Board logo

标题: Portfolio Management and Wealth Planning【Reading 14】 [打印本页]
作者: mouse123    时间: 2012-3-23 13:36     标题: [2012 L3] Portfolio Management and Wealth Planning【Session 4 - Reading 14】

Which of the following statements regarding the Human Capital equation below is least accurate?

A)
The expectancy of receiving a bonus is incorporated into the numerator.
B)
The amount of human capital is based on an investor’s current annual inflows.
C)
Volatility is included in the denominator.


The Human Capital equation is:

Thus the amount of human capital (HCt) is based on future income expectations and not just current income.
作者: mouse123    时间: 2012-3-23 13:36

Social security and other employment-related pension payments are considered:
A)
human capital because they are derived directly from the investor’s labor.
B)
financial capital because they are derived from an accumulation of the investor’s past labor.
C)
neither human capital nor financial capital because they are received after retirement.


Since social security and other employment-related pension payments are derived directly from the investor’s labor, they are considered human capital. Thus, an individual’s human capital can have a positive value at retirement.
作者: mouse123    时间: 2012-3-23 13:36

A measure of an individual’s lifetime earning capacity is best defined as which of the following?
A)
Financial capital.
B)
Total wealth.
C)
Human capital.


The definition of human capital is a measure of an individual’s lifetime earning capacity. It is the present value of the individual’s expected income from salary, wages, bonuses, etc, as well as employment-related retirement pension income. Human and financial capital added together are called total wealth.
作者: mouse123    时间: 2012-3-23 13:37

Which of the following is considered human capital?
A)
Social Security payments.
B)
Investment gains.
C)
Inheritance.


Human capital is a measure of the individual’s lifetime earning capacity. It is the present value of the individual’s expected income from salary, wages, and bonuses, as well as employment-related retirement pension income. Since social security is derived directly from the investor’s labor it is considered human capital. Both investment gains and inheritance are considered financial capital defined as the total value of financial assets owned.
作者: mouse123    时间: 2012-3-23 13:37

In the following graph which of the following statements is most accurate regarding what the vertical axis represents besides dollars?

A)
The point in time when the individual is born and their potential human capital is the greatest while their financial capital is the smallest.
B)
The combined amount of human and financial capital called total wealth.
C)
The point in time when the individual finishes their educational training and starts working.


The vertical axis denotes the point in time when the investor finishes preparing for their career by completing their education or training and starts generating income. It also shows the amounts of human and financial capital separately.
作者: mouse123    时间: 2012-3-23 13:37

A financial asset that is specifically designed to address the problem of outliving one’s assets is called:
A)
a guaranteed investment contract.
B)
a life annuity.
C)
life insurance.


Life annuities are designed to pay income to the owner as long as the owner is alive. Therefore, unless the insurance company issuing the annuity fails and is unable to make the payments as promised, the annuitant cannot outlive their income.
作者: mouse123    时间: 2012-3-23 13:37

Life insurance is most commonly used to hedge against:
A)
mortality risk.
B)
earnings risk.
C)
longevity risk.


Life insurance is the most commonly employed hedge against mortality risk.
作者: mouse123    时间: 2012-3-23 13:38

Which of the following statements regarding human capital is most accurate?
A)
For a young investor their human capital is equivalent to a large holding of an illiquid asset.
B)
A person’s human capital is highest when they are born and trends downward after that.
C)
A person’s human capital is zero at retirement.


Young investors are at the peak of their human capital which is defined as the present value of all expected future income derived from their labor. Human capital is illiquid because at the beginning of their careers young investors cannot cash in their future earnings or pension accounts which they have not earned yet. A person’s human capital is highest when they have finished their training or education for their career and it steadily trends downward from there. Social Security and pension payments are derived from labor thus they are considered part of human capital so at retirement if a person receives social security or a pension from a company their human capital at retirement would not be zero.
作者: mouse123    时间: 2012-3-23 13:38

With regard to an individual’s total wealth, which statement is most accurate? If an individual’s human capital is fixed income-like their financial portfolio:
A)
may be weighted more heavily towards risky assets.
B)
should be weighted with similar non-risky fixed income assets.
C)
should be weighted in no specific way that is related to their human capital.


