Reading 13 Managing Institutional Investor Portfolios FinQuiz.com FinQuiz.com CFA Level III Item-set - Solution Study Session June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 13 Managing Institutional Investor Portfolios FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 13: Managing Institutional Investor Portfolios Question ID: 12425 Correct Answer: C Pinnacle Pharmaceuticals has a below average risk tolerance because: The plan is underfunded by $13 million The company has high leverage and low profitability compared to the industry average The average age of the workforce is high The active to retired lives ratio is low Question ID: 12426 Correct Answer: B The minimum return objective equals the discount rate used to determine the present value of the pension liabilities This, for PP, is 7.5% PP plans to decrease the surplus return by 50% (this return is most likely to generate pension income or to minimize future contributions to the plan) The previous year’s surplus return percentage is 10.57-6.89= 3.68% Reducing it by 50% and adding it to the discount rate we have a total return objective of: 7.5+1.84=9.34% Question ID: 12427 Correct Answer: A The return objective of a foundation equals the spending rate plus the inflation rate plus investment management expenses For PLF, this equals: 4.75+0.67+2.5=7.92% Overhead associated with grant making—for example, the salaries of program officers and other executives—counts toward the payout requirement (spending rate), so there is no need to add it further (this will result in double counting) Question ID: 12428 Correct Answer: A Statement is correct Carry-forwards and carry-backs allow a foundation to make a large grant in a single year without compromising the long-run soundness of its investment program Hence, they make smoothing rules workable Statement is incorrect Income that is not related to a foundation’s charitable purposes is classified as unrelated business income and is subject to regular corporate taxes Hence, income from the grocery store should be taxed at the corporate tax rate However, income from real estate is also taxable as unrelated business income if the property is debt financed, but only in proportion to the fraction of the property’s cost financed with debt FinQuiz.com © 2018 - All rights reserved Reading 13 Managing Institutional Investor Portfolios FinQuiz.com Question ID: 12429 Correct Answer: A The current leverage–adjusted duration gap equals: 7.8–(243,999,452/368,460,157) 3.5 = 5.48 To immunize the balance sheet, the LADG should be reduced to zero This can be done by decreasing the duration of assets to 2.3177: 2.3177 – (243,999,452/368,460,157) 3.5 = When the LADG equals zero, the market value of net worth will be unaffected Question ID: 12430 Correct Answer: C Since the bank’s loan portfolio has low credit risk, the bank can take more credit risk with its securities portfolio However, since the bank’s liabilities have a short duration (3.5 years), the securities portfolio will have a short time horizon FinQuiz.com © 2018 - All rights reserved .. .Reading 13 Managing Institutional Investor Portfolios FinQuiz. com FinQuiz Level III 20 18 – Item- sets Solution Reading 13: Managing Institutional Investor Portfolios Question ID: 124 25 Correct... 7.8– (2 43, 999,4 52 /36 8,460,157) 3. 5 = 5.48 To immunize the balance sheet, the LADG should be reduced to zero This can be done by decreasing the duration of assets to 2 .31 77: 2 .31 77 – (2 43, 999,4 52 /36 8,460,157)... property’s cost financed with debt FinQuiz. com © 20 18 - All rights reserved Reading 13 Managing Institutional Investor Portfolios FinQuiz. com Question ID: 124 29 Correct Answer: A The current leverage–adjusted