L3 mock sample exam CFA level III essay questions 2012

Describe one change in Alonso’s circumstances that has decreased his financial market risk in retirement and one change that has increased his financial market Alonso has a buy-and-hol

Trang 1

The Morning Session of the 2012 Level III CFA® Examination has 9 questions For grading purposes, the maximum point value for each question is equal to the number of minutes allocated to that question

1 Portfolio Management – Individual 27

2 Portfolio Management – Individual 9

3 Portfolio Management – Monitor/Rebalance/Execution 21

4 Portfolio Management – Individual/Behavioral 17

5 Portfolio Management – Economics 24

6 Portfolio Management – Institutional 34

7 Portfolio Management – Fixed Income 23

8 Portfolio Management – Derivatives 13

9 Portfolio Management – Derivatives 12

Total: 180

Trang 2

THIS PAGE INTENTIONALLY LEFT BLANK

ANY MARKS MADE ON THIS PAGE WILL

NOT BE GRADED

Trang 3

Questions 1 and 2 relate to Juan Pablo Alonso A total of 36 minutes is allocated to these

questions Candidates should answer these questions in the order presented

QUESTION 1 HAS FIVE PARTS (A, B, C, D, E) FOR A TOTAL OF 27 MINUTES

Juan Pablo Alonso, age 40, is the manager of a national, publicly-funded soccer team located in a country that uses the U.S dollar (USD) as its currency This country’s debt is rated AAA

Alonso has a one-year employment contract that has been renewed for several years He is

confident that he can maintain this job, or a similar managing position, until his planned

retirement at age 55 Alonso is divorced and the father of teenage children He wants to fund a dedicated trust to provide for his children’s needs until they reach age 25 He will need USD 250,000 within the next few months to fund the trust

Alonso’s income tax rate is 30% Other than a small cash reserve, he holds all of his investment assets in a tax-exempt account with a current value of USD 900,000 Contributions to this

account are made after tax Withdrawals are entirely tax-free, without penalty Alonso saves USD 25,000 of his after-tax income every year, and plans to continue doing so until retirement His next contribution will be made in one year As part of his normal expenses, Alonso annually provides approximately USD 30,000 of support to local youth sporting leagues

When Alonso retires in 15 years, he plans to purchase a 25-year annuity that pays USD 100,000 after tax annually He will need USD 1,600,000 at retirement to fund the annuity Alonso expects the annual payout to be sufficient to meet all his needs on an inflation-adjusted basis He does not plan to leave any estate at his death

A Calculate the required annual return that would enable Alonso to purchase the retirement

annuity at age 55 Show your calculations

Note: Assume all cash flows occur at the end of each period

(5 minutes)

B Discuss two reasons why Alonso’s ability to take risk could be considered above average

(4 minutes)

Five years have passed, and Alonso, age 45, signs a 10-year employment contract, which

includes a one-time signing bonus, with a corporate-owned professional soccer club His annual base salary with this club is higher than his previous salary and is indexed to inflation Because the club has had financial difficulties in the past, the owner agrees to guarantee Alonso’s salary over the life of the contract Alonso intends to keep his living expenses unchanged and increase his annual savings

Alonso still plans to retire at the end of the 10-year contract Given his improved financial

position, he now plans to depend on cash flow from his investment portfolio to meet retirement expenses rather than purchase the 25-year annuity

Trang 4

C i Describe one change in Alonso’s circumstances that has decreased his earnings

risk and one change that has increased his earnings risk

ii Describe one change in Alonso’s circumstances that has decreased his financial

market risk in retirement and one change that has increased his financial market

Alonso has a buy-and-hold portfolio of individual securities, including treasury bills,

asset-backed securities (ABS), government bonds, and equities His current portfolio allocation is shown in Exhibit 1

Exhibit 1 Alonso’s Current Portfolio Allocation

Weight

A-rated corporate amortizing ABS 10%

AAA-rated government bonds 10%

Small-cap domestic equities 25%

Large-cap international equities 50%

E Determine which one asset class in Alonso’s portfolio most closely resembles his current

human capital Justify your response with two reasons

ANSWER QUESTION 1-E IN THE TEMPLATE PROVIDED ON PAGE 9

(6 minutes)

Trang 5

Answer Question 1 on This Page

Template for Question 1-C

i Describe one change in Alonso’s circumstances that has:

