CFAIII模考1学生版（题目＋解析）

QUESTION1HASTHREEPARTS(A,B,C)FORATOTALOF10MINUTES.

-A.IdentifythebehavioralbiasthateachdiagnosticquestioninExhibit1ismost

1

likelytoreveal.

Note:Eachdiagnosticquestionisdesignedtorevealadifferentbias.

DiagnosticQuestion

Identifythebehavioralbiasthat

eachdiagnosticquestioninExhibit

ismostlikelytoreveal.

(circleone)

1

1

2

3

.

.

.

Ifyouareofferedtwofreelottery

tickets,wouldyouselectyourown

numbersorhaveamachinedoit?

Lossaversion

Endowment

Regretaversion

Illusionofcontrol

Overconfidence

Framing

Atwhatpriceareyouwillingtosell

offtheinvestmentholdingsthatyou

receivedasaninheritance?

Lossaversion

Endowment

Regretaversion

Illusionofcontrol

Overconfidence

Framing

Howdoyougenerallyattributethe

successofyourdecisions?

Lossaversion

Endowment

Regretaversion

Illusionofcontrol

1

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Overconfidence

Framing

1-B.EvaluatethedecisionmadebytheadvisorregardingBraidwood’sportfolio

preference.

Response:

Theadvisor’sdecisionisaccurateforTomBraidwood.Braidwoodisexpressinga

portfoliogoalthatconsidersexpectedreturnandstandarddeviation.Thisis

consistentwithtraditionalfinance,andheislikelytopreferamean-varianceefficient

portfolio.

2

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1

-C.Selectthebehavioralfinanceconcept(availability,confirmation,framing,

gambler’sfallacy,representativeness,overconfidence,hothandfallacy)bestexhibited

ineachofAndy’stwostatements.Justifyyourresponsewithonereason.

Andy’sstatement

Selectthe

Justification

behavioral

finance

conceptbest

exhibitedin

eachof

advisor’stwo

statements.

Note:Nobehavioral

financeconceptcanbe

usedmorethanonce.

(Circleone)

1

.

Itisalways

recommendedtoknow

thehistorical

Representativenessrefersto

judgmentsbasedon

stereotypes.Itclassifiesnew

informationbasedonpast

experiencesand

classifications.Andymaybe

overlyoptimisticthatFrio

Industriesshareswill

performwellbecausethe

CEOofFrioIndustriesdid

wellatAPCO.

Availability

performanceofthe

CEOofthecompany

beforeinvestinginit.

ThoughFrioIndustries

hasnotshownany

significantstockprice

appreciationovermany

yearscomparedtoits

peers,therehavebeen

recentnewspaper

Confirmation

Framing

Gambler’sfallacy

Representativeness

Overconfidence

Hothandfallacy

headlinesaboutitsnew

CEO.Frio’sCEOhas

joinedfromAPCO

aftersuccessfully

managingitsoperations

foroveradecade.

Basedonhisprevious

trackrecord,you

shouldinvestinshares

ofFrio,whichwill

makeagood

investment.

3

/37

2

.

GlobalEquityFunds

haveincreasedby1.5–

Availability

Thegambler’sfallacyisa

cognitivebehavioralbiasin

whichananalystwrongly

projectsareversaltoa

long-termtrend.This

reflectsafaulty

understandingofthe

behaviorofrandomevents.

Theanalystexpectsa

patternthathasdiverged

fromthelongtermaverage

toreversewithinaspecific

time.

2

.0timesthehistorical

Confirmation

Framing

averageoverthepast

twoyears.Basedonthis

information,Iexpect

globalequityfundsto

faceareversalinthe

nearfuture.Asaresult,

itispreferredto

reallocatefundsfrom

equitiestofixed-rate

portfolioassets.

Gambler’sfallacy

Representativeness

Overconfidence

Hothandfallacy

4

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QUESTION2HASFOURPARTS(A,B,C,D)FORATOTALOF25MINUTES.

2-A.Determinetheclientsegmentoradvisertype(massaffluentsegment,high-net-

worthsegment,ultra-high-net-worthsegment)thatismostappropriateforRobert’s

plan.Justifyyourresponse.

Response:

“

PrivateClient”RangeofHigh-Net-WorthSegment.

Justification:Theprivateclientrangeinthehigh-net-worthsegmentcoversasset

levelsbetween$1millionand$50million.Robert’sassetlevelof$7.5millionputshim

intherangeofthehigh-net-worthsegment.

