Would we get credit?

CFA Level III
#1

So this is Question 4 2008

It says for the return requirement

“Earn an average annual return of 8.7 percent plus management fees of .7 percent”

The guideline answer calculates the return as 9.4% vs 9.5 % for geometric (1.087)(1.07).

I cant find any instance in the text calculating that requirement as additive and not geometric, yet in the exam it is additive.

why does it matter you ask?

Because in the calc for the return of the corner portfolios (10.3 and 9.1 %)

using the normal R1(w) + R2(1-W) formula - using 9.4% W=.25 using 9.5% W=.33.

Major difference in calcs of everything, sharpes, Stdevs, weights of assets in portfolios, etc…

Think the CFAI woudl take it either way? Its only one way on the exam and it says “…return of 8.7 percent plus management…” in the return statement

#2

there is a calculation mistake you are doing

  1. if you used the multiplicative and did not set rounding - you end up with a 0.3 weight.

  2. with the 0.3 weight - you end up with a Std Deviation > 10%

  3. with the additive requirement - you get an EXACT 10% …

so now deal with the other facets of the problem now. … before you think of partial credit

I guess work the Std Dev … decide 0.3/0.7 is not fine

go back to additive

do 0.25, 0.75

(lose time, do not finish paper, come back boo hoo)

#3

I Got 10.3 for Std Dev, figured that was acceptable given its .3 over…

I used .33 and .67…did you see an error with that math?

9.5 = 10.3w + 9.1(1-w)

9.5-9.1=10.3w-9.1w

.4=1.2w

w=.333

1-.333=.6667

#4

My personal dream is to open up the booklet and see like 10 corner portfolio problems.

#5

9.46 = 10.3 w + 9.1 (1-w)

w = (9.46 - 9.1) / (10.3 - 9.1) = 0.3

You rounded up to 9,5 … ended up with the diff

Not sure about the part about “figured 0.3 over was ok …”

#6

looking at past trends from the available AM exams, she IS DUE in 2012

along with:

pension plans for SS5

grinold kroner in SS7

contingent immun in SS9

returns vs holding in SS11

that is just me doing a quick analysis of what has shown up in recent years and what is ‘due’ to be tested again

let the record show that i am not trying to game the exam, i was just bored and decided to track questions and their frequencies over the past several years on the AM section

#7

throw in one spending rate + one IRR I/Y calculation

Behavioral shit scares me …

#8

this whole thing scares me…what kinda numbers are yall hitting on AM mocks?

Mine aren’t impressive at all…Im a little scared guys…

#9

hey cpk, question about the IRR for IPS

lets say your current portfolio is pv =100, n =10, pmt = 5, and fv = 120 (not calculated, just made up)

you calculate return as 5% (also made up) and inflation is 3%. what answer do you give for required return in IPS?

is it 5% or (1.05)*(1.03)? do you also adjust the PMT by inflation or no?

#10

You dont multiply inflation in the IPS Calc, you add it on at the end after the taxes. (Assuming it wants after tax)

Although the multiplicative method is acceptable I believe, as it is shown both ways in the IPS calcs.

Also whether one adds inflation is based on whether or not its asking for nominal or real.

You have to factor whether then numbers you are using are nominal or real.

If its a mortgage payment, that is not going to have to be adjusted for inflation, right?

If you currently have 10 million and you need 15million at the end of the period, then that is a nominal amount already, hence no need to calculate any inflation…

So it depends…

Just remember though its all about the payment. If the payment is something fixed, then it needs no adjustment (i.e mortgage payment - it doesnt grow with time). Else if its an income requirement it does increase with inflation, do we have to adjust it (assuming they are asking for nominal, not real)