Ophelia McGillicutty, a retired airline executive, has been buying and selling stocks for more than 50 years. At 74, she controls a modest investment portfolio of $280,000. Over the last three decades, McGillicutty has given away millions of dollars to charities. She lives comfortably on her pension and her deceased husband’s Social Security benefits. McGillicutty keeps the bulk of her investments in stocks, although her children and grandchildren say she is taking on too much risk at her age. McGillicutty should be most concerned about: A) diversification. B) liquidity. C) tax considerations. Your answer: B was incorrect. The correct answer was C) tax considerations. Given McGillicutty’s ability and willingness to live on her existing monthly income, liquidity is not a concern. We have no reason to believe that income will not support her for the rest of her life, and we know of no pressing needs for her investment funds. As such, while a high stock weighting may look odd on paper considering her age, it is not necessarily inappropriate, particularly if she is investing for growth to fund charitable donations or her children’s inheritance. Taxes, however, concern most investors. Given McGillicutty’s relative insensitivity to the other two options, tax considerations seem to be the biggest potential problem area. the question is so ambigious, it could really be any of the choices. if youre going to argue that she is living comfortably and doesnt need liquidity from her portfolio and isnt bothered by being undiversified because she is able to absborb the loss, then i dont see why taxes of all things matter. if anything, losses will create tax benefits. and any tax increases due to gains cant be worse than stock losses.
woof. this makes me fear level 3 more so than level 2. agree this is a completely ambiguous question… none of those answers really feels great. i would’ve been b/t A and C… flip a coin? could we get an IPS item set in PM? yes, definitely. i don’t know if i’d rather the ambiguity of something like this or tax questions which i haven’t learned the formulas for. pick your poison.
Oh Banni. Just wait.
hopefully i’ll get there, but i don’t plan to ever study with you again… mwvt9, cfa. (or soon to be)
I hope you are right!..but you might not be. : ( …sorry I jacked your thread show
I couldn’t get passed Ophelia McGillicutty. that might be the best fake name ever.
There are bunch of Stalla practice questions in SS18 that are very similar to this one. So I totally expect to see one or two of these. Better review portfolio management process.
If she donates money to charity doesn’t she get tax writeoffs?? These are tough.
jut111 Wrote: ------------------------------------------------------- > I couldn’t get passed Ophelia McGillicutty. that > might be the best fake name ever. Agreed. If I see, "Taco Vandervelde, CFA … " anywhwere on the exam, I might die. jut, check out this site: http://nameoftheyear.blogspot.com/
I didn’t think it was that hard? States she lives comfortably off pension and SS benefits, thus eliminating liquidity risk. Makes no mention that she isn’t diversified and says she invests in stocks, so I would take that to mean numerous stocks, thus making her diversified. With her age and active investment style in stocks it would pose serious tax implications due to short term capital gains and possibly dividends. Thus, taxes seem the best answers.
yeah, but what about a fixed income mix as part of diversification. CAPM is all about the risk-free rate. I thought it was diversification because she’s all old and everything fully invested in equity. Obviously, I was wrong.
I did this question, and I moved on. Let’s let it go
That’s too much real world thinking. Correct me if I’m wrong, but I’m pretty sure there was no mention of allocation between FI and Equity in the PM readings. I could be wrong… tomorrow night is my review for those.
jdane416 Wrote: ------------------------------------------------------- > I didn’t think it was that hard? > > States she lives comfortably off pension and SS > benefits, thus eliminating liquidity risk. > > Makes no mention that she isn’t diversified and > says she invests in stocks, so I would take that > to mean numerous stocks, thus making her > diversified. > > With her age and active investment style in stocks > it would pose serious tax implications due to > short term capital gains and possibly dividends. > Thus, taxes seem the best answers. thats a terrific response. i didnt think of it that way. liquidity – has lots of cash to live off, doesnt care about portfolio being liquid diversification – just because she has lots of stock doesnt mean the stock isnt diversified taxes – shes old, so she may be doing a lot of ST trades as an active investor–this may create lots of tax drag