protection strategy. It can be called upon when time horizons are not certain (for example, post retirement) or the investor does not want to limit the upside potential of a portfolio. It utilizes a monte carlo and considers differing asset allocations and their associated account values which are generated based upon some portfolio criteria with various equity/bond allocations for example. The point being made here seems to be that the risk component is not defined in terms of standard deviation, but rather considering what the risk is in not meeting a goal and the probabilities associated with it.
FastEd : Thank you further response. Do you mean that there are 3 strategies (absolute performance / cash flow matching / Asset Allocation Approach ) of “Lifestyle Protection Strategies” ? The “Asset Allocation Approach” is a lifestyle protection strategy as you said, but there is not such a term of “Asset Allocation Approach” stated in R18 of CFAI text. The statements (refer to Exhibit 3/4 ) in R18 of CFAI text seem to be different from those in Schweser’s study note. The statements and the exhibit regarding the “Asset Allocation Approach” in Schweser’s study note are easier to understand. I don’t understand those statements (refer to Exhibit 3/4 ) in R18 of CFAI text quite well. Are those statements in R18 of CFAI (refer to Exhibit 3/4 ) are about the so-called “Asset Allocation Approach” in Schweser’s study note ? Anyone else has comment ?
FastEd : After my revisit to P.303~307, I think : 1. The “absolute performance (absolute return strategies) shall be one strategy of “Lifestyle Protection Strategies”. Please refer to the second paragraph on P.303. 2. The “cash flow matching” shall be one strategy of “Fixed Horizon Strategies”. Please refer to “Cash Flow Matching” on P.303~304 (especially the second paragraph on P.304 : If the answer to any of these questions suggest that cash flow matching is not the best approach, then life protection strategies may be a better fit”) and the first paragraph on P.307. These statements seem to mean that “cash flow matching” is one strategy of "Fixed Horizon Strategies"not one strategy rather than one strategy of of “Lifestyle Protection Strategies”. Am I right ?
I only had my Schweser notes to review. I’ll look at CFAI soon. Again, this is from last year’s text books that I will be acquiring the information. Time for bed.
Hi AMC - I re-read the CFAI texts today and here are my thoughts: > 1. The "absolute performance (absolute return > strategies) shall be one strategy > of “Lifestyle Protection Strategies”. Yes - I would agree. > 2. The “cash flow matching” shall be one strategy > of “Fixed Horizon Strategies”. I Disagree. Let me build out this response some as I believe this reading muddles a few things. Cash flow matching is not utilized for the fixed horizon strategy, so far as I can understand. There is a reference to cash flow matching in the section on fixed horizon strategies (I believe this is on page 310 of your reading), but in context it is only referencing how to decide which strategy to use and does not suggest that cash flow matching is a strategy for the fixed time horizon. For review and clarification, let’s discuss why one uses cash flow matching 1) If a client’s individual goals can be stated in exact amounts, cash flow matching can be preferred utilizing a laddered bond strategy 2) Bonds are purchased w/maturities matching the target dates such that the maturity of one bond combined with cash flows from longer-term bonds meet each cash flow. 3) Keep in mind that cash flow matching will be using, presumably, bonds that pay coupons and mature at different times to provide the necessary cash flows to meet investor goals. While I am sure it can include zero-coupon bonds, the reading does NOT discuss this as part of the strategy. NOW, What is the fixed horizon strategy? 1) The time horizon is fixed and assumed there is a min amount the investor will need at the conclusion of this investment horizon. 2) The strategy is to purchase a zero-coupon bond that matures at the end of the horizon such that the min amount for the investor is met. The reading also states that if you implement this strategy you must be cognizant of the risk-free investment. 3) As the reading explains, IN COMBINATION with the zero coupon bond, an aggressive sub portfolio is added to help provide some asset growth. I don’t like this sentence either: “If the answer to any of these questions suggest that cash flow matching is not the best approach, then life protection strategies may be a better fit.” The cash flow matching section appears as a sub-section within the reading “Investing to Meet Current Lifestyle Needs.” I would suggest that if they distinguish cash flow matching as not being a “Life Style Protection Strategy” than is it is certainly a strategy to help meet “Current Lifestyle Needs.” Keep in mind that the LOS D is asking you to compare LifeStyle Protection vs. Fixed Planning Horizon and does not mention cash flow matching. Now, about the term Asset Allocation Approach, it is a Schweser term and not one that I see being called out in the CFAI texts. I would avoid using it on the exam in answering the morning session if you get a questions on this. Hope this helps and I tried to capture some other questions you had in this one post.
