Mark-to-market investment return

A firm’s mark-to-market investment return is substantially lower than its reported return. This can indicate the company is: a. Selectively selling appreciated investments. b. Poorly managing its investments. c. Reclassifying their investments. Explain your choice.

i’ll give A a whirl- reported return only has the realized G/L but mark-to-market includes the unrealized. you only sell off your winners, you’d have a higher reported return than mark to market return.

I have not seen the term “Mark-to-market” return on the curriculum anywhere - but Stalla seems to have plenty of questions with that concept present… Am I missing something?

SS5- definitely was there last year and i think it’s there this year? mark to mkt return = dividends + interest + realized gains (losses) + unrealized gains (losses) the unrealized G/L’s tracked through the market valuation adjustment. MVA = difference b/t fair mkt value of the investment portfolio and its cost on a given B/S date. this stuff was definitely a big SS5 thing in '08 and i still have it in my notecard pile so i want to say it’s in. hang- i can check LOS’s.

> reported return only has the realized G/L but mark-to-market includes the unrealized But with held-for-trading, unrealized G/L also goes on I/S.

not there this year, I am seeing the text book amongst the minority passive pieces in text.

wow i just dug and you’re right, gonzo. alright, will take that notecard out of the stack! dreary- you are right that on trading securities unrealized g/l goes on the I/S. it does say selling “selective” securities though- maybe you sell your winners that are being held at cost? i dunno. C when you reclassify, don’t you have to immediately realize any unrealized G/L’s? that’s why i didn’t choose that one. either way, seems like this question might not be in this year’s materials? what was the answer?

cpk, I didn’t see the term in the CFAI material either, but I just took the term at its meaning. bannisja, you are correct on choosing A, but I had doubts, and I still don’t fully understand it, an example might help, if anyone cares to give one. I’m signing off for now.

dreary- say you have some available for sale security, cost basis 50, trading at 100 now. on your B/S you carry it at mkt value 100. but on your I/S you don’t report it there, only the realized stuff for AFS. you also have an AFS security with cost basis 200 that’s at 100. neither stock pays a dividend or interest let’s say to keep it easy. so in reality, you have a market value of your stocks of 200, but a cost basis of 250, you are down on the portfolio as a whole for the year. let’s say you sell the winner this year at 100. your reported return is that you bought something at 50, sold it at 100, you’re up 100%. you have an unrealized loss of 100 but that’s not being reported yet on the I/S. mark to mkt though you’d have to report the unrealized loss so it’d show up. is the whole held to maturity/AFS/trading security SS5 stuff gone too? it looks like yes? wow, this was a pretty solid chunk last year- def a full item set on the exam.

held to maturity, trading, afs is present as minority passive investments - but the mark to market stuff is definitely not there. there is a lot of stuff changed in the curriculum in fsa from last year.

That’s a good example banni. All of this stuff is still there, but not the mark-to-market terminology per se, which sounds to me like held-for-trading.

it’s definitely A, but I don’t see why C is not an answer. if you reclassify (if allowed) securities as (for example) held-to-maturity securities, then wouldn’t reported gains/losses be overstated relative to MTM valuations (say they’re illiquid securities trading way below par)? Can anyone shed some light?