Julia Valverde Case Scenario
Julia Valverde, CFA, is a trust officer at Royal National Bank (RNB). She recently met Luis Sevilla, age 45, owner of agriculture and real estate partnerships. Valverde hopes that Sevilla will bring his personal investment business to RNB, as well as that of his partnerships and perhaps also his family’s philanthropic foundation. Although Sevilla is fairly knowledgeable, he wants Valverde to analyze two stocks (Bici and Velo) which have been recommended by his broker at Ekimov Investment Partners. Sevilla tells Valverde that he will consider only those investments which are expected to return 10 percent pre-tax. Sevilla provides Valverde with the information in Exhibit 1.
Valverde begins her analysis by reviewing RNB’s 10-year expected annualized returns for various markets (shown in Exhibit 2).
As Valverde conducts an analysis of Bici and Velo stock returns, Sevilla asks whether the assumptions of the Capital Asset Pricing Model (CAPM) are accurate. Specifically, Sevilla asked Valvarde about the assumptions that all:
1. assets can be traded without taxes or transaction costs.
2. assets are marketable in any quantity without affecting price.
3. investors have different views about the risk and return of risky assets.
Sevilla asks whether an Arbitrage Pricing Theory (APT) model can be used instead of a CAPM model. Valverde responds that the APT model offers a richer context for investors to make portfolio decisions and makes less restrictive assumptions than the CAPM. Specifically, the APT model assumes that:
A. returns are described by a factor model,
B. investors can construct portfolios that eliminate asset specific risk,
C. it is possible for investors to arbitrage among well diversified portfolios
Before she provides an answer regarding the two stocks, Valverde asks Sevilla to complete RNB’s required “know your customer” questionnaire. Using Sevilla’s responses, Valverde completes the listing of Sevilla’s total assets (Exhibit 3) and his investment profile (Exhibit 4).
Based on Sevilla’s investment profile, Valverde also develops the Investment Policy Statement (IPS) shown in Exhibit 5.
55. Given the U.S. data in Exhibit 1 and Exhibit 2, the expected return for Velo stock (E())using the security market line is closest to:
A. 12.0%.
B. 12.5%.
C. 14.0%.
Answer: C
“Portfolio Concepts,” Richard A. Defusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkel 2009 Modular Level II, Volume 6, pp. 362-363 Study Session 18-66-e, f
Explain the capital asset pricing model (CAPM), including its underlying assumptions and the resulting conclusions.
Discuss the security market line (SML), the beta coefficient, the market risk premium, and the Sharpe ratio, and calculate the values of one of these variables given the values of the remaining variables.
Velo’s expected returns, using Ekimov-estimated beta vs. the DJ Wilshire 5000 Index from Exhibit 1, and RNB’s U.S. equity (DJ Wilshire 5000) 10-year returns from Exhibit 2 would be: SML Equation: E( ) = RFR + β( – RFR)
E( ) = 0.02 + 1.5 × (0.10 – 0.02) = 14.0%
56. Which of Sevilla’s three statements regarding the assumptions underlying the Capital Asset Pricing model is least accurate?
A. Statement 1.
B. Statement 2.
C. Statement 3.
Answer: C
“Portfolio Concepts,” Richard A. Defusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkel 2009 Modular Level II, Volume 6, p. 362
Study Session 18-66-e Explain the capital asset pricing model (CAPM), including its underlying assumptions and the resulting conclusions.
Sevilla’s Statement 3 is incorrect – it is not a CAPM assumption and is inaccurate.
CAPM assumes that investors have identical views about the risk and returns of risky assets. Statements 1 and 2 are underlying assumptions of the CAPM.
57. Which of Valverde’s three statements about the assumptions of the APT model is least accurate?
A. Statement A.
B. Statement B.
C. Statement C.
Answer: C
“Portfolio Concepts,” Richard A. Defusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkel 2009 Modular Level II, Volume 6, pp. 382-383 Study Session 18-66-l Discuss the arbitrage pricing theory (APT), including its underlying assumptions and its relation to the multifactor models, calculate the expected return on an asset given an
asset’s factor sensitivities and the factor risk premiums, and determine whether an arbitrage opportunity exists, including how to exploit the opportunity. Statement C is correct. This statement incorrectly states an assumption of arbitrage pricing theory. In fact APT assumes that it is not possible for investors to arbitrage among well diversified portfolios
58. Is Valverde’s assessment of Sevilla’s liquidity and unique circumstances, from Exhibit 5, most likely correct?
A. Yes
B. No, the assessment of liquidity needs is incorrect.
C. No, the assessment of unique circumstances is incorrect.
Answer: C
“The Portfolio Management Process and the Investment Policy Statement,” John L. Maginn, Donald L. Tuttle, Dennis W. McLeavey, and Jerald E. Pinto 2009 Modular Level II, Volume 6, pp. 554-556 Study Session 18-71-c Define investment objectives and constraints and explain and distinguish among the types of investment objectives and constraints. Valverde is correct with respect to liquidity and incorrect with regard to unique circumstances.
Sevilla has no current liquidity needs from the investment portfolio. The high current income means that any liquidity requirements can be from income. Unique circumstances are significant. The $100,000 annual charitable giving goal represents 10% of Sevilla’s $1 million investment portfolio. To achieve a 10% after-tax return, Sevilla must earn approximately 15% before tax on the portfolio which is well above the portfolio’s historical earnings.
59. In Exhibit 5, is Valverde most likely correct regarding Sevilla’s taxes and time horizon?
A. Yes
B. No, he is incorrect about taxes.
C. No, he is incorrect about time horizon.
Answer: A
“The Portfolio Management Process and the Investment Policy Statement,” John L. Maginn, Donald L. Tuttle, Dennis W. McLeavey, and Jerald E. Pinto 2009 Modular Level II, Volume 6, pp. 555-556 Study Session 18-71-c Define investment objectives and constraints and explain and distinguish among the types of investment objectives and constraints. Valverde correctly states Sevila’s tax needs and time horizon. Taxes, at 30% to 35%, are important. Time horizon is multi-stage; the first stage is age 45 – 55, and the second stage follows retirement.
60. Based on the information presented in Exhibits 3 and 4, Sevilla’s ability to take risk is most likely:
A. average.
B. below average.
C. above average.
Answer: C
“The Portfolio Management Process and the Investment Policy Statement,” John L.
Maginn, Donald L. Tuttle, Dennis W. McLeavey, and Jerald E. Pinto 2009 Modular Level II, Volume 6, pp. 549-552 Study Session 18-71-c Define investment objectives and constraints and explain and distinguish among the types of investment objectives and constraints. The reading indicates that investors with high levels of wealth relative to probable worst case scenarios can take more risk. Exhibit 3 indicates assets with a market value of $78,500,000 and annual income of $340,000; therefore Sevilla’s ability to take risk is above average. |
发表于 2009-7-2 14:46
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