I took this exam today and just finished thoroughly reviewing AM. Overall, I thought it was fair and realistic (besides the last Q which was too calculation intensive). Very mad at myself for making lots of dumb mistakes. I bookmarked a few of the questions I had, let me know if you guys agree or have some answers. Hopefully these questions/points can help everyone and we can get a discussion going. Thanks.
1B (ability to take risk): While the asset base is large (which makes them above average), the key point I think is that they are COMPLETELY DEPENDENT on the portfolio in retirement. In the first year of retirement they only have living expenses for themselves and mother and no inflows. Shouldn’t this relianc bring them down to average?
1B (overall risk): I’m completely ignoring this whole business about “counseling” or “reconciling”–I’ve seen it in no previous exams. For overall I just restate which points from the willingness/ability sections are stronger or more pronounced. Agree?
1C (time horizon): Anyone else say it was three stage? They say in the vignette that they wish to leave their estate to children–doesn’t this imply a multigenerational view and add a third stage (post death)?
1C (liquidity constraint): I was concerned to see the answer key just listed the expenses without writing the #'s. Do you all agree that it is always best to put the dollar values in for liquidity and add them up (I think this is how most old exam answer keys show it)? I wrote $250,000 living expenses and $68,958.50 mother’s expenses.
1C (liquidity constraint): Anyone else planning to put “5-6 months living expenses in cash”? I’m hesitant to do this because you may have to quantify it/it may mess up your asset allocation decision.
1D (asset allocation): Portfolio C is said to have suffificent cash for emergencies. But their liquidity constraint is living expenses of $318,959. Well, as we saw in the answer to 1A, $318.959 / $8,135,524 is 3.92%, so Portfolio C’s cash allocation of 3% seems insufficient, no?
3C (relative value of gift tax vs. estate): This question absolutely killed me. Spent 10 minutes carefully putting together this formula to not make a mistake but I didn’t realize that you have to add TgTe because the testator pays the gift taxes. Did this get people too? Anyone else surprised that there was no partial credit for at least solving the formula without the TgTe in there, especially for a 10 point question?
4A (bank objectives): They are not meeting enhanced return objective because they are holding risky bonds–how does that make sense? Also, in my view, everything but this objective is a RISK objective, not a return objective–do you agree?
5A: CSI can be argued to be constant mix because: a) as S&P goes up/down, its stock value after rebalancing goes up/down by a lesser amount and b) the stock value after rebalancing is constantly 75% of the portfolio value. FHM can be argued to be CPPI because a) as S&P goes up/down, its stock value after rebalancing goes up/down by a larger amount. But what about the second point on the % stock of portfolio value (to match CSI’s second point)–its stock value after rebalancing goes from 75% to 69% to 72% to 67%, so how do we tell from this metric if it is CPPT or buy and hold?
8A: S&P futures 5 month contracts were used, but 270 day t-bills were used. How do you know if your exponent in your calculation should be 5/12 or 270/360? Can you have a mismatch?