An individual’s financial portfolio can be weighted more heavily towards risky assets if their human capital is fixed income-like. If an individual has a secure job with an annual salary, they are able to accept more risk in their financial portfolio since their human capital has very low risk.
作者: mouse123    时间: 2012-3-23 13:38

A salesman is paid by his employer by the commission of his sales only. He has noticed that in the last couple years, the amount of his sales has been closely correlated with the U.S. market. The salesman should:
A)
weight his financial portfolio more so in risky assets.
B)
weight his financial portfolio more so in low risk, fixed income assets.
C)
have no preference for how his financial portfolio is weighted.


If an individual’s human capital is equity-like (tied directly or indirectly to equity markets), he or she may want to hold a lower risk, fixed-income weighted portfolio to compensate for the riskiness of their human capital.
作者: mouse123    时间: 2012-3-23 13:39

In general, an individual facing retirement has a greater amount of:
A)
financial capital than human capital.
B)
human capital than financial capital.
C)
both human and financial capital than when they first started working.


An individual facing retirement has a decreased amount of human capital, but most likely has accumulated a significant amount of financial capital. On the other hand, a young individual beginning their career most likely has minimal financial capital but a great amount of human capital.
作者: mouse123    时间: 2012-3-23 13:39

Financial wealth and the demand for life insurance have:
A)
a negative relationship.
B)
a positive relationship.
C)
either a positive or a negative relationship depending upon the individual’s level of wealth.


Financial wealth and the demand for life insurance have a negative relationship which means if a person has a lot of financial wealth their need for life insurance is small and visa versa.
作者: mouse123    时间: 2012-3-23 13:39

Which of the following statements regarding human capital volatility is most accurate? When human-capital is bond-like, an investor’s financial assets should be:
A)
allocated towards low risk assets and their demand for life insurance will increase.
B)
more aggressively allocated and their demand for life insurance will decrease.
C)
more aggressively allocated and their demand for life insurance will increase.


When human-capital is bond-like, an investor’s financial assets can be more aggressively allocated and the demand for life insurance will increase. On the other hand, when human-capital is equity-like, an investor’s financial assets should be allocated towards low risk assets and their demand for life insurance will decrease.
作者: mouse123    时间: 2012-3-23 13:40

Factors that are positively related to the demand for life insurance include:
A)
human capital volatility and risk aversion.
B)
financial wealth and probability of death.
C)
risk aversion and probability of death.


As either risk aversion or probability of death increase, so does the demand for life insurance. Human capital volatility and financial wealth are both negatively correlated with the demand for life insurance.
作者: mouse123    时间: 2012-3-23 13:40

The volatility of human capital and the demand for life insurance are:
A)
negatively correlated.
B)
positively correlated.
C)
uncorrelated.


Human capital volatility and demand for life insurance are negatively correlated. Life insurance acts as a substitute for human capital, so its face value depends on the perceived value of the human capital it replaces. If the human capital has high volatility (equity-like), a higher discount rate is used to estimate its present value. Thus, human capital with high volatility has a smaller present value than human capital with low volatility.
作者: mouse123    时间: 2012-3-23 13:40

Which of the following is NOT an example of a cause of savings risk?
A)
The financial markets drop significantly wiping out a significant portion of a person’s wealth.
B)
A person expects to average a 12% rate of return in their 401k retirement account.
C)
A person fails to determine how much they need to save given an assumed rate of return and time frame.


A drop in a person’s financial wealth due to a drop in the equity markets is an example of financial market risk and not savings risk. Savings risk is when a person doesn’t save enough for retirement and spends more than they should during the accumulation phase. Savings risk usually arises from a lack of long-term planning and is the result of consuming too much current income rather than saving it. Relying too much on growth in a 401k to make up for a lack of saving is an example of savings risk.
作者: mouse123    时间: 2012-3-23 13:40

The three primary risks that could jeopardize the desired lifestyle and/or bequest of an individual include which of the following?
A)
Longevity risk, savings risk, and inflation risk.
B)
Savings risk, financial market risk, maturity risk.
C)
Financial market risk, longevity risk, and savings risk.


