I have a few questions on Investment Policy Statement-based on CFA past exam questions.
2007-Essay Questions
(1)-Q-1- (a) Risk tolerance for Ingrams is given as above average-due to high asset base. But the portfolio requires an annual return of 7.46%, which is moderate and not very low. Also won’t the total dependence of Ingrams on portfolio returns, post retirement, reduce their ability to take risk.
Is there any specific rule-that can be used to determine whether the asset base is large or small?
(c) Unique circumstances-Isn’t the concentrated holding in employer’s stock a unique circumstances
(2) Q-2-B-When Equity collar is chosen as the most appropriate strategy in Part A.
Exchange funds-How does it eliminate any significant upside price potential associated with the position in Pitt. Doesn’t it just diversify the portfolio? Only outright sale should
eliminate upside price potential. Or I am missing something.作者: prashantsahni 时间: 2013-4-17 19:06
Harish, I had many of the same questions as you since I just completed the ‘07 exam. For 1(C), see page 86 in practice exam volume 2.
Regarding the Ingram’s risk tolerance being above avg. due to a high asset base to spending needs with the real required return of 4.84%…great question, because when I review the 2008 exam the Carlvalhos’ 5.53% real required return is stated as justification for taking less risk. So, is 5% the line between more/less ability for risk?
Nailing the risk tolerance question on the exam seems simple enough, but in reality what a pain.作者: Houjichasan 时间: 2013-4-17 19:07
For question 2:
We buy a put and sell a call in the equity collar. Thus if the price drops below the floor we are protected by the put but if the stock price increases over and above the strike price in the call, we have to pay the call holder, thus eliminating any upside.作者: dkishore1 时间: 2013-4-17 19:07
*bump* i have the same questions – i also said exchange funds are the best choice because collars eliminate the upside and exchange funds dont
also for question 1, how can they say that its above average with all the gifting constraints? we are allowed to just throw them away?!?作者: ashycal 时间: 2013-4-17 19:07
I’m really confused on this too.
With bequest preference and a total reliance on portfolio to meet living expenses
Both reduce ability to take risk.
In my opinion, risk tolerance is average.
Equally, because bequest preferences are featured in the return calculation, they should certainly be concrete enough goals to affect risk tolerance.
Yet the guideline answer says, they can simply forget about the bequest if their above-av. risk tolerance leads to excessive losses!
