Reading 16 Introduction to Asset Allocation 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 16 Introduction to Asset Allocation FinQuiz.com FinQuiz Level III 2018 – Item-sets Solution Reading 18: Introduction to Asset Allocation Question ID: 134345 Correct Answer: C C is correct Investment governance is the structure expected to ensure that assets are invested to achieve the asset owner’s objectives within his/her/their risk tolerance and constraints and in compliance with all applicable laws and regulations Question ID: 134346 Correct Answer: C C is correct While capital market expectations are employed as an input in developing strategic asset allocations, formulating these expectations not represent a basic step in developing a strategic asset allocation A is incorrect Effective governance models should articulate the long- and short-term objectives for the investment program B is incorrect Effective governance models specify processes for developing and approving the investment program’s strategic asset allocation Question ID: 134347 Correct Answer: B Assets Financial assets Investment portfolio Home property $ Liabilities and Net Worth Financial liabilities 800,000 Mortgage debt 800,000 Legal fees Extended assets Extended liabilities Present value of earnings till retirement Present value of tuition costs Present value of pension income Present value of damages payable 2,500,000 Present value of charitable 1,800,000 donation Present value of post-retirement 1,200,000 living expenses Present value of yacht purchase costs Economic net worth (Economic assets – economic liabilities) FinQuiz.com © 2018 - All rights reserved $ 355,000 600,000 85,000 200,000 3,200,000 265,000 Reading 16 Total Introduction to Asset Allocation 7,100,000 FinQuiz.com 2,395,000 7,100,000 Question ID: 134348 Correct Answer: C Sasha’s distaste for liquidity and the couple’s numerous investment goals suggests that the allocation to illiquid asset classes such as private equity should be lower and instead asset classes which provide for portfolio growth should be selected Question ID: 134349 Correct Answer: B B is correct Stephenson is only correct with respect to the risk objectives aspect of the goals-based approach The goals-based approach subdivides an investment portfolio into sub-portfolios each aligned with a particular goal and required probability of achieving the goal The risk objective is stated in terms of the probability of failing to achieve each of these goals while the investment objective is to achieve the specified goals with a required probability of success Question ID: 134350 Correct Answer: C C is correct Low correlated assets have tighter rebalancing ranges A is incorrect Illiquid asset classes cannot be traded without significant transaction costs and/or delays Accordingly, illiquid asset classes are assigned a wider corridor width for asset rebalancing B is incorrect Higher transaction costs imply wider corridor widths for a target asset allocation FinQuiz.com © 2018 - All rights reserved .. .Reading 16 Introduction to Asset Allocation FinQuiz. com FinQuiz Level III 2018 – Item- sets Solution Reading 18: Introduction to Asset Allocation Question ID: 134 345 Correct Answer:... assets – economic liabilities) FinQuiz. com © 2018 - All rights reserved $ 35 5,000 600,000 85,000 200,000 3, 200,000 265,000 Reading 16 Total Introduction to Asset Allocation 7,1 00,000 FinQuiz. com... developing and approving the investment program’s strategic asset allocation Question ID: 134 347 Correct Answer: B Assets Financial assets Investment portfolio Home property $ Liabilities and Net