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1、Question:1Topic:PortfolioManagement-IndividualMinutes:26Questions1and2relatetoPatriciaandAlexanderTracy.Atotalof35minutesisallocatedtothesequestions.Candidatesshouldanswerthesequestions加theorderpresented.QUESTION1HASFOURPARTS(A,B,C,D)FORATOTALOF26MINUTES.PatriciaandAlexanderTracy,bothage59,arereside
2、ntsofCanada.Theyhavetwinsonswhowillenterafour-yearuniversityprograminoneyear.Patriciaisalong-timeemployeeofatelecommunicationscompany.Alexanderisaself-employedsalesconsultant.Alexandersannualincomeisnowsteadyafteryearsofextremehighsandlows.TheTracyshavebuiltaninvestmentportfoliothroughsavinginAlexan
3、dershighincomeyears.TheTracys,currentannualincomeisequaltotheirtotalexpenses;asaresult,theycannotaddtosavingscurrently.Theyexpectthatboththeirexpensesandincomewillgrowattheinflationrate.Allmedicalcosts,nowandinthefuture,arefullycoveredthroughgovernmentprograms.TheTracysworryaboutwhethertheyhavesaved
4、enoughforretirement,andwhethertheywillbeabletomaintaintherealvalueoftheirportfolio.Inflationisexpectedtoaverage4%fortheforeseeablefuture.TheTracyshaveapproachedDancnBriscoctohelpthemanalyzetheirinvestmentstrategyandretirementchoices.TheTracysdisagreeabouttheappropriateinvestmentstrategy.Patriciapref
5、ersnotlosingmoneyovermakingahighreturn.Thisispartlyaresultofcontinuingregretforalossexperiencedinanequitymutualfundseveralyearsago.AlexandershistoryofmakingfrequentchangesintheirportfoliogreatlyannoyedPatricia.ShethinksAlexanderfocusedonlyonpotentialreturnandpaidlittleattentiontorisk.TheTracyscurren
6、tlyhavealltheirassetsininflation-indexed,short-tenbondsthatareexpectedtocontinuetoearnareturnthatwouldmatchtheinflationrateaftertaxes.Afterretirement,theyarewillingtoconsiderchangingtheirinvestmentstrategyifnecessarytomaintaintheirlifestyle.TheTracysarceligibletoretirenextyearatage60.Iftheydo,Patric
7、iawillreceiveannualpaymentsfromhercotnpany,sdefined-benefitpensionplanandbothPatriciaandAlexanderwillreceivepaymentsfromtheCanadiangovernmentpensionplan.Alexanderdoesnotparticipateinanycompanyorindividualretirementplan.BriscoehascompiledfinancialdataandmarketexpectationsfortheTracys,retirement,shown
8、inExhibit1.Currently,BriscoeestimatesthattheTracys,investmentportfoliowillgrowto1,100,000Canadiandollars(CAD)bytheirretirementdatenextyear.Question:Topic:Minutes:1PortfolioManagement-Individual26Exhibit1FinancialDataandMarketExpectationsPatriciaandAlexanderTracyRetirementatAge60(2010)Expectedannuale
9、xpensesCAD125,000Annualpensionincome(after-tax)PatriciascompanyplanCAD40,000CombinedgovernmentpensionCAD40,000TotalannualpensionincomeCAD80,000Expectedannualinflation4.0%Expectedannualafter-taxportfolioreturn4.0%PensionincomefrombothPatricia,scompanyplanandthegovernmentpensionplanisfullyindexedforin
10、flation.Briscocexpectsataxrateof20%toapplytotheTracys,withdrawalsfromtheinvestmentaccount.TheTracysexpecttoearnnoemploymentincomeafterretirement.TheTracys,residenceisnotconsideredpartoftheirinvestableassets.TheTracyshavetheoptiontodelayretirementuntilage65.TheTracysintendtoretiretogether,whetheritis
11、in2010atage60orin2015atage65.BriscoedeterminesthatiftheTracysretireatage60,theirrisktoleranceisbelowaverage.Iftheyretireatage60,theyplantopayofftheirmortgageandassociatedtaxesbywithdrawingCAD100,000fromtheirportfoliouponretirement.AnotherconsiderationfortheTracysrelatestofundinguniversityexpensesfor
12、theirsons.IftheTracysretireatage60,eachsonwillreceiveascholarshipavailabletoretireefamiliesfromPatricia,scompanythatwillcoveralluniversitycosts.IftheTracysretireatage65,allpensionincomewouldincreaseandwouldalmostmeettheirannualspendingneeds.Iftheyretireatage65,theTracyswouldpayalluniversityexpensesf
13、romtheirinvestmentportfoliothroughanarrangementwiththeuniversity.Thearrangement,coveringbothsons,wouldrequiretheTracystomakeasinglepaymentofCAD200,000atage60.Question:1Topic:PortfolioManagement-IndividualMinutes:26A.i.PreparethereturnobjectivesportionoftheTracys,investmentpolicystatement(IPS)thatwil
14、lapplyiftheyretireatage60.ii.Calculatethepre-taxnominalrateofreturnthatisrequiredfortheTracys,firstyearofretirementiftheyretireatage60.Showyourcalculations*(12minutes)B.IndicatespecificfactorsfortheTracys,foreachofthefollowing,whichsupportBriscoe,sconclusionthattheTracys,risktoleranceisbelowaverage:
15、i.Abilitytotakerisk.Indicatehwfactors.ii.Willingnesstotakerisk.Indicateonefactor.(6minutes)C.Preparethecurrent(2009)liquidityconstraintfortheTracys,IPS:i.iftheyretireatage60.ii.iftheyretireatage65.(4minutes)D.Preparethecurrent(2009)timehorizonconstraintfortheTracys,IPS:i.iftheyretireatage60.ii.ifthe
16、yretireatage65.(4minutes)Question:1Topic:PortfolioManagement-IndividualMinutes:26ReadingReferences:8.uFrameDependence:TheSecondThemejCh.3,BeyondGreedandFear:UnderstandingBehavioralFinanceandthePsychologyofInvesting,HershShefrin(OxfordUniversitySchoolPress,2002)14.ManagingIndividualInvestorPortfblios
17、,ManagingInvestfnentPortfolios:ADynamicProcess3rdedition,JamesW.Bronson,MatthewH.Scanlan,andJanR.Squires(CFAInstitute,2007)Purpose:Totestthecandidates:(1)understandingoftheinvestmentpolicystatementforanindividualinvestor,(2)abilitytoassesspertinentfactorsforaninvestor,sabilitytoassumerisk,(3)ability
18、tocalculateaninvestorsrequiredreturn,and(4)understandingofaninvestorsotherconstraintfactors.1.OS2009-I11-3-8-a,fc4FrameDependence:TheSecondThemeThecandidateshouldbeableto:a)explainhowlossaversioncanresultininvestors9willingnesstoholdontodeterioratinginvestmentpositions;1.OS2009-III-4-14-a,fj,k,l,4fc
19、ManagingIndividualInvestorPortfbliosThecandidateshouldbeableto:a)discusshowsourceofwealth,measureofwealth,andstageoflifeaffectindividualinvestorsrisktolerance;f)compareandcontrastriskattitudesanddecision-makingstylesacrossdistinctinvestorpersonalitytypes,includingcautious,methodical,spontaneous,andi
20、ndividualisticinvestors;j)explainhowtosetriskandreturnobjectivesforindividualinvestorsanddiscusstheimpactthatabilityandwillingnesstotakeriskhaveontolerance;k)identifyandexplaineachofthemajorconstraintcategoriesincludedinanindividualinvestor,sinvestmentpolicystatement;1)formulateandjustifyaninvestmen
21、tpolicystatementforanindividualinvestor;Question:Topic:Minutes:1PortfolioManagement-Individual26GuidelineAnswer:PARTAReturnObjectiveStatementTheTracys,returnobjectiveistoprovidesufficientafter-taxcashflowinretirementtomeetannuallivingexpensesinexcessofpensionandotherretirementincome.GiventheTracys,c
22、oncernaboutinflationerodingtheirpurchasingpower,theportfolioshouldalsorealizeareturnhighenoughtomaintainthereal(inflationadjusted)valueoftheirassetbase.ReturnCalculationsare:RetireNextYearatAge60CashFlowsInflowsPatriciascompanypensionCombinedgovernmentpensionTotalInflowsCAD40,00040,00080,000Outflows
23、Estimatedexpenses125,000After-taxnetincomeneeded(45,000)Pretaxnetincomeneeded(using20%taxrate)(56,250)InvestableAssetsEstimatedinvestmentportfolioinoneyearMortgagepayoffInvestmentportfoliouponretirement1,100,000(100,000)1,000,000RequiredReturnCalculationPretaxincomeneeddividedbyinvestableassetsPluse
24、xpectedinflation5.625%4.000%RequiredPretaxNominalReturn(arithmetic)RequiredPretaxNominalReturn(geometric)(L05625X1.04)-1=.0985=9.850%OR(1.05639.625%9850%1.04)-1=9.86%lQuestion:1Topic:PortfolioManagement-IndividualMinutes:26PARTBThesecircumstancesindicateabelowaverageoverallrisktolerancefortheTracys:
25、AbilitytotakeriskSmallamountofinvestableassetstosupporttheminretirementrelativetotheirspendinglevels,particularlyiftheychoosetoretireatage60Becausetherewillbenopost-retirementemploymentincome,therewillbenofurtherfundsaddedtotheirportfolio(nohumancapitalduringretirement).Withoneyeartoretirement,there
26、willbenofurtherfindsaddedtoinvestableassetssincecurrentannualincomeequalsexpense.Alexanderdoesnotparticipateinanycompanyorindividualretirementplan.WillingnesstotakeriskThcirdesirefbrpreservationoftherealvalueoftheirportfolioPatricia,spreferencetoavoidlossesduetopreviousexperienceConservativenatureof
27、currentinvestmentsPARTC1.iquidityNeedsIn2009,theyearbeforeretirement,theTracyshavenoliquidityconstraints.Iftheyretireatage60:TheTracyswillneedsignificantannualdistributions(CAD56,250pretaxorCAD45,000aftertax)fromtheirinvestmentportfoliotosupporttheirlivingexpenses*TheywillalsoneedCAD100,000topayofft
28、heirmortgageandincometaxesassociatedwiththewithdrawaluponretirement.Theyexpectnoothersignificantinflowsoroutflows.Iftheyretireatage65:TheTraceysneedCAD250,000CAD200,000/(1-0.2)tofundtheirsons,prepaidtuitionplaninoneyearandpaytaxesonthewithdrawal.TherewillbenootherliquidityneedsbecausetheTracysexpect
29、tocontinuemeetingtheirlivingexpenseswiththeirsalaryincomeuntilretirement.PARTDTimeHorizonIftheyretireatage60:Question:1Topic:PortfolioManagement-IndividualMinutes:26Theoneyeartoretirementcouldbeconsideredthefirstofatwo-stagehorizon.Otherwise,theTracyshavealong,singlestagetimehorizonof25yearsormorein
30、retirementbasedupontheircurrentages.Iftheyretireatage65:TheTracyshaveatwostagehorizon.1)Thefirstcoversthesix-yearperioduntilretirement.2)Thesecondcoversanestimated20yearsormoreinretirement.Alternatively,theTracyscouldbesaidtohaveamulti-stagehorizonconsistingof1)oneyearduringwhichtheUniversitypayment
31、isdue,2)fiveadditionalyearsofwork,and3)anestimated20yearsormoreinretirement.Question:2Topic:PortfolioManagement-IndividualMinutes:9Questions1and2relatetoPatriciaandAlexanderTracy.Atotalof35minutesisallocatedtothesequestions.Candidatesshouldanswerthesequestionsitheorderpresented.QUESTION2HASONEPARTFO
32、RATOTALOF9MINUTES.PatriciaandAlexanderTracybothretiredfiveyearsagoatage65andtheirsonsnowsupportthemselves.Asaresultofbetterthanexpectedinvestmentreturnsoverthepastfiveyears,theTracys,investmentportfoliohassignificantlyincreasedinvalue.Theynowthinkthattheirfutureafter-taxinvestmentreturnswillexceedth
33、eirexpensesfortheirremainingjointlifeexpectancy.Theirnewinvestmentobjectiveistomaximizetheassetstheirsonswillinherit,subjecttoareviewoftheTracys,risktolerancebytheirnancialadvisor.Duringretirement,theTracys,medicalcostsarefullycoveredbythegovernment.TheTracyshavenoearnedincomeduringretirement.Theyha
34、vepreviouslypaidoffalldebtandexpecttoremaindebt-free.Determinewhethereachofthefollowingmeasureshasincreased,decreased,orremainedunchangedfortheTracyssincejustpriortoretirement:i.impliedassetsii.impliedliabilitiesiii.risktoleranceJustifyeachresponsewithonereason.AnswerQuestion2intheTemplateprovidedon
35、page9.(9minutes)Question:2Topic:PortfolioManagement-IndividualMinutes:9TemplateforQuestion2MeasureDeterminewhethereachofthefollowingmeasureshasincreased,decreased,orremainedunchangedfortheTracyssincejustpriortoretirement,(circleone)Justifyeachresponsewithonereason.i.impliedassetsIncreasedDecreasedRe
36、mainedunchangedii.impliedliabilitiesIncreasedDecreasedRemainedunchangediii.risktoleranceIncreasedDecreasedRemainedunchangedQuestion:2Topic:PortfolioManagement-IndividualMinutes:9ReadingReferences:15.Excerptsfrom4fcLifestyle,WealthTransferandAssetClasses,Ch.4,andtfcTechniquesforImprovingAfter-TaxInve
37、stmentPerformance,Ch.6,InvestmentManagementforTaxablePrivateInvestors,JarrodWilcox,JeffreyE.Horvitz,andDandiBartolomeo(TheResearchFoundationofCFAInstitute,2006)19.Life-CycleInVeStingjCh.3,InvestmentManagementforTaxablePrivateInvestorsyJarrodWilcox,JeffreyE.Horvitz,andDandiBartolomeo(TheResearchFound
38、ationofCFAInstitute,2006)20.LifetimeFinancialAdvice:HumanCapital,AssetAllocation,andInsurance/*RogerG.Ibbotson,MoshcA.Milevsky,PcngChen,FinancialAnalystJournal(CFAInstitute,JanuaryZFebmary2006)46.Monitorii争andRebalancing/5Ch.11,ManagingInvestmentPortfolios:ADynamicProcess3rdedition,RobertD.Arnott,Tc
39、rcnccE.Burns,LisaPlaxco,andPhilipMoorc(CFAInstitute,2007)Purpose:Totestthecandidates:(1)understandingoftheinvestmentpolicystatementforanindividualinvestor,(2)abilitytoassesspertinentfactorsforaninvestorsabilitytoassumerisk,(3)abilitytocalculateaninvestorsrequiredreturn,and(4)understandingofaninvesto
40、rsotherconstraintfactors.1.OS2009-Hl-4-15-b,ExcerptsfromInvestmentManagementforTaxablePrivateInvestorsThecandidateshouldbeableto:b)explaintheexpectedeffectsofshrinkingtimehorizons,asinvestorsgrowolder,on(1)therisktoleranceforaverageinvestorsandthatofverywealthyinvestorswithbequestgoals,and(2)thedesi
41、rabilityofrealizingtaxablegains;1.OS2009-I11-4-19-a,b,tTifc-CyclcInVeStingThecandidateshouldbeableto:a)explaintheimportanceofageandlevelofwealthinsettinginvestmentpolicy;b)explainhowchangesintheratioofdiscretionarywealthtototalassetscanaffectaninvestorsassetallocation;1.OS2009-11I-4-20-a,LifetimeFin
42、ancialAdvice”Thecandidateshouldbeableto:a)explaintheconceptanddiscussthecharacteristicsof“humancapita,asacomponentofone,stotalwealth;Question:2Topic:PortfolioManagement-IndividualMinutes:91.OS2009-11I-16-46-c,uMonitoringandRebalancing”Thecandidateshouldbeableto:c)recommendandjustifyrevisionstoaninve
43、stor,sinvestmentpolicystatementandstrategicassetallocation,givenachangeininvestorcircumstances;Question:2Topic:PortfolioManagement-IndividualMinutes:9TemplateforQuestion2MeasureDeterminewhethereachofthefollowingmeasureshasincreased,decreased,orremainedunchangedfortheTracyssincejustpriortoretirement(
44、circleone)JustifyeachresponseWithonereason.i.impliedassetsIncreased(RemainedunchangedThepresentvalueoftheTracysfutureemploymentincomeiszero.Theirimpliedassetsdroppedtozerouponretirementandremainatzero.ii.impliedliabilitiesIncreased(reaSe)RemainedunchangedTheTracys,impliedliabilities(thepresentvalueo
45、ftheirretirementexpenses)peakedatthebeginningoftheirretirement.Sincethen,theimpliedliabilitieshaveregularlydeclinedalongwiththeirlifeexpectancy.ii.risktoleranceQeaS色二)DecreasedRemainedunchangedTheTracys,risktolerancehasincreasedsinceretirementgiventheirincreasingdiscretionarywealth.Also,theTracys,ne
46、winvestmentobjectiveistomaximizetheirsons,inheritancerequires/allowsforalonger,multigcncrationaltimehorizon,whichincreasesrisktolerance.Question:3Topic:InstitutionalPMMinutes:24QUESTION3HASFIVEPARTS(A,B,C,D,E)FORATOTALOF24MINUTES.Wirth-MooreCorporationisaU.S.-basedpublisherofeducationalmedia.Wirth-M
47、ooresponsorsadefmed-benefitpensionplan.Theplan,sassetsareinvestedinabroadlydiversifiedportfolioofgovernmentandinvestmentgradecorporatebonds.Pensionplanparticipantsincludebothactiveworkersandretirees.Pensionbenefitspaymentsarcnotadjustedforinflation.Thedurationandmarketvalueofthepensionplan,sassetsar
48、eequaltothedurationandmarketvalueoftheplansprojectedbenefitsobligation(PBO).Wirth-Moorebelievesthatithasadequatefinancialstrengthandprofitabilitytomaintainannualpensioncontributionsbasedonthepensionplan,sfeaturesandWirth-Moore,sworkforcecharacteristics.Wirth-MoorcrecentlyestablishedtheFoundationforthe
