Reading 11 Concentrated Single Asset Positions 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 11 Concentrated Single Asset Positions FinQuiz.com FinQuiz Item-set ID: 19274 Questions (19275 ) through (19280 ) relate to Reading 11 Joyce Carlin Case Scenario Joyce Carlin is a wealth advisor at Summit Associates, a U.S based asset advisory firm Carlin advises high net-worth clients whose accounts are concentrated by either a single-stock position or investment real estate During her annual round of meetings with clients, Carlin observes a collective need for the diversification of concentration risk Carlin jots down notes with respect to four of her clients and their accounts Rob Martin Martin, aged 60, is the retired chief operating officer (COO) at DA Solutions Martin holds $20 million worth of DA’s stock which constitutes 70% of his investment portfolio Also comprising his portfolio is an equal allocation to the three categories; cash/Treasuries, commodities, and equities Carlin employs goal-based planning for managing Martin’s portfolio Furthermore, • Martin resides in a $2 million home with no outstanding mortgage balance • Earlier this year Martin had received an offer to purchase his holding at the then market price of $55 per share However, Martin refused to sell his stock for less than $60/share stating, “The stock holds significant value to me I have worked hard to bring the company to where it stands today and refuse to sell the stock at a price which disregards my efforts.” • DA Solutions has not met the past two years’ performance targets Gus Chappell Chappell owns a vacant warehouse located within his factory premises He is seeking to sell the property to pay off a $25 million loan due in three months’ time Carlin summarizes details on alternative strategies which may be used to generate the necessary proceeds (Exhibit 1) The warehouse is valued at $26 million with a zero cost basis Last year Chappell had fully utilized $6 million of unused capital loss carry forwards The applicable tax rate is 30% Exhibit Alternative Strategies for Chappell’s Investment Real Estate Strategy A B C Type Refinancing Refinancing Sale and leaseback LTV 68% 75% N/A Recourse Yes No N/A Lease term N/A N/A 15 years Leila Ali • Ali is a 65-year old retired executive who is in excellent health FinQuiz.com © 2018 - All rights reserved Reading 11 • • • • Concentrated Single Asset Positions FinQuiz.com She holds a concentrated position in her former employer’s stock and heavily depends on the dividend yield to cover retirement living expenses She would like to purchase a $2 million boat in three months’ time as well as diversify her portfolio She would like discretion in managing her portfolio Any diversification strategy must allow her to: o participate in the stock’s upside price potential, o provide protection against downside risk and o minimize taxes Based on the information gathered on Ali, Carlin devises four potential diversification strategies three of which involve options Exhibit Proposed Diversification Strategies for Ali’s Portfolio Strategy Position (s) Premium (s) Strike price (s)* Long put $10 $45 W** Short call $12 $45 X** Short call $9 $48 Long put $8 $43 Y** Short put $6 $40 Z Exchange fund N/A N/A *The share’s current market price is $45 **All options are identical in terms of maturity and the underlying FinQuiz.com © 2018 - All rights reserved Reading 11 Concentrated Single Asset Positions FinQuiz.com FinQuiz Question ID: 19275 The amount of funds allocated to the personal risk bucket in Martin’s portfolio is closest to: A $2.86 million B $4.19 million C $8.57 million FinQuiz Question ID: 19276 Which of the following behavioral biases does Martin most likely suffer from? A Endowment effect B Anchoring and adjustment C Overconfidence and familiarity FinQuiz Question ID: 19277 Using the information provided in Exhibit 1, which of the following proposed strategies will be most suitable for paying off Chappell’s $25 million loan? A A B B C C FinQuiz Question ID: 19278 Strategy B (Exhibit 1) is economically equivalent to a: A call option issued by Chappell with a strike price of $13.65 million B put option issued by Chappell with a strike price of $19.50 million C put option issued by a mortgage lender with a strike price of $19.50 million FinQuiz Question ID: 19279 Based on the three option strategies presented in Exhibit and Ali’s needs and requirements, which of the following strategies is most suitable? A W B X C Y FinQuiz Question ID: 19280 Which of the following statements least accurately outlines why Strategy Z will not be an appropriate diversification vehicle for Ali’s portfolio? A Exchange funds impose lockup periods B The contribution of the stock to the fund is an immediate taxable event C Exchange fund investors have limited discretion in managing their portfolios FinQuiz.com © 2018 - All rights reserved .. .Reading 11 Concentrated Single Asset Positions FinQuiz. com FinQuiz Item- set ID: 1 927 4 Questions (1 927 5 ) through (1 928 0 ) relate to Reading 11 Joyce Carlin Case Scenario... terms of maturity and the underlying FinQuiz. com © 20 18 - All rights reserved Reading 11 Concentrated Single Asset Positions FinQuiz. com FinQuiz Question ID: 1 927 5 The amount of funds allocated... old retired executive who is in excellent health FinQuiz. com © 20 18 - All rights reserved Reading 11 • • • • Concentrated Single Asset Positions FinQuiz. com She holds a concentrated position in