Robert’sinterestinmoresophisticatedinvestmentswithlongertimehorizons,

greaterrisk,andlessliquidityrequiresamorecustomizedstrategyandawealth

managerwiththoroughproductknowledge.Henceaprivatewealthmanagerthat

specializesinhigh-net-worthclientsratherthanamanagerforthemassaffluent

segmentcanprovideateamofspecializedadvisersthatsupportsmorecustomized

strategiesformoresophisticatedinvestmentsthatmeetRobert’sinvestment

objectives.Also,such

a

teamofpeoplewilllikelyhavespecializeand

complementaryskills,includingtaxadvisers,legaladvisers,investmentspecialists,

andarelationshipmanager.

2

-Bi.IdentifyRobert’splannedgoals.

Response:

Robert’splannedgoalsare(a)fundinghisandhiswife’sretirement;(b)purchasinga

vacationhome;(c)makingacharitabledonationin15years;(d)supportinghiswife’s

lifestyleneedsincaseofhisdeath.

5

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2-Bii.DeterminethemostsuitableJustifyyourresponsebygivinganadvantageof

approachthatMesashouldusetothechosenapproachandadisadvantageofeach

analyzeRobert’sretirementgoals.approachnotselected.

(Circleone)

Amortalitytableallowsforestimatingthe

presentvalueofretirementspendingneedsby

associatingeachoutflowwithaprobability

basedonlifeexpectancy.Adisadvantageofthis

approachisthatitcannotmodeldifferent

scenarios,whichareimportantgivenRobert’s

variousgoals.Also,anindividualclient’s

probabilityoflivingtoacertainagemay

exceedthatofthegeneralpopulation.

MortalityTables

Therefore,thesurvivalprobabilitiesfroman

actuarialperspectivemayunderstatethetrue

probabilityofRobert’slivingtoagivenage.

Inthismethod,Robertcancalculatethepresent

valueofhisdesiredretirementspendingby

pricinganannuity.Withthismethod,different

goal-basedscenariosforRobertwillnotbe

achieved.Also,ifRobertliveslongerthanthe

actuarialstatisticsassume,hisandMary’s

actualretirementspendingneedswillexceedthe

amountthatMesahasplannedforthem.

Therefore,thisscenariointroduceslongevity

risk.

AnnuityMethod

6

/37

MonteCarlosimulationyieldsanoverall

probabilityofmeetingretirementneedsby

aggregatingtheresultsofmanytrialsof

probability-basedestimatesofkeyvariables,and

itisaflexibleapproachforexploringdifferent

retirementscenarios.

MonteCarlosimulationcananalyzethe

likelihoodofRobert’sportfoliomeetinghis

anticipatedretirementneedsandinvestment

objectives.Thesimulationmodelsthe

uncertaintyofthekeyvariablesandthe

uncertaintyorvariabilityinthefutureoutcome.

AnadvantageofMonteCarlosimulationfor

retirementplanningisitsflexibilityinmodeling

andexploringdifferentscenarios.Robert’s

retirementgoalsaremorecomplexthanafixed,

annualcashflowneed.Hemaywishto

determinetheeffectofasignificantpurchaseor

largeunforeseenexpense;hecanmodelthese

scenarioswithaMonteCarlosimulation.

MonteCarloSimulation

7

/37

2

-C.Selectthebehavioralconsiderationexhibitedby:

i.Robert

ii.Mary

JustifyeachselectionwithonefactfromtheinformationaboutthePuentes’

providedinvignette.

Justifyeachselectionwith

Selectthebehavioralconsiderationfori.Robert

andii.Mary.

onefactfromtheinformation

aboutthePuentes’presented

invignette.

(Circleoneforeach)

•

Robertcontinuestoholdthe

losinginvestments.Theidea

ofactuallylosingmoneyis

sopainfulthatthefirst

reactionistoholdthe

investmentuntilitbreaks

even.Heisactingbasedon

emotions,notcognitive

reasoning.

Heightenedlossaversion

Consumptiongaps

The“annuitypuzzle”

Preferenceforinvestmentincome

overcapitalappreciation

i.Robert

•

Conversely,thewinnersare

makingmoney.Robert

tendstosellthese

investmentsandrealize

theirgainstoavoidany

furtherrisk

•

Duetolossaversionand

uncertaintyaboutfuture

financialneeds,Mary

Heightenedlossaversion

Consumptiongaps

believesthatasretirees,

theyshouldbespending

lessthantheircurrent

expenditures.Thisresultsin

agapbetweenactualand

potentialconsumption.

The“annuitypuzzle”

ii.Mary

Preferenceforinvestmentincome

overcapitalappreciation

8

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2

-D.Calculatetheminimumbequest(inUSD)fromRobert’sestatetoMarytomeet

herspendingneedsandtaxes.Showyourcalculations.

Response:

Mary’slegalentitlementishalfofthecommunityproperty.Only15%ofRobert’s

assetsarecommunityproperty.

Communityproperty=15%×USD7,500,000=USD1,125,000

Mary’slegalentitlement=50%×USD1,125,000=USD562,500

SinceMaryneedsUSD950,000,hershortfallisUSD387,500.

AssetsbequeathedtoMary,aboveandbeyondherlegalentitlementunderthe

communitypropertylaw,willbetaxedatthespousalinheritancetaxrateof25%.

Therefore,RobertwouldneedtobequeathMaryUSD387,500/(1-25%)=USD

5

16,667orUSD520,000approx.tomeetherspendingneedsandthespousal

inheritancetaxof25%

9

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QUESTION3HASTHREEPARTS(A,B,C)FORATOTALOF16MINUTES

-A.i.Calculatethemodifieddurationofthebank’sequitycapitalinthecurrent

3

structure.

ii.Calculatethemodifieddurationofthebank’sequitycapitalintheproposedstructure.

Showyourcalculations.

Response:

Themodifieddurationofthebank’sequitycapitalisgivenby:

퐴

퐴

훥푖);퐸/퐴=10%,

푖.퐷퐸∗=(퐸)퐷퐴∗−(퐸

−1)퐷퐿∗(

퐴/퐸=10

훥푦

퐷퐸∗=10×2.5−(9×1.15×0.75)=17.2375

푖푖.퐸/퐴=20%,

퐴/퐸=5

퐷퐸∗=5×2.25−(4×1.15×0.75)=7.80

3

-B.i.Calculatethestandarddeviationofthebank’sequitycapitalunderthecurrent

structure.

ii.Calculatethestandarddeviationofchangesinthevalueofthebank’sequity

capitalundertheproposedstructure.Showyourcalculations.

Response:

Thevarianceofthepercentagechangesinthemarketvalueofequitycapitalisgivenby:

=(

퐴)2ꢀ2

퐸/퐸

+(퐸

퐴

−1)2ꢀ2−2(퐴)(−1)ꢁꢀ∆퐴/퐴ꢀ∆퐿/퐿

퐴

ꢀ

2

∆

∆퐴/퐴

∆퐿/퐿

퐸

퐸

퐸

푖.ꢀ∆2퐸=(10)2×0.032+(9)2×0.0152−2×(10)×(9)×0.8×0.03×0.015

퐸

=

0.043425

thestandarddeviationofthepercentagechangeinmarketvalueofequitycapital=

(0.043425)1/2=0.2084=21%peryearapprox.

푖푖.ꢀ∆2퐸=(5)2×0.022+(4)2×0.0152−2×(5)×(4)×0.8×0.02×0.015

퐸

=

0.0040

thestandarddeviationofthepercentagechangeinmarketvalueofequitycapital=

(0.0040)1/2=0.063246=6.325%peryearapprox.

3

-C.Determinethemostlikelyimpactoftheproposedchanges–loweringof

leverageandshiftinginvestmentstoliquidgovernmentassetsonthebank’s

earningspershare,returnonassets,creditrating,andlong-termgrowth.Justify

eachresponse.

10/37

LinkBank’sMetrics

Earningspershare

Returnonassets

(Circleone)

Justification

Theproposedchangesare

likelytoreduceearningsper

share,firstbyhavinga

greaternumberofshares

outstanding,andsecond

becauseofthenatureoflow

yieldingshort-maturity

liquidgovernment

Increase

Decrease

Nochange

securities.

Theexpectedreturnon

assetswilllikelydecline

becauseoflowyielding

short-maturityliquid

governmentsecurities.

Increase

Decrease

Nochange

CreditRating

Thelowerleveragewill

improvetheriskprofilethat

mightresultinahigher

creditrating.

Increase

Decrease

Nochange

Thebankissacrificingcurrent

earningswhilelookingforwardto

anuncertaintimehorizonwhenit

canaggressivelyexpandinamore

favorablefutureenvironment.This

improvesthelong-term

Long-termgrowth

Increase

Decrease

Nochange

survivabilitywithstronger

leverageratiosthatcouldresultin

ahigherlong-termgrowthoutlook.

11/37

QUESTION4HASTHREEPARTS(A,B,C)FORATOTALOF13MINUTES

4-A.Statetwostrengthsofeachapproachthathaslikelyappealedtoeachanalyst.

Response:

Rothusestheeconometricmodelingapproach.Rothlikelyusesthisapproach

becauseofitsfollowