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1、TheMorningSessionofthe2012LevelIIICFArExaminationhas9questions.Forgradingpurposes,themaximumpointvalueforeachquestionisequaltothenumberofminutesallocatedtothatquestion.MinutesQuestionTopic1PortfolioManagement-Individual272PortfolioManagement-Individual91 4 42 L 2 33PortfolioManagement-Monitor/Rebala
2、nce/Execution4PortR1沁-Mana3ememIndivid&al/Beha3oral9PortfolioManagemenI-EeeRefi46PortfolioManagement-Institutional7PortfolioManagementFixedIncome238PortfolioManagementDerivatives139PortfolioManagementDerivatives12Total:180THISPAGEINTENTIONALLYLEFTBLANKANYMARKSMADEONTHISPAGEWILLNOTBEGRADEDQuestions1a
3、nd2relatetoJuanPabloAlonso.Atotalof36minutesisallocatedtothesequestions.CandidatesshouldanswerthesequestionsintheOFderpresented.QUESTION1HASFIVEPARTS(A,B,C,D,E)FORATOTALOF27MINUTES.JuanPabloAlonso,age40,isthemanagerofanational,publicly-fundedsoccerteamlocatedinacountrythatusestheU.S.dollar(USD)asits
4、currency.ThiscountrysdebtisratedAAA.Alonsohasaone-yearemploymentcontractthathasbeenrenewedforseveralyears.Heisconfidentthathecanmaintainthisjob,orasimilarmanagingposition,untilhisplannedretirementatage55.Alonsoisdivorcedandthefatherofteenagechildren.Hcwantstofundadedicatedtrusttoprovideforhischildre
5、n,sneedsuntiltheyreachage25.HewillneedUSD250,000withinthenextfewmonthstofundthetrust.Alonso,sincometaxrateis30%.Otherthanasmallcashreserve,heholdsallofhisinvestmentassetsinatax-exemptaccountwithacurrentvalueofUSD900,000.Contributionstothisaccountaremadeaftertax.Withdrawalsareentirelytax-free,without
6、penalty.AlonsosavesUSD25,000ofhisafter-taxincomeeveryyear,andplanstocontinuedoingsountilretirement.Hisnextcontributionwillbemadeinoneyear.Aspartofhisnormalexpenses,AlonsoannuallyprovidesapproximatelyUSD30,000ofsupporttolocalyouthsportingleagues.WhenAlonsoretiresin15years,heplanstopurchasea25-yearann
7、uitythatpaysUSD100,000aftertaxannually.HewillneedUSD1,600,000atretirementtofundtheannuity.Alonsoexpectstheannualpayouttobesufficienttomeetallhisneedsonaninflation-adjustedbasis.Hcdocsnotplantoleaveanyestateathisdeath.A.CalculatetherequiredannualreturnthatwouldenableAlonsotopurchasetheretirementannui
8、tyatage55.Showyourcalculations.Note:Assumeallcashflowsoccurattheendofeachperiod.(5minutes)B.DiscussZworeasonswhyAlonso,sabilitytotakeriskcouldbeconsideredaboveaverage,(4minutes)Fiveyearshavepassed,andAlonso,age45,signsa10-yearemploymentcontract,whichincludesaone-timesigningbonus,withacorporate-owned
9、professionalsoccerclub.Hisannualbasesalarywiththisclubishigherthanhisprevioussalaryandisindexedtoinflation.Becausetheclubhashadfinancialdifficultiesinthepast,theowneragreestoguaranteeAlonso,ssalaryoverthelifeofthecontract.Alonsointendstokeephislivingexpensesunchangedandincreasehisannualsavings.Alons
10、ostillplanstoretireattheendofthe10-yearcontract.Givenhisimprovedfinancialposition,henowplanstodependoncashflowfromhisinvestmentportfoliotomeetretirementexpensesratherthanpurchasethe25-yearannuity.C.i.DescribeonechangeinAlonsoscircumstancesthathasdecreasedhisearningsriskandonechangethathasincreasedhi
11、searningsrisk.ii.DescribeonechangeinAlonso,scircumstancesthathasdecreasedhisfinancialmarketriskinretirementandonechangethathasincreasedhisfinancialmarketriskinretirement.ANSWERQUESTIONI-CINTHETEMPLATEPROVIDEDONPAGE7.(8minutes)D.DiscusshoweachofthefollowinginvestmentconstraintshaschangedforAlonso:i.t
12、imehorizonii.liquidityneeds(4minutes)Alonsohasabuy-and-holdportfolioOfindividualsecurities,includingtreasurybills,asset-backedsecurities(ABS),governmentbonds,andequities.HiscurrentportfolioallocationisshowninExhibit1.Exhibit1AlonsoSCurrentPortfolioAllocationAssetClassPortfolioWeightTreasurybills5%A-
13、ratedcorporateamortizingABS10%AAA-ratedgovernmentbonds10%Small-capdomesticequities25%Large-capinternationalequities50%E.DeterminewhichoneassetclassinAlonso,sportfoliomostcloselyresembleshiscurrenthumancapital.JustifyyourresponsewithZhqreasons.ANSWERQUESTIONI-EINTHETEMPLATEPROVIDEDONPAGE9(6minutes)AN
14、YMARKSMADEONTHISPAGEWILLNOTBEGRADEDAnswerQuestiononThisPageTemplateforQuestionI-Ci.DescribeoechangeinAlonso,scircumstancesthathas:decreasedhisearningsrisk.increasedhisearningsrisk.ii.DescribecchangeinAlonso9Scircumstancesthathas:decreasedhisfinancialmarketriskinretirement.increasedhisfinancialmarket
15、riskinretirement.AnswerQuestiononThisPageTemplateforQuestionI-EDeterminewhichoneassetclassinAlonso,sportfoliomostcloselyresembleshiscurrenthumancapital,(circleone)JustiKyourresponsewith加，。reasons.TreasurybillsA-ratedcorporateamortizingABSAAA-ratedgovernmentbondsSmall-capdomesticequities1.arge-capint
16、ernationalequitiesL2.Questions1and2relatetoJuanPabloAlonso.Atotalof36minutesisallocatedtothesequestions.Candidatesshouldanswerthesequestionsintheorderpresented.QUESTION2HASTWOPARTS(A,B)FORATOTALOF9MINUTES.JuanPabloAlonsoisnowage54andanticipatingretirement.Approximately60%ofhistotalinvestmentsarecurr
17、entlyheldinatax-exemptaccountand40%inataxableaccount.Contributionsintobothaccountsaremadewithafter-taxincome.Inthetax-exemptaccount,withdrawalsarcentirelytax-freeandwithoutpenalty.Inthetaxableaccount,Alonsonowincursa20%taxonbothincomeandrealizedcapitalgains.Realizedlossescanbeusedtooffsetcurrentorfu
18、tureincomeandcapitalgains.Alonsoexperiencedsubstantiallossesinbothofhisinvestmentaccountsoverthepastyear.Heestimatesthathewillneedtopostponeretirementandquestionswhetherhisinvestmentswerestructuredoptimally.Alonsomeetswithhisadvisortodiscusstheeffectsofthetaxregimeonhisportfolios.Theadvisorsuggestst
19、hatoverthelastyear,bothAlonsosafter-taxreturnandinvestmentriskwouldhavebeenhigherifalargerproportionofassetshadbeenheldinthetaxableaccount.A.Determine,basedonlyontaxconsiderations,whetherAlonso,sadvisoriscorrectorincorrectwithrespecttoAlonso,s:i.after-taxreturn.ii.investmentrisk.Justifyeachresponsew
20、ithoereason.ANSWERQUESTION2-AINTHETEMPLATEPROVIDEDONPAGE15.(6minutes)Alonso,sadvisorproposesa100,000U.S.dollar(USD)investmentinaportfolioofdividendpayingequitiesinthetaxableaccount.Alldividendincomeandrealizedcapitalgainswouldbetaxedat20%andreinvested.Theadvisorsuggestsastrategyofrealizingnomorethan
21、halfoftheavailablecapitalgainsannually.Heestimatesthe3-yearand15-yearaccrualequivalentreturnsontheproposedportfoliotobe5.8%and6.3%,respectively.B.ExplainwhytheestimatedaccrualequivalentreturnsdiHerforthetwotimeperiods.Note:Nocalculationsarerequired.(3minutes)ANYMARKSMADEONTHISPAGEWILLNOTBEGRADED2012
22、CFAInstitute.Allrightsreserved.AnswerQuestion2onThisPageTemplateforQuestion2-Determine,basedonlyontaxconsiderations,whetherAlonsosadvisoriscorrectorincorrect(circleone)withrespecttoAlonso,s:Justifyeachresponsewithonereason.i.aftcr-taxreturncorrectincorrectii.investmentriskcorrectincorrectTHISPAGEINT
23、ENTIONALLYLEFTBLANKANYMARKSMADEONTHISPAGEWILLNOTBEGRADEDQUESTION3HASTHREEPARTS(A,B,C)FORATOTALOF21MINUTES.WcndyKadar,CFA,managesanequityfundthatinvestsglobally.AmongthecountriessheinvestsinareAlphastanandBetania.Bothcountriesusetheeuro(EUR)astheircurrency.InfbnnationabouteachequitymarketisshowninExh
24、ibit1.Exhibit1AlphastanandBetaniaEquitxrMarsetsAlphastanBetaniaMarkettypeQuote-drivenQuote-drivenAveragedailyvolume25millionshares15millionsharesMarketvolatility22%16%Latest12-monthmarketreturn5.3%15.1%Numberofmemberfirms532MarkethoursTuesday-Thursday:9:00am-4:00pmMonday-Friday:9:00am-4:00pmFounding
25、year19731903TheorderbooksfortypicalAlphastanandBetaniaequitieswithidenticalmarketcapitalizationsandfreefloatsappearinExhibits2and3.Exhibit21.imitOrderBookforaTypicalAlphastanEqllityDealerBidDealerAsPrice(EUR)SizePrice(EUR)SizeA49.82200C50.11200B49.73400D50.261000C48.22600A51.31500D47.68500B51.55600E
26、xhibit31.imitOrderBookforaTypicalBetaniaEquityDealerBidDealerAskPrice(EUR)SizePrice(EUR)SizeA49.88800C50.13900B49.811000D50J91000C49.751900A50.311500D49.501700B50.382600FromtheinformationprovidedinExhibits1,2,and3,KadarconcludesthatBetaniahasahigherqualitymarket.A.Identih,threemarketcharacteristicst
27、hatsupportKadar,sconclusionthatBetaniahasahigherqualitymarket.Justifyeachresponsewithonereason.ANSWERQUESTION3-AINTHETEMPLATEPROVIDEDONPAGE23.(9minutes)Kadarexpectstoreceivealargeinflowofcashintoherfundfromanewclient.Wheninvestingthenewmoney,sheintendstousealgorithmicexecutionforthetrades.Globalequi
28、tymarketshavebeenvolatileandtrendingupwardsandKadarforecaststhiswillcontinue.B.Determinewhichalgorithmicparticipationstrategyvolume-weightedaverageprice(VWAP),time-weightedaverageprice(TWAP),orimplementationshortfallismostappropriateforKadar,strades.Justifyyourresponsewithtworeasons.ANSWERQUESTION3-
29、BINTHETEMPLATEPROVIDEDONPAGE24.(6minutes)Kadar,sfirmoffersclientstheabilitytoreducetheirriskexposurebyinvestinginamixofriskfreesecuritiesandKadar,sglobalequityfund.Clientsareabletoselectarebalancingstrategythatbestsuitstheirpreferences.Theavailablerebalancingstrategiesarebuy-and-hold,constantmix,and
30、constant-proportionportfolioinsurance(CPPI).Anewclient,GuyMarsden,agreeswithKadar,sforecastfortheglobalequitymarkets.HeinvestsEUR250,000fromhistax-exemptaccountinamixofrisk-freesecuritiesandKadar,sglobalequityfund.HedoesnotwantthevalueofhisportfoliotofallbelowEUR175,000,butiswillingtoacceptadditiona
31、lriskashisportfoliovalueincreases.C.Determinewhichoftheavailablerebalancingstrategies(buy-and-hold,constant-mix,orCPPl)ismostappropriateforMarsden.Justifyyourresponsewithtworeasons.ANSWERQUESTION3-CINTHETEMPLATEPROVIDEDONPAGE25.(6minutes)ANYMARKSMADEONTHISPAGEWILLNOTBEGRADEDAnswerQuestion3onThisPage
32、TemplateforQuestion3-AIdentifythreemarketcharacteristicsthatsupportKadarsconclusionthatBetaniahasahigherqualityrmarket.Justifyeachresponsewithonereason.Characteristic1:Characteristic2:Characteristic3:AnswerQuestion3onThisPageTemplateforQuestion3-BDeterminewhichalgorithmicparticipationstrategyvolume-
33、weightedaveragePriCe(VWAP),time-weightedaverageprice(TWAP),orimplementationshortfall)ismostappropriateforKadar,strades,(circleone)Justifyyourresponsewithtworeasons.volume-weightedaverageprice(VWAP)time-weightedaverageprice(TWAP)implementationshortfall2.AnswerQuestion3onThisPageTemplateforQuestion3-C
34、DeterminewhichOftheavailablerebalancingstrategies(buy-and-hold,constant-mix,orCPPI)ismostappropriateforMarsden,(circleone)Justifyyourresponsewithtworeasons.buy-and-holdconstant-mixCPPlL2.THISPAGEINTENTIONALLYLEFTBLANKANYMARKSMADEONTHISPAGEWILLNOTBEGRADEDQUESTION4HASTHREEPARTS(A,B,C)FORATOTALOF17MINU
35、TES.AnadvisorforAlesiCapitalManagementisworkingwithanewclient,MelanieStoffer.Priortomeetingwithher,theadvisorasksStoffcraseriesofdiagnosticquestionstodctcnincwhethershemayhaveanyofthefollowinginvestmentbehavioralbiases:anchoringhindsightregretaversionrepresentativenessstatusquoSamplediagnosticquesti
36、onsarcshowninExhibit1.EXhibit1AlesiCapitalManagementSamPIeDiagIlOStiCQIleStk)IIS1.Wouldapriorinvestmentdecisionthatresultedinalossstopyoufrommakingasimilardecision,evenifthenewinvestmentappearstobethebestalternative?2.Howfrequentlydoyoureviewyourinvestmentportfolio?3.Wouldyousellarecentequityinvestm
37、entfollowingamanagementannouncementofasignificantdeclineintheexpectedgrowthrateofrevenue?A.Identih,thebehavioralbiasthateachdiagnosticquestioninExhibit1ismostlikelytoreveal.Note:Eachdiagnosticquestionisdesignedtorevealadifferentbias.ANSWERQUESTION4-AINTHETEMPLATEPROVIDEDONPAGE33(6minutes)Attheirinit
38、ialmeeting,theadvisorIcarnsthatStoffcrisamid-levelmanageratabankandhasbuiltaninvestmentportfoliobyaccumulatingsavings,stockoptions,andrestrictedstockfromhercompany.Stofferbelievesshecurrentlyhasasufficientlevelofwealthtoachieveherprimarygoalofmaintaininghercurrentlifestyleuntilherdeath.Indiscussingh
39、erinvestmentphilosophy,Stoffcrexplainsthatshelikestokeepseparateinvestmentaccountsforhersavings,stockoptions,andrestrictedstock.Shehasadistinctinvestmentstrategyforeachaccount.Inaddition,StofIersaysthatshealwaysfollowsherfathersinvestmentadviceof4fcinvcstonlyinwhatyouknow.Stofibralsobelievesthatshei
40、spersonallycontributingtotheperformanceofherbanksstockprice.Combined,thesefactorshaveledStoffertokeepalargepercentageofhertotalportfolioinherbank,sstockandoptions.TheadvisortellsStofferthatthisconcentratedholdingrepresentssignificantriskinachievingherprimarygoal.Stofferrefusestoconsiderthesuggestion
41、thatshepartiallyhedgetheriskofherbank,sstock.AfterevaluatingStoffer,sinvestmentphilosophy,theadvisorisconcernedthatStoffbrisexhibitingsomeofthefollowingcognitivebiases:endowmentconservatismmentalaccountingillusionofcontrolB.IdentifytwocognitivebiasesexhibitedbyStoffer.Justifyeachresponsewithonereaso
42、n.ANSWERQUESTION4-BINTHETEMPLATEPROVIDEDONPAGE34.(6minutes)C.RecommendwhethertheadvisorshouldprimarilyattempttomoderateStoffcr,sbiases,oradapthisrecommendationstobetterreflectStoffer,sbiases.Justifyyourresponsewithtworeasons.(5minutes)ANYMARKSMADEONTHISPAGEWILLNOTBEGRADEDAnswerQuestion4OnThisPageTem
43、plateforQuestion4-ANote:Eachdiagnosticquestionisdesignedtorevealadifferentbias.DiagnosticQuestionIdentifythebehavioralbiasthateachdiagnosticquestioninExhibit1ismostlikelytoreveal,(circleone)1.Wouldapriorinvestmentdecisionthatresultedinalossstopyoufrommakingasimilardecision,evenifthenewinvestmentappe
44、arstobethebestalternative?anchoringhindsightregretaversionrepresentativenessstatusquo2.Howfrequentlydoyoureviewyourinvestmentportfolio?anchoringhindsightregretaversionrepresentativenessstatusquo3.Wouldyousellarecentequityinvestmentfollowingamanagementannouncementofasignificantdeclineintheexpectedgro
45、wthrateofrevenue?anchoringhindsightregretaversionrepresentativenessstatusquoAnswerQuestion4OnThisPageTemplateforQuestion4-BIdentifytwocognitivebiasesexhibitedbyStoffer.(circleone)Justifyeachresponsewithonereason.Firstcognitivebias:endowmentconservatismmentalaccountingillusionofcontrolSecondcognitive
46、bias:endowmentconservatismmentalaccountingillusionofcontrolQUESTION5HASFOURPARTS(A,B,C,D)FORATOTALOF24MINUTES.Emergistanisadevelopingcountryfounded50yearsagothathasexhibitedsignificanteconomicgrowth.Initsfirst38years,Emergistanhadlowinflation.Atthattime,thecountryestablishedacentralbankwithaprimarym
47、andatetoencourageeconomicgrowth.Theresultingmonetarypolicyhasledto12yearsofhighandvolatileinflation.Itsequitymarketiswell-establishedandliquid.Bycontrast,secondarymarkettransactionsforbondsaresmallandinfrequent.JoeCookeisaneconomistforapensionadvisoryfirm.HeisanalyzingEmergistantoidentifyinvestmentopportunities.CookeperformsseveralanalysesofEmergistan5Seconomy.Exhibit1containsadescriptionoffiveofhisanalysesandselectedcommentsfromhisreport.Exhibit1EconomicAnalysesOfEmergista
