I’ll reference Schweser Practice Book 2 Test 2 AM page 75 question 1, but it’s not needed to answer this question
These should be simple questions:
If there is a box for the liquidity contstraint, are we only supposed to mention liquidity needs in the coming year? For example, children are 10 and 12 and The Jones would like to pay for their education. If we only have that vague comment, should this be something that is mentioned in liquidity constraint. What if there is an amount listed. For example, they will have to pay a one time payment of $34,000 in 6 years. Would that get added to the liquidity constraint?
Same question for unique constraints. I sometimes include extra info that isn’t considered unique. Is the college education in the future considered a unique circumstances section? The couple in this example also just received 2.5 Million after taxes. This is also not included in the unique circumstances section according to the answer key.Is this consistent with CFA materials?
For liquidity, I would go for current (meaning short-term) liquidity needs. Education in 6 years should not be included. It would be part of the return objective, not a constraint. If it represents a large part of the family’s wealth (big change in circumstances), it should be added in time horizon, as an extra stage.
College education wouldn’t be considered in unique circumstances… it’s not a constraint. The 2.5mln after taxes could be added if it represents a constraint in the sense that it would weight on potential decision risk… It’s not necessary to add it.
In unique circumstances:
Important: SRI screens, Special requests, Bequests, Desired goals that can’t be met.
Potentially: source of wealth (if perceived as a constraint…), primary residence (ongoing mortgage maybe)…
For liquidity, I would go for current (meaning short-term) liquidity needs. Education in 6 years should not be included. It would be part of the return objective, not a constraint. If it represents a large part of the family’s wealth (big change in circumstances), it should be added in time horizon, as an extra stage.
College education wouldn’t be considered in unique circumstances… it’s not a constraint. The 2.5mln after taxes could be added if it represents a constraint in the sense that it would weight on potential decision risk… It’s not necessary to add it.
In unique circumstances:
Important: SRI screens, Special requests, Bequests, Desired goals that can’t be met.
Potentially: source of wealth (if perceived as a constraint…), primary residence (ongoing mortgage maybe)…
also add, if they have recurring on-going liquidy needs, such as a mortgage pymt each year or distributions from invst portfolio to cover living expenses every year, those would also be included as a constraint
“The other category can include many different types of liquidity needs. On past exams, these have included a plan to pay cash in several years to build a house, to make a contribution to a charity, to help develop a business, and to meet a planned bequest. All of these have a similar characteristic in being future outflows that do not affect the immediate portfolio allocation and, under some circumstances, might not be considered in the required return calculation. Any of this type of outlay should be mentioned in the client’s liquidity constraint.”
Why would liquidity constraints be limited to 1 year or any other arbitrary time period. If the liquidity need exists, then it needs to be mentioned as a constraint. I would play it safe and mention it as a constraint.
College expenses would not be considered unique. All of us went to college, right? So it’s not unique. A unique circumstance might be something like your particular set of investments that might require special consideration.
unfortunately this is one area where the institute will take off points for too much information. you can’t just list everything that might need to be included in liquidity in the liquidity section and hope you cover it. If the pament needs to be kept liquid it should go in the liquidity section period. if it is included in the return objective - then it doesn’t need to be in the liquidity section.
fortunately the test will tell you what should and should not be included in liquidity. for instance if the person says they don’t want some payment that’s coming up included in their return/assets then that would need to be kept liquid.
Emergency Reserves : 3 to 6 months expenses as cash emergency
Events : Negative: education , health , house down payment etc etc
Positive : will receive cash disbursement from IRA , or a bonus etc etc.
House : Would like to keep this out of the portfolio although it is a liquidity drag
: Maybe used for future large emergency needs
Something like that would take 3 to 4 minutes to write , but be crystal clear . They cannot reduce points for being crystal clear , if you didn’t miss anything