Uninteresting? I thought it was interesting. We’re talking about factors that influence their ability to take risk. In the 2005 through 2007 exams (and especially in 2007), the guideline answers included options that the clients had that would increase their ability to take risk. In 2007, the guidelines said the couple could drop the charity donation or go back to work as circumstances that would increase ability to take risk. And time horizon was a very big deal in supporting above average for the past three exams. Anyway, if I consider the options available to the 2008 couple, it’s true that they could completely pay off the mortgage and still have (if I remember correctly) three years of living expenses in their portfolio and a 2nd trust distribution and an inheritance down the road.
Etienne, glad someone else thinks that…I also had below average…
rohufish Wrote: ------------------------------------------------------- > anyone go with limit orders for the 6-month > rebalancing trade? > > they have time to rebalance, who cares of its > intitutional counterparties or not, why not take > the 6 months and get best price using limits? bump
The way I looked at it, the portfolio was providing one thing and one thing only, the mortgage. It was not providing living expenses. Sure, you can say the mortgage is a living expense, but the case mentioned that the goal of the portfolio is to pay for the mortgage. That is it. Salary and living expenses completely offset each other. The portfolio was worth about 1M and they need roughly 5% per year from it. This was the same as 2 years ago. The guy needed 2M a year and his portfolio was worth about 40M, so the portfolio needed to earn about 5%, and in that situation, he had no other income. CFAI said he was above-average since he was young and had a substantial asset base. I don’t see how that is different than this year. If anything, this couple is even better off in a relative sense since they will be receiving another inflow of cash in 10 years plus an inheritance at some point so their portfolio could take a hit and they would still be fine. Seems cut and dry they were above average.
rohufish Wrote: ------------------------------------------------------- > rohufish Wrote: > -------------------------------------------------- > ----- > > anyone go with limit orders for the 6-month > > rebalancing trade? > > > > they have time to rebalance, who cares of its > > intitutional counterparties or not, why not > take > > the 6 months and get best price using limits? > > > bump that was my exact thinking process. based on some of the answers around here, i no longer have a lot of confidence in that. i think the institutional counterparties piece of info implies that it should be a principal trade. the only thing i know for sure is that market order was wrong.
mo34 Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > mo34 Wrote: > > > -------------------------------------------------- > > > ----- > > > I picked principal trade for that one ( the > > trade > > > size was very large compared to average daily > > > volume and most holders were institutions, so > > you > > > need someone to shop the trade around for > you). > > > > > > The other one was market order, because of > the > > > time sensitivity of the information (press > > > conference the next day) and the small > bid/ask > > > spreads. > > > > > > When there are a number of institutional > investors > > and you dont need to complete the order right > away > > ECN is the best way to go > > The trade was very large compared to the volume, I > remember 100000 shares to be traded and the > average daily volume in 120000. You’re not going > to get this filled in thousand year on an ECN. My reasoning for the principal trade was that it was a large percentage of avg daily vol. and also since institutions had a large degree of control the principal would be more suited to go directly to these institutions and offer to sell to them.
40MM is a far cry from 955K, and in that I remembered something about he can cut down on his living expenses. It’s not like this family can reduce the mortgage cost, if the portfolio doesn’t keep them afloat they’re done.
s23dino Wrote: ------------------------------------------------------- > My reasoning for the principal trade was that it > was a large percentage of avg daily vol. and also > since institutions had a large degree of control > the principal would be more suited to go directly > to these institutions and offer to sell to them. that was my logic exactly
principal trades are used with dealers when you’re in a rush to get the trade done. its got nothing to do with institutional investors as the dealers ultimate counterparty when closing out inventory on their principal trades. 6 months, whats the rush? get best price with limits…anyone?
They move back in with the parents. That’s where they were living before.
There is one thing that seems to be a theme in these exams: long horizons and sizable assets supercede pretty much everything else.
Granted: my choice of phrase “uninteresting” was a poor one (too strong)! Final attempt to win someone around to below average: the mortgage NEEDS to get paid. If you start from the presumption that their goals are really as stated (preserve real value and make $55,000 payments), then a risky investment portfolio will not deliver that consistently. If that was your mortgage and you wanted your portfolio to make the payments for you, would you really invest in equities / EM (“above average” -type investments)?
it doesnt matter what we all think…what matters is what CFAI think…may be they thought it was ‘average’ in which case we are all scr…d…although in which case we should urge them to give us half a point on that one… i chose above avg on the following points: - they are very young…30s… - have 500k cash assets… - getting 750k very soon and another 750k in 10 years for sure… - their salaries are sufficient to meet their living expenses the mortgage is 55k, not much considering their age and cash assets plus inheritance from trust…their ‘current’ ability appears above avg…although of course their portfolio can go down…but they did not appear to be risk takers… and even if they did put all that money in junk bonds, they have time on their side to recover from losses…and also remember that mortgage is secured on the home that they buy… it wouldnt not quite affect the portfolio in worst case scenario!!!..
Etienne, the answer could very well be below average. I don’t trust CFAI to be consistent, but if they followed the same logic in 2008 as they did in 2005 through 2007, it should be above average. Time horizon, income needs, asset base, goals and available options all point toward above average. (TIAGO was my risk-ability checklist, btw.) Anyway, I wonder how many points the actual “circle” was worth, relative to the supporting factors.
crap, i’m starting to believe in average for first 10 now…dang it. extra labor income option for 30 yr olds put me over the wall.
chalk the resistance to above avg down to anchoring, conservatism, overconfidence, whatever… 
can we rule out below average I dont think it was that at all? they had to many options, i.e. lots of human capital, can save more (call option), l-t horizon, large asset base, getting the 750 k for sure, meeting living expenses.
mo34 Wrote: ------------------------------------------------------- > kingcobra Wrote: > -------------------------------------------------- > > Dang, wasn’t the short on currency going > against > > Red River…does anyone recall the specifics > > > they were short Yen and the forward rate was like > 15 Yen/SAR and the spot was 17.5 Yen/Sar… So if > you’re going to get SAR for your Yens you want > them at the !5 Yen/Sar. > > they were exposed to credit risk. Thanks…one more in the -ve list
I kinda want to go for average now… maybe that’s the answer. I see where the above average people are coming from, and the guideline I am using makes sense to me also. To be honest, if it is average, no-one has got it right and it is a non-issue (curve-wise)…
Do you remember the soccer player question from yesteryears? He had a substantial money coming out of portfolio and he was retiring in a year. I thought the ability to take risk was below average. Correct answer was ‘above average’