Schweser Practice Exam 2 AM Question 12

It provides a required return objective 8.5% and a minimum acceptable return -8…0%. I don’t get it. If the required return is 8.5%, why would we have a MAR lower than 8.5%. Can I take the required return as an expected minimum return number while in reality the return could be possibly lower than the required return?

In Question 12A, it clearly states that we cannot use return requirement as a reason, but can I use it as a reason in question 12B? saying the reason why Portfolio D is not selected is its expected return 8.29% < required return 8.5%? The answer key doesn’t include this as a reason.


I thought the same thing about the MAR - doesn’t make much sense. But all the examples i have seen have very low / if not negative MAR’s

It’s in a Roy’s safety first type context. The expected return less 2x std devs shall be over -8. I don’t have the q in front of me, but some pros had a return above the expected, but such high volatility that the mar was lower than -8.

The return objective is a long term return - it is not actually a minimum acceptable return that ABSOLUTELY MUST be achieved every single year. In reality, no return over the risk free is reasonably achievable every single year. The minimum acceptable return is the worst a return can be in a given year.

It’s a simple of way of checking if you know the Roy’s Safety First. 8.5 - (-8) / 2 = 8.25% meaning the standard deviation of the PF cannot exceed 8.25%. Only one of the portfolios in the question meets that guideline.

Also, I agree about it not being clear about using return as a justification for 12B. In a real exam I’m sure it would be acceptable since it is asking you to state the reason why the PF was not appropriate. In the end, if you wanted to be safe, you should have used another justification.

Thank you nvestn! That’s really helpful