i was reviewing q1 of 2007 exam . there are two issues that bothers me. 1. when guideline answers list out reasons for risk tolerance, out of 5 reasons listed, 3 of them were not stated in the case at all. my question is how much room do we have to make up stretched stories? 2. should “low basis holdings” be mentioned as tax constraint or unique circumastance or either one as long as mentioned?

low basis holdings i would mention under both tax and unique. there’s nothing to say something in a clients situation must be mutually exclusive to a part of the IPS.

I agree with Striker, I would include in both but most importantly in Unique. As regards to #1, i haven’t done 2007 yet as I’ll do that towards the end so I can’t help ya.

The one piece of advice I’ve received is to never mention the same thing in two sections (low basis stock for example). This is from an instructor of one of the prep classes that used to grade the exam. The exam answers do it a lot, but for the actual exam it makes getting points on both parts difficult.

  1. should “low basis holdings” be mentioned as tax constraint or unique circumastance or either one as long as mentioned? I was having trouble with this too.

Hmm… When I was working with the Stalla material, I had problems where I thought “I’d already mentioned it here; I can’t just go say it again there.” The Stalla answers suggested it was ok to do that, and presumably that’s because some situations have multiple impacts on an IPS. My sense is that you should try not to put something in more than one spot if you can avoid it, but it’s not the end of the world if you can’t.

I think its mainly a tax constraint, but it is also a unique and a liquidity issue as well.

True…I think if it fits under certain sections then it doesn’t hurt as long as its stated as to why you put it under Liquidity (say holdings was >50% of funds total assets) and Taxes (May incur large capital gains if sold) and Unique.

Would it really be liquidity if it was >50% of TA, or mentioned in liquidity at all? Even if the person said “I don’t want this sold, ever” I’d still only put it in unique circumstances. Haven’t seen the question though, just going on what’s been said.

I’m sorry you are correct, my goof. It would belong definitely in Unique and I would mention it under Taxes.

Right but if they are trying to get out of the large low basis position it could take time to avoid the tax consequences which in turn effects liquidity. Just something to mention.

in this scenario you would not write low basis holding under liquidity…you’re confusing the definition of a stock’s liquidity vs. the liquidity constraint. liquidity is immediate cash needs. Just because a position is illiquid (which would be the case in a low basis holding) does not affect the liquidity constraint. The liquidity constraint is used for current spending needs, upcoming expenses/donation/purchasees/wealth transfer…

I think when they give you the template, you can put something like “low basis” as a reason, but you have to get the justification part right. So if it fits in many spaces, just make sure you are using the right justification.

Schweser says that the liquidity characteristics of the portfolio should also be addressed.

Yes, they should be addressed - these characteristics being immediate needs (ie one time expenses) ongoing needs (recurring expenses) one time needs (i.e. the sale of a house or business…). A low basis position doesn’t necessarily equate to illiquidty… you may not want to liquidate it for tax reasons but if necessary you could still liquidate it with ease (of course depending on the characteristics of the stock being held). which is why low basis holdings effect tax and unique and not liquidity. that’s my opinion. we can argue this all day since its not black and white, but you’ll have to say something profound to change my mind.

I won’t argue, don’t put it if yout don’t want to.