The three primary risks that could jeopardize an individual’s retirement plans are: financial market risk, longevity risk, and savings risk. Financial market risk refers to the effects of volatility in the financial markets that could result in significant drops in portfolio values. Longevity risk refers to the chance of out-living one’s financial assets. Savings risk refers to the chance of an individual spending more than they should so that they save less than needed during the accumulation stage. This is usually the result of poor long-term planning. Inflation risk is included in savings risk.
作者: mouse123    时间: 2012-3-23 13:41

Which of the following is least likely to jeopardize an individual’s desired lifestyle and/or bequest?
A)
Savings risk.
B)
Longevity risk.
C)
Liquidity risk.


The three primary risks that could jeopardize an individual’s desired lifestyle and/or bequest are: (1) financial market risk, (2) longevity risk, and (3) savings risk. Liquidity risk is not a factor in determining an individual’s desired lifestyle or bequest.
作者: mouse123    时间: 2012-3-23 13:41

Which of the following is least likely a solution to longevity risk?
A)
SMarT programs.
B)
Social Security.
C)
Pension plans.


SMarT (Save More Tomorrow) programs are considered solutions to savings risk (not longevity risk) because in the SMarT programs individuals pledge to save a portion of future raises.
作者: mouse123    时间: 2012-3-23 13:42

An advantage of a fixed annuity over a variable annuity is:
A)
the fixed annuity’s income stream is stable throughout the life of the annuity purchaser.
B)
the fixed annuity’s income offers a hedge against inflation during periods of stagflation.
C)
fixed annuities are easier to terminate than variable annuities.


One advantage of a fixed annuity over the variable annuity is the stable income stream offered by the fixed annuity. Since the variable annuity’s income is tied to the return of underlying assets, which are usually equity-like the annuity’s income also fluctuates as the return on the underlying assets fluctuates. A disadvantage of fixed annuities is since their income stream is fixed they lose real earning power over time due to inflation. Once the fixed or variable contracts are annuitized meaning the investor decides to have the payments sent to them for life, both fixed and variable annuities are equally difficult to terminate.
作者: andytrader    时间: 2012-3-23 13:43

Which of the following is NOT an example of a drawback to fixed annuities?
A)
The payments in some periods may fail to meet the investor’s needs or may be zero if the funds lose money.
B)
The real values of the cash flows fall over time.
C)
The investor could become locked into a low interest rate.


A fixed annuity may fail to meet the investor’s needs, but the payment will never be zero. This is an example of a drawback for a variable annuity. The real values of cash flows from a fixed annuity do fall over time. An investor could get locked into a low lifetime return if interest rates are historically low when the fixed annuity is purchased.
作者: andytrader    时间: 2012-3-23 13:44

Which of the following is NOT a drawback to a fixed annuity?
A)
The cash flows could be zero if the underlying asset return is negative for the investment period.
B)
The investor usually cannot void the contract.
C)
The real value of the cash flows may decline over time.

Cash flows received on a variable pay annuity (not fixed annuity) are based on the performance of an underlying fund or set of funds selected by the investor and thus the cash flows are variable and could be zero if the performance of the underlying funds is negative for the investment period. Drawbacks to fixed annuities are:
作者: andytrader    时间: 2012-3-23 13:44

An advantage of a variable annuity over a fixed annuity is the:
A)
variable annuity offers the opportunity to stay even with the rate of inflation.
B)
variable annuity offers stable income over the life of the purchaser of the annuity.
C)
purchaser of the variable annuity will never out live the income stream from the annuity.


Since variable annuities are invested in mutual fund like sub-accounts that can be directly invested in equities they offer a return that can meet or exceed the inflation rate. For example if the return in the equity-like subaccounts is high enough the annuity payments will increase instead of stay the same as would be the case with a fixed annuity. Both fixed and variable annuities offer income streams for the remaining life of the annuitant. The variable annuity’s cash flows are not stable and will fluctuate according the investment returns in the sub-accounts and will not keep pace with inflation if the returns are less than the inflation rate.
作者: andytrader    时间: 2012-3-23 13:44

Which of the following statements is least accurate regarding human capital?
A)
When possible, one should maximize the correlation of human and financial capital.
B)
If an investor’s human capital is equity-like they should allocate a greater amount of their financial capital to fixed income investments.
C)
The demand for life insurance will increase if human capital is bond-like.


