Take an example: An endowment has an asset basis of $100 million. Suppose the endowment has a one-time spending of $10 million for facility purchase in one year and need to make $5 million distribution annually. How many time horizons does the endowment have? I think it has only one. But according to a question in 2002 CFAI exam, the endowment’s time horizon should consist of two distinct time horizons: first stage is the following year ; second stage encompasses the remaining years in future. I feel confused. Do you remember the Q1 in 2006 exam? Soccer player Serra has a big one-time spending in one year, but this year is not a separate stage within his time horizon. Anybody can explain it? If I encounter such question again, how should I deal with the one-year stage?
I agree with you. In Schweser and CFAI material they subtract the one time near term spending from the asset base and consider it a 1 period time horizon. Anyone else?
Tim Horton is 2 stage, one is medium double-double, the other is chcolate glazed timbits
it is only 2 stage if the investment direction (risk / return objective) are different… in this question, if it state an obvious reason why the 2 tim horton has different risk / return objective… then it should be 2 stages otherwise i will go with 1 on the exam day
i would insist on this issue and give a more specific example. spoilers for 2002 and 2004 exams. compare 2004 Hale foundation with 2002 JU endowment. they both have an outflow in the coming year. and yet for 2004 we have a one-stage horizon, while in 2002 there is a two-stage horizon. also, regarding the same two. 2002 JU considers the current income from portfolio only under liquidity, but 2004 Hale accounts for the computer business profit in the return calculations. any opinions?
on the same subject, how much of a % of portfolio would be considered a major cash outflow that justifies a second time horizon. Is there a rule of thumb like 10 %?
come on guys, help us on these questions. i would not insist this much if IPS weren’t such a hefty and crappy portion of this exam.
Hmm this is a little tricky . I think the time horizon is multi stage when the outlay in further in to the future ( i.e more than 1 year ) . However I see that in the case of Jarvis it is not too far off …??? .
I’d avoid studying Jarvis U. old exam question unless you feel you’ve exhausted all other study sources…it was a complete snake trap that I’m sure CFAI realized was a mistake.
If you know of your distribution with certainty now and the exact amount, wouldn’t you just invest the PV of the capital now i.e. (10m/(1+r)). If the PV is already segregated and accounted for, in one year, there are no real changes, just the out flow. I probably would have said one on the exam.
according to books, one large outflow would determine a stage for the horizon. now i don’t know what percentage should that be from the invested assets to determine what “large” means. and additionally (reg my second question), what would you do if you were given a portfolio for a foundation and a corresponding current yield? consider the yield when computing return?
* so if I have to pay off $10 mil in criminal charges in 10 days by liquidating my portfolio and live in obscurity for the remainder of my life, is that one stage or two stages?
A). if my total net worth is $100 mil B). if my total net worth is $12 mil
The multistaging of time horizon is more important for indiv IPS than institutions. What is more important for institutional is if their TH is long term or not…my 2 kobo…
forget about the football player serra. His one time spending was on a house and it was paid by his last salary - not the portfolio
a) I don’t think that the number of periods is that important, as long as you explain your reasoning briefly. b) In Serra’s case, if I remember properly, you are asked to put yourself one year head from now. So, if first year is gone, there are two periods left. c) What I find difficult is to qualify the risk: below, average or above. I think this is extreemly subjective. Even in Serra’s case, he is spending quite a lot. I read in Schweser that unless an individual has more than 50 m and a spending rate of 2-3%, he cannot be considered wealthy enough to be qualified as an above average risk taker. That was not the case of Serrra. In addition, psychologically he must have calmed down with the various losses he made, don’t you think? d) A question I have. In the CFAI AM they mention a couple of times to give *one* reason (the one is even put in italics). Does it mean “only one” or “one at least”? If you give one and that there are 3 or 4, do you get all the points? MH