FastEd : Thank you for your response again and the effort made by you is really appreciated ! Can I say that “cash flow matching” is neither one of the “lifestyle protection strategies” nor one of “Fixed Horizon Strategies” ? That is to say, “cash flow matching” is mentioned here just to explain that it is not appropriate to be one of the “lifestyle protection strategies”. On the other hand, I think the “Asset Allocation Approach” stated in Schweser’s study note seems to be the “Monte Carlo simulation” approach of “Fixed Horizon Strategies”, do you think so ? The figure in Schweser’s study note is easier to understand than the Exhibit 3/4 in CFAI’s text, but do they mean same matter ? I am still a little bit confused because this reading is somewhat vague. Just for your reference, I am also a re-taker. I didn’t study this reading well for 2009 eaxm.
FastEd : Correction to my previous message. Can I say that “cash flow matching” is neither one of the “Lifestyle Protection Strategies” nor one of the “Fixed Horizon Strategies” ?
AMC Wrote: ------------------------------------------------------- >>Can I say that “cash flow matching” is neither one of the “lifestyle protection strategies” nor one of “Fixed Horizon Strategies” ? That is to say, “cash flow matching” is mentioned here just to explain that it is not appropriate to be one of the “lifestyle protection strategies”. I see where you are going with the question and I guess, based on that silly sentence in the CFAI, one is probably best to conclude that cash flow matching is neither life style protection nor fixed horizon. Essentially, it stands on its own as a strategy in the umbrella of “Investing to Meet Current Lifestyle Needs.” Why cash flow matching isn’t explicitly a lifestyle protection strategy is not something I am able to answer, but it sure sounds like it is one to me. > On the other hand, I think the “Asset Allocation Approach” stated in Schweser’s study note seems to be the “Monte Carlo simulation” approach of “Fixed Horizon Strategies”, do you think so ? I don’t think so. Asset allocation is linked to lifestyle protection and not fixed horizon, but don’t get too into what Schweser is saying here. Their terminology is different than CFAI texts, so I would avoid trying to figure out exactly what they are discussing. For example, I didn’t see ANY reference to monte carlo in CFAI. If you elect to attend a 3-day seminar or windsor, I would save the question until then or email Schweser for support. The figure in Schweser’s study > note is easier to understand than the Exhibit 3/4 > in CFAI’s text, but do they mean same matter ? The general ideas are the same. Just for your > reference, I am also a re-taker. I didn’t study > this reading well for 2009 eaxm. Actually, I passed the exam last year, but have found it interesting to stick around and “lurk.” I loved looking at the guideline answers from last year as they were posted today. Trust me, when you get this behind you, have your charter on the wall, you will feel a great sense of relief and accomplishment. All the best to you as you study.
FastEd : First of all, congratulation on your success in 2009 L3 exam and I admire/respect you to come back to review CFAI’s L3 curriculum. I am sorry again that what I shall say in my previous message is that the “Asset Allocation Approach” stated in Schweser’s study note seems to be the “Monte Carlo simulation” approach of [lifestyle protection strategy] instead of [Fixed Horizon Strategies], do you think so ? The “Monte Carlo simulation” is mentioned on P.222 of V2 of 2009 (P300 of V2 of 2010) CFAI text in its explanation of Exhibit 3/4. Anyway, you are highly appreciated for discussing with me.
FastEd : My e-mail address is smkuo@aamcc.biz Please advise me your e-mail address, maybe I need your advices on some issues.
AMC Wrote: ------------------------------------------------------- > FastEd : > > First of all, congratulation on your success in > 2009 L3 exam and I admire/respect you to come back > to review CFAI’s L3 curriculum. > > I am sorry again that what I shall say in my > previous message is that the “Asset Allocation > Approach” stated in Schweser’s study note seems to > be the “Monte Carlo simulation” approach of > instead of , do you think so ? As best as I can frame the answer, it appears that the two are tied together in the Schweser notes. > The “Monte Carlo simulation” is mentioned on P.222 > of V2 of 2009 (P300 of V2 of 2010) CFAI text in > its explanation of Exhibit 3/4. Yes it is, but it is discussed in terms of generating portfolio results based on investor goals and restating risk in terms of outcomes versus the traditional frontier. The discussion in the text book does not bring monte carlo into the strategies used for lifestyle protection per se, only to suggest/imply perhaps that the outcomes can be “monte carloed” to give the investor a sense of the decision he/she is making based on a the risk/reward profile. The Monte Carlo part of this reading is best part of your understanding for LOS A of this section, where it says to “explain the benefits of defining portfolio efficiency in terms of client goals rather than traditional measure of risk and return.”