One should always offset the risk of their human capital with the risk of their financial capital and minimize the correlation between the two. If an investor’s human capital is equity-like they should reduce the correlation with their financial capital by allocating a greater amount of their financial capital to fixed income investments and visa versa. The demand for life insurance will increase if human capital is bond-like and decrease if human capital is equity-like.
作者: andytrader    时间: 2012-3-23 13:45

Which of the following has a positive relationship with the demand for life insurance?
A)
The level of financial wealth.
B)
The volatility of the investor’s human capital.
C)
An investor’s aversion to risk.


An investor’s aversion to risk and the demand for life insurance have a positive relationship – the greater their level of risk aversion the more life insurance they demand. The level of financial wealth and demand for life insurance have a negative relationship as does the volatility of the investor’s human capital and demand for life insurance.
作者: andytrader    时间: 2012-3-23 13:46

Karl and Karen Arlt are both thirty-five years old and have two children, Noah and Jamie ages 5 and 7, respectively. Karen is a tenured professor at the local state college and Karl is an engineer working at an electrical utility company. Together the Arlts have a combined income of $150,000 per year. The Arlts are meeting with a financial consultant Katherine Ryals, CFA, for the first time who was recommended to them by Karl’s brother who is also training with Ryals to become a financial consultant himself. The four of them are meeting around the Arlt’s dining room table where Ryals is gathering information to determine an investment policy statement for the Arlts who state they want to retire when they are 60 years old. One of the questions asks the Arlts about their general feelings of risk and Karen blurts out “the recent turmoil in the financial markets due to the mortgage crisis makes me sick to my stomach!” Up to this point in their lives the Arlt’s have not amassed a significant amount of financial wealth nor have they given much thought about leaving a bequest.

It is now two weeks later and the Arlt’s are meeting with Ryals and Karl’s brother again. Ryals suggests that they purchase a million dollar variable universal life (VUL) policy whereby their premium payments will go into mutual fund type investments resulting in equity-like returns. She states “because your incomes are stable your human capital is fixed income-like thus to be able to replace your steady income your demand for life insurance is high.” She goes on to state “since your incomes are stable your assets should be invested in more equity-like investments like the ones found in the VUL thus it is the perfect investment vehicle for you.”

Ryal’s analysis reveals that to maintain their current $150,000 per year income when they retire in 25 years at age 60 assuming a 3% increase in income per year would require an income stream of about $314,000 per year. This represents a portfolio worth approximately $3.3 million at retirement, assumes they live another 20 years during retirement, achieve a 7% rate of return on their portfolio during retirement, and there is nothing left of the portfolio at the end of 20 years. Ryals goes on to further explain that to amass the equivalent of $3.3 million 25 years from now given they have no retirement savings now and assuming a 10% yearly rate of return would require them to save roughly $2,500 per month.

After careful consideration of their insurance needs the Arlts decide to purchase term insurance on both of them and invest a portion of their after tax income into a deferred variable annuity. Upon retirement the Arlts are expecting to choose the largest cash outflow possible from the annuity utilizing the “joint and survivor” payout option. Based on the information regarding Karl and Karen’s incomes the discount rate used to determine their human capital would be:
A)
high because their incomes would have a low variability over time.
B)
low representing lower risk due to their stable incomes.
C)
indeterminate since the discount rate is based on factors other than the variability in their incomes.



The Human Capital equation is:
Since the Arlts both have stable incomes with Karen being a tenured college professor and Karl working in the utility industry, neither of which are closely tied to the economy, the risk of their incomes is low thus the risk premium would also be low resulting in a lower overall discount rate and higher human capital. (Study Session 4, LOS 14.g)

Given the Arlt’s personal information gathered from the questionnaire, which of the following statements regarding the correct asset allocation of their portfolio is most accurate?
A)
Their portfolio should be allocated more towards risky assets since their human capital is bond-like.
B)
Since they are in the early part of the accumulation phase of their careers they can tolerate more risk in their portfolio and thus should be invested more heavily in equities.
C)
Their portfolio should be allocated more towards less risky assets because they have a below average willingness to accept risk thus their overall risk level is below average.


Even though the Arlt’s human capital is bond-like indicating they should invest their portfolio more towards equities, Karen’s statement about the mortgage crisis indicates a below average willingness to take risk, thus their overall level of risk tolerance is below average. Knowing the size of their portfolio is relatively small the advisor should defer to the client’s willingness to take risk if willingness is below ability and the portfolio is not appreciably large. (Study Session 4, LOS 14.g)
The statements made by the financial consultant regarding the demand for life insurance and the asset allocation of the policy premiums are:
A)
correct for only one of the statements.
B)
incorrect for both statements.
C)
correct for both statements.


The statements made by the financial consultant are correct for both statements. Since the incomes of both Karen and Karl are stable their human capital is bond-like thus to replace this income their demand for life insurance is high and their assets should be allocated more aggressively in equity type investments. (Study Session 4, LOS 14.g)
A disadvantage of the Arlt’s choice of the annuity is:
A)
the annuity will lose real earning power in periods of high inflation.
B)
the annuity is less tax efficient than utilizing a 401k or 403b account.
C)
if they both die before their predicted life expectancy the remainder of their assets will go to the insurance company instead of their heirs.


One disadvantage of an annuity is that a person may die sooner than their predicted life expectancy in which case if they also choose the largest payout this means they aren’t leaving anything to beneficiaries. In that case the rest of their assets in the annuity would go to the insurance company instead of being passed on as a bequest to their heirs. Real earning power is only lost in a fixed annuity in which the income stream is fixed and thus would not keep pace with inflation. The Arlts purchased a variable annuity which should keep pace with inflation assuming the investment returns are at least as high as the rate of inflation. A deferred annuity is not necessarily less tax efficient than a 401k or 403b account because in all these accounts income and capital gains are tax deferred so they are equivalent from that tax standpoint. One tax difference between the 401k / 403b accounts and annuities is the 401k / 403b accounts are funded with pretax dollars which lowers the investor’s taxable income by the amount contributed. In contrast the annuity is funded with after tax dollars thus the investor’s taxable income is not lowered at the time of the contribution as occurs with the 401k / 403b contribution but they owe less income taxes when they withdraw the money during retirement. The goal of the Arlts was to mitigate longevity risk which can only be done with an annuity which offers lifetime payments which is not an option with a 401k / 403b. Although taxes should always be considered they are not specifically mentioned as an issue in this case. (Study Session 4, LOS 14.g)
The planning Ryals is helping the Arlts do regarding showing them how much they would have to save today to meet their retirement needs is helping to mitigate what type of risk?
A)
Savings risk.
B)
Longevity risk.
C)
Earnings risk.


Savings risk is the risk of spending too much now and not saving enough for later on in life. This risk is usually caused by a lack of proper planning which Ryals is helping the Arlts determine how much they would have to save given their various constraints of when they want to retire, how long they will live, expected returns before and during retirement, and whether or not to assume there will be anything left over of the portfolio after they die.

Note: CFA Institute almost always assumes the asset base in the portfolio will not be touched in retirement and that the investor will live off the total return of the portfolio instead of a combination of the total return and principal as in this question. (Study Session 4, LOS 14.e)
What type of risk will the purchase of the deferred variable annuity mitigate against?
A)
Savings risk.
B)
Financial market risk.
C)
Longevity risk.


The deferred variable annuity will mitigate against longevity risk which is the risk of living too long by paying out an income stream for the remaining life of the purchaser of the annuity. Savings risk relates to consuming too much now and not saving enough for retirement. Purchasing an annuity may help to decrease savings risk because this forces the person to save a portion of their income but the main purpose of an annuity is to provide an income stream for life. Financial market risk is the risk of a person’s wealth decreasing due to a downturn in the financial markets. A remedy for financial risk is to diversify your assets. A variable annuity can hedge against financial risk because they offer the ability to diversify among many different types of equity and fixed income investments. Thus, even though a deferred variable annuity can help to reduce savings risk and financial market risk through diversification options, the main purpose of an annuity is to provide an income stream for life which reduces longevity risk. (Study Session 4, LOS 14.e)



欢迎光临 CFA论坛 (http://forum.theanalystspace.com/) Powered by Discuz! 7.2