Thoughts and questions on Schweser Live Mock AM

CFA Level III
#1

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?

#2

Just looking at 3C, Schweser’s grading key is totally made up. They have llittle insight into how partial credit is awarded. Seriously doubt an error like that would count 10 points against you.

#3

yes, that is the hope. think thats still a bit too quantitative for the exam. maybe more of a pm Q if anything.

any thoughts on other points? thanks.

#4

Can’t speak on risk ability, I never, ever, ever, get those right. It is just too insanely subjective to me. If the CFAI will not give you a % return that qualifies as “moderate liquidity needs” relative to portfolio size, I don’t see how this can ever have a “correct” answer. As a matter of fact this is the one part of the test I feel VERY strongly needs to be removed.

For liquidity, yes i always include dollar amounts. I don’t include cash reserves unless they mention it. I doubt you will get docked for it though.

1D) good point , i don’t know what to say there. I picked C because it was obviously the best choice, but you are correct as far as i can see about the cash

3C) I got this right, but I thought I had recalled where this was either errattad or something to where we did not have to “calculate”, just explain…

4A) I got that wrong too… i thought that was the only objective they had correctly met, and i figured that since we had already covered that it violated the risk objective we didn’t need to consider that since the question focuses on return

5A) Buy and Hold would have a slop of 1.0, where CPPI has 1.2 in this question. So x(TA - Floor), x = 1.2x that the cushion between total assets and the floor moves up for each change in value.

8A.) you are using 270 day bills, but you are gaining exposure through index futures. The risk free rate is given annualized, so even if it were a 2 day t-bill you would convert the annualized rate to whatever period you are actually going to create the synthetic position over.

#5

5A) So if it were buy and hold, we would see that:

a) percentage change in “stock value after rebalancing” would be the exact same as percentage change in “S&P 500 Index”

and

b) “stock value after rebalancing” divided by “Portfolio Value” would be the same percentage every period?

Thanks for other answers.

#6

A.) I think that is correct

B.) That sounds like constant mix not buy and hold.

#7

oh crap youre right on B.

so if you only had the portfolio value and stock value after rebalancing columns, how could you tell CPPI from B&H?

CM would be the same percentage each period.

in this case FHM’s stock value after rebalancing goes from 75% to 69% to 72% to 67%, so how do we tell from this metric if it is CPPI or buy and hold?

#8

solve two equations on the 2nd case.

1.23 = m (1.775 - F)

1.5 = m ( 2-F)

m = 1.2, F=0.75 is the solution.

Since m = 1.2 > 1 -> it is CPPI

On the first case Stocks / Portfolio = 0.75 constant (=m <1 - so Concave strategy, Constant Mix).

This can also be reached by solving

1.5 = m ( 2-F)

1.33125 = m (1.775 - F)

subtracting : 0.16875 = 0.225 m

m = 0.75

F = 0

You have your answers from the data provided.

#9

great explanation, thanks!