Trang 6

Template for Question 1-E

Determine which one asset

class in Alonso’s portfolio most

closely resembles his current

Trang 7

Questions 1 and 2 relate to Juan Pablo Alonso A total of 36 minutes is allocated to these

questions Candidates should answer these questions in the order presented

QUESTION 2 HAS TWO PARTS (A, B) FOR A TOTAL OF 9 MINUTES

Juan Pablo Alonso is now age 54 and anticipating retirement Approximately 60% of his total investments are currently held in a tax-exempt account and 40% in a taxable account

Contributions into both accounts are made with after-tax income In the tax-exempt account, withdrawals are entirely tax-free and without penalty In the taxable account, Alonso now incurs

a 20% tax on both income and realized capital gains Realized losses can be used to offset

current or future income and capital gains

Alonso experienced substantial losses in both of his investment accounts over the past year He estimates that he will need to postpone retirement and questions whether his investments were structured optimally Alonso meets with his advisor to discuss the effects of the tax regime on his portfolios The advisor suggests that over the last year, both Alonso’s after-tax return and

investment risk would have been higher if a larger proportion of assets had been held in the taxable account

A Determine, based only on tax considerations, whether Alonso’s advisor is correct or

incorrect with respect to Alonso’s:

i after-tax return

ii investment risk

Justify each response with one reason

ANSWER QUESTION 2-A IN THE TEMPLATE PROVIDED ON PAGE 15

(6 minutes)

Alonso’s advisor proposes a 100,000 U.S dollar (USD) investment in a portfolio of paying equities in the taxable account All dividend income and realized capital gains would be taxed at 20% and reinvested The advisor suggests a strategy of realizing no more than half of the available capital gains annually He estimates the 3-year and 15-year accrual equivalent returns

dividend-on the proposed portfolio to be 5.8% and 6.3%, respectively

B Explain why the estimated accrual equivalent returns differ for the two time periods

Note: No calculations are required

(3 minutes)

NOT BE GRADED

Trang 8

Template for Question 2-A

Determine, based only on tax

considerations, whether

Alonso’s advisor is correct or

incorrect (circle one) with

Trang 9

NOT BE GRADED

Trang 10

QUESTION 3 HAS THREE PARTS (A, B, C) FOR A TOTAL OF 21 MINUTES

Wendy Kadar, CFA, manages an equity fund that invests globally Among the countries she invests in are Alphastan and Betania Both countries use the euro (EUR) as their currency

Information about each equity market is shown in Exhibit 1

Exhibit 1 Alphastan and Betania Equity Markets

Average daily volume 25 million shares 15 million shares

Latest 12-month market return 5.3% 15.1%

Bid

Dealer

Ask Price

(EUR) Size

Price (EUR) Size

Bid

Dealer

Ask Price

(EUR) Size

Price (EUR) Size

Trang 11

From the information provided in Exhibits 1, 2, and 3, Kadar concludes that Betania has a higher quality market

A Identify three market characteristics that support Kadar’s conclusion that Betania has a

higher quality market Justify each response with one reason

(9 minutes)

Kadar expects to receive a large inflow of cash into her fund from a new client When investing the new money, she intends to use algorithmic execution for the trades Global equity markets have been volatile and trending upwards and Kadar forecasts this will continue

B Determine which algorithmic participation strategy [volume-weighted average price

(VWAP), time-weighted average price (TWAP), or implementation shortfall] is most

appropriate for Kadar’s trades Justify your response with two reasons

ANSWER QUESTION 3-B IN THE TEMPLATE PROVIDED ON PAGE 24

(6 minutes)

Kadar’s firm offers clients the ability to reduce their risk exposure by investing in a mix of free securities and Kadar’s global equity fund Clients are able to select a rebalancing strategy that best suits their preferences The available rebalancing strategies are buy-and-hold, constant-mix, and constant-proportion portfolio insurance (CPPI)

risk-A new client, Guy Marsden, agrees with Kadar’s forecast for the global equity markets He invests EUR 250,000 from his tax-exempt account in a mix of risk-free securities and Kadar’s global equity fund He does not want the value of his portfolio to fall below EUR 175,000, but is willing to accept additional risk as his portfolio value increases

C Determine which of the available rebalancing strategies (buy-and-hold, constant-mix, or

CPPI) is most appropriate for Marsden Justify your response with two reasons

ANSWER QUESTION 3-C IN THE TEMPLATE PROVIDED ON PAGE 25

(6 minutes)

NOT BE GRADED

Trang 12

Identify three market

characteristics that support

Kadar’s conclusion that Betania

has a higher quality market

Characteristic 1:

Trang 13

Template for Question 3-B

Determine which algorithmic

participation strategy

[volume-weighted average

price (VWAP),

time-weighted average price

(TWAP), or implementation

shortfall] is most appropriate

for Kadar’s trades

Trang 14

Template for Question 3-C

Determine which of the

Trang 15

NOT BE GRADED

Trang 16

QUESTION 4 HAS THREE PARTS (A, B, C) FOR A TOTAL OF 17 MINUTES

An advisor for Alesi Capital Management is working with a new client, Melanie Stoffer Prior to meeting with her, the advisor asks Stoffer a series of diagnostic questions to determine whether she may have any of the following investment behavioral biases:

1 Would a prior investment decision that resulted in a loss stop you from

making a similar decision, even if the new investment appears to be the best alternative?

2 How frequently do you review your investment portfolio?

3 Would you sell a recent equity investment following a management

announcement of a significant decline in the expected growth rate of revenue?

A Identify the behavioral bias that each diagnostic question in Exhibit 1 is most likely to

reveal

Note: Each diagnostic question is designed to reveal a different bias

(6 minutes)

At their initial meeting, the advisor learns that Stoffer is a mid-level manager at a bank and has built an investment portfolio by accumulating savings, stock options, and restricted stock from her company Stoffer believes she currently has a sufficient level of wealth to achieve her

primary goal of maintaining her current lifestyle until her death

In discussing her investment philosophy, Stoffer explains that she likes to keep separate

Trang 17

personally contributing to the performance of her bank’s stock price Combined, these factors have led Stoffer to keep a large percentage of her total portfolio in her bank’s stock and options The advisor tells Stoffer that this concentrated holding represents significant risk in achieving her primary goal Stoffer refuses to consider the suggestion that she partially hedge the risk of her bank’s stock

After evaluating Stoffer’s investment philosophy, the advisor is concerned that Stoffer is

exhibiting some of the following cognitive biases:

C Recommend whether the advisor should primarily attempt to moderate Stoffer’s biases,

or adapt his recommendations to better reflect Stoffer’s biases Justify your response

with two reasons

(5 minutes)

NOT BE GRADED

Trang 18

Note: Each diagnostic question is designed to reveal a different bias

1 Would a prior investment decision that resulted

in a loss stop you from making a similar

decision, even if the new investment appears to

be the best alternative?

anchoring hindsight regret aversion representativeness status quo

2 How frequently do you review your investment

portfolio?

anchoring hindsight regret aversion representativeness status quo

3 Would you sell a recent equity investment

following a management announcement of a

significant decline in the expected growth rate

of revenue?

anchoring hindsight regret aversion representativeness

Trang 19

Template for Question 4-B

Identify two cognitive biases

exhibited by Stoffer

(circle one)

First cognitive bias:

Trang 20

QUESTION 5 HAS FOUR PARTS (A, B, C, D) FOR A TOTAL OF 24 MINUTES

Emergistan is a developing country founded 50 years ago that has exhibited significant economic growth In its first 38 years, Emergistan had low inflation At that time, the country established a central bank with a primary mandate to encourage economic growth The resulting monetary policy has led to 12 years of high and volatile inflation Its equity market is well-established and liquid By contrast, secondary market transactions for bonds are small and infrequent

Joe Cooke is an economist for a pension advisory firm He is analyzing Emergistan to identify investment opportunities Cooke performs several analyses of Emergistan’s economy Exhibit 1 contains a description of five of his analyses and selected comments from his report

Exhibit 1 Economic Analyses of Emergistan Analysis Description of Each Analysis and Selected Comments

3

Cooke performs a regression analysis on today’s developed economies when they were at a similar stage of development as Emergistan is now He states: “Based on this analysis, Emergistan is likely to achieve average real GDP growth of 5% for the next 10 years.”

4

Cooke constructs a daily series of bond prices for Emergistan’s bond market He interpolates prices between actual transaction data points He states: “Based on this analysis, Emergistan’s bond market has historically provided excellent returns for the level of volatility experienced.”

5

Cooke examines Emergistan’s balance of payments and notes a small current account deficit balanced by capital inflows He states: “I expect this to continue and the composition of the balance of payments to remain unchanged.”

Định dạng
Số trang	36
Dung lượng	154,27 KB