Lets Discuss Number 19 CFA Reading 26, bk 3 p338

I have been screwing the pooch in Asset allocation, and apparently this is not different. This question was very open ended. Summary. Total assets 55 million necessary payout 5% Payout = 2,750,000 The answer states “the ongoing cash flow form the bond portfolio should easily provide for all working capital needs” I don’t get it…the allocation they have as an example (p 345) shows an aggregates percentage of return from bonds at around 1.545… That would be 849750 per year… 1) How does that cover the payments? 2) When we are allocating, do we always assume that things like stock and illiquid investments’ payouts are included in the cash flows? 3) why is VC in this case considered “equity” and not “alt investments”? 4) is everyone else struggling with Asset allocation or am I alone in this?

  1. I got confused too when I read this first time. I reasoned it out ( no hard facts , just for my consolation) , that bond cash flow includes income return ( i.e. coupons ) and principal ( face value). If your intention is to provide the right amount of cash flow , you could structure the maturities in the bond flow to cover any shortfall in cash flow from coupons by principal return from the bonds. 2. explain a bit more , too tired to read betwen the lines. 3. Venture capital is alternative investments but has equity like characteristics , i.e. reacts similarly to traditional equity securities to macro-economic factors, is valued similarly too

janakisri Wrote: ------------------------------------------------------- > 1. I got confused too when I read this first time. > I reasoned it out ( no hard facts , just for my > consolation) , that bond cash flow includes income > return ( i.e. coupons ) and principal ( face > value). If your intention is to provide the right > amount of cash flow , you could structure the > maturities in the bond flow to cover any shortfall > in cash flow from coupons by principal return from > the bonds. > > 2. explain a bit more , too tired to read betwen > the lines. > > 3. Venture capital is alternative investments but > has equity like characteristics , i.e. reacts > similarly to traditional equity securities to > macro-economic factors, is valued similarly too 1. Ok, so the bonds covering the cash flows don’t need to do it all with coupons? They are counting cash flows from bond maturities toward the payment of the 5% payout? 2. Was pretty much related to the bond question, because it appears the bond payout cannot pay off the annual spending requirement, so I assumed they were taking cash flows form the equity side as well to meet spending requirements.