Reading Managing Individual Investor Portfolios FinQuiz.com FinQuiz.com CFA Level III Item-set - Question 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 Managing Individual Investor Portfolios FinQuiz.com FinQuiz Item-set ID: 12492 Questions 1(12493) through 6(12498) relate to Reading Mark and Lisa Case Scenario Mark and Lisa Bowe live in Bordeaux, France They own a small two bedroom house on which they owe no mortgage payments Mark Bowe, aged 39, works as an inspector at Bistillo, a maker of herbal remedies, and earns an annual salary of €75,000 before taxes Lisa Bowe, aged 38, is a homemaker The couple has no children but plans to start a family soon Lisa Bowe has recently inherited €1.5 million (after wealth-transfer taxes) from her father’s estate The Bowe’s living expenses amount to €100,000 annually Any rises in future salary are expected to be offset by rises in living expenses In addition to the inheritance amount, Mark Bowe’s current portfolio comprises of an €80,000 mutual fund; €65,000 cash savings; and a €50,000 equity fund The Bowes plan to make two charitable donations, one amounting to €25,000 which they plan to make in three months time, and one to be made upon retirement They plan to make the two donations by withdrawing the necessary funds from their portfolio During a meeting with their financial adviser, Antoine Desmarais, they discuss the following issues: They would like to retire in 26 years time and, upon retirement, would like their portfolio to adequately meet their retirement living expenses and the charitable donation (to be made upon retirement) Mark likes to carefully evaluate investments and take his time when implementing decisions He stresses on analysis and thorough research He tells his adviser, “I like to rationally think out an investment and prefer making investment decisions which have economic sense Investment discipline is the key to my portfolio decisions.” Lisa Bowe, on the other hand, tells Desmarais, “My parents were heavy risk takers and had, as a result, suffered from considerable portfolio losses on a regular basis As a consequence, I have observed that I prefer minimizing our portfolio volatility as much as possible I not want to risk our retirement savings by riding on the same roller coaster as my parents had.” Their portfolio was poorly managed by their previous financial adviser and had generated substantial loss They would like to minimize the riskiness of their portfolio as much as possible Their post-retirement medical expenses will be covered by a medical insurance program available for Bistillo employees and their spouses Mark Bowe pays for the medical expenses of his retired father, who suffers from a terminally-ill disease, from his salary His medical expenses are included in their annual living expenses Upon the conclusion of their discussion, Desmarais determines that the firm will need their portfolio to grow to €3 million at the time of retirement in order to adequately fund their retirement living expenses and charitable donation The applicable tax rate is 35% and is FinQuiz.com © 2018 - All rights reserved Reading Managing Individual Investor Portfolios FinQuiz.com applicable to capital gains, salary, and investment income Additionally, Desmarais has determined that the shortfall risk (total expected return minus two standard deviations) for the Bowe’s portfolio should not fall lower than – 12% Desmarais has determined four asset allocation alternatives for the Bowes’ portfolio Exhibit Alternative Asset Allocations Asset Allocation Domestic large-cap stocks Domestic small-cap stocks Foreign stocks AA rated intermediate term corporate bonds Treasury Bonds Cash and cash equivalents Total Expected annual return (nominal) Annual Standard Deviation A (%) 12 55 20 10 100 4.9 6.5 Portfolio B (%) C (%) 25 40 25 15 10 40 25 10 100 100 5.1 8.7 7.2 12.6 D (%) 30 20 20 30 0 100 8.9 16.7 FinQuiz Question ID: 12493 Which of the following personality types most likely typify Mark Bowe? A Cautious B Methodical C Individualist FinQuiz Question ID: 12494 Which of the following personality types most likely typify Lisa Bowe? A Cautious B Methodical C Spontaneous FinQuiz Question ID: 12495 The after-tax nominal return required on the Bowes’ portfolio is closest to: A 1.1% B 3.4% C 4.7% FinQuiz.com © 2018 - All rights reserved Reading Managing Individual Investor Portfolios FinQuiz.com FinQuiz Question ID: 12496 Which of the following factors will most likely decrease the Bowes’ ability to tolerate risk? A The death of Mike Bowe’s father B Lisa Bowe becomes employed C The birth of a child FinQuiz Question ID: 12497 The time horizon for the Bowe couple most likely consists of: A stages B stages C stages FinQuiz Question ID: 12498 Which of the following asset allocations is most appropriate for the Bowes’ portfolio? A A B B C C FinQuiz.com © 2018 - All rights reserved Reading Managing Individual Investor Portfolios FinQuiz.com FinQuiz Item-set ID: 5369 Questions 7(5370) through 12(5375) relate to Reading Mark and Lisa Case Scenario William James, 32, is one of the top pop musicians in his country He has sold over million records and is still witnessing surging popularity James has recently married his girl friend Diana Jones, who is 28 years old and is also a lead singer in an underground band James and Jones have decided not to have kids for the next five years, as James would like to focus on taking his musical career international James’ father works at a local retail store and earns enough income to cover his and James mother’s living expenses James and Jones are meeting with their financial advisor Richard Mary, CFA, to discuss different investment opportunities James states that their annual living expenses stand at $500,000 and combined with Jones’ savings, they have a portfolio worth of $4,500,000 This year, he expects to earn $350,000 aftertax through numerous concerts and endorsements Both James and Jones are taxed at 30% and Mary is seeking to deploy strategies to reduce the tax impact on their portfolio Inflation is expected to remain stable at 5% for the foreseeable future FinQuiz Question ID: 5370 The required before-tax nominal return for James and Jones is closest to: A 10% B 12.14% C 8.50% FinQuiz Question ID: 5371 James ability to take risk is most likely categorized as: A above-average B below-average C average FinQuiz Question ID: 5372 Which of the following most accurately explains the portfolio’s time horizon? A Single-stage long-term B Two-stage long-term C Two-stage intermediate-term FinQuiz.com © 2018 - All rights reserved Reading Managing Individual Investor Portfolios FinQuiz.com FinQuiz Question ID: 5373 10 James liquidity needs are most likely to be: A $375,000 B $214,285 C $150,000 FinQuiz Question ID: 5374 11 The portfolio’s tax constraint is most likely: A moderate B significant C insignificant FinQuiz Question ID: 5375 12 Assuming the tax rate of 30% applies only to withdrawals, the required before-tax nominal return for James and Jones will be closest to: A 10.00% B 12.14% C 8.50% FinQuiz.com © 2018 - All rights reserved ... Standard Deviation A (%) 12 55 20 10 100 4.9 6.5 Portfolio B (%) C (%) 25 40 25 15 10 40 25 10 100 100 5.1 8. 7 7 .2 12. 6 D (%) 30 20 20 30 0 100 8. 9 16.7 FinQuiz Question ID: 124 93 Which of the following... A B B C C FinQuiz. com © 20 18 - All rights reserved Reading Managing Individual Investor Portfolios FinQuiz. com FinQuiz Item- set ID: 536 9 Questions 7( 537 0) through 12( 537 5) relate to Reading Mark.. .Reading Managing Individual Investor Portfolios FinQuiz. com FinQuiz Item- set ID: 124 92 Questions 1( 124 93) through 6( 124 98) relate to Reading Mark and Lisa Case Scenario