Help me grade this? (2014AM Q1)

I have images of my answer.

below images are guideline answers for convinience. i have tried to highlight that one’s match mine.

Question is worth 20 minuts. Hopefully it will not waste your too much time.

Highly appreciate this.

Part A - 4 minutes The Crusoes have a below-average risk tolerance because:  Their investment portfolio is heavily weighted towards fixed income, indicating a low willingness to take risk.  They would like to retire in only four years, so they would not have a long time to recover from investment losses before retirement, indicating a low ability to take risk.Neither Louis nor Marie are eligible for a defined benefit pension and are thus totally reliant on their investments to fund their needs in retirement, indicating a low ability to take risk.  To the extent that their wealth has been passively accumulated through savings, they might be less confident they can rebuild their wealth should it be lost, indicating a low willingness to take risk.

Part B - 3 minutes The Crusoes’ liquidity requirement from their portfolio for the coming year is equal to USD 85,000:  They will pay off their home mortgage of USD 25,000 within the next few weeks.  They will establish a USD 60,000 university tuition fund in the next few weeks for their daughter. Therefore, USD 60,000 + USD 25,000 = USD 85,000 Note: The Crusoes’ ongoing expenses of USD 100,000 per year (USD 135,000 after-tax income less USD 35,000 annual savings) are not included as a component of the liquidity requirement. The Crusoes are net savers, and thus ongoing expenses do not create a liquidity need from the portfolio.

Part C - 5 minutes

Alternative #2: In four years the Crusoes will accumulate USD 1,735,786, an amount lower than the USD 2,200,000 that will sustain them in retirement. Present value (PV) : (USD 1,330,000) Annual savings (PMT) : (USD 35,000) After-tax expected rate of return (i) : 4.5% Number of years (n) : 4 years Solve for future value (FV) : USD 1,735,786

Part D - 4 minutes (couldn’t find anything that matches my answer) In order for the Crusoes to be able to retire in four years, they would need to:  Increase their willingness to take risk by changing their asset allocation to investments with a higher expected return. An after-tax return of 11.21% per year would allow them to accumulate USD 2,200,000 in four years. This much higher return would be far from certain, even at a significantly higher level of risk.  Reduce the size of their investment portfolio needed when they retire by accepting a lower standard of living, or spending less, during retirement. They are currently on track to accumulate USD 1,735,786 in their investment portfolio in four years.

Part E - 4 minutes (my answer is not matching) The percentage return after taxes for the Crusoes’ investment portfolio was 4.9% and calculated as follows:  The total dollar return based on the 6% before-tax annual return: USD 1,330,000 x 6% = USD 79,800  The taxes due on each component of return: Interest: USD 40,698 x 0.25 = USD 10,175 Dividends: USD 10,374 x 0.15 = USD 1,556 Realized capital gains: USD 21,546 x 0.15 = USD 3,232  The total dollar return net of taxes due is: USD 79,800 – (USD 10,175 + USD 1,556 + USD 3,232) = USD 64,837

 The percentage return after taxes is equal to the total dollar return net of taxes due, divided by the beginning value of the investment portfolio: USD 64,837 / USD 1,330,000 = 0.049 or 4.9%


Someone who has cleared exam and not running out of time might be able to help?


I’ll help you out.

As for A, I think you may get full credit, although you could’ve worded your first answer slightly better.

B and C both look like full points to me

For D: Your first point is stated in the question so likely no points for that. Your second point should probably include something additional like "to reduce the PV of estimated requriements at retirement.

For E You didnt include the unrealized gain in the reutrn calculation but did everything else correct so you’d likely get 1 or 2

For A 3/4

For B 3/3

For C 5/5

For D 1/4

For E 2/4

Total 14/20

Ok thank you very much. Your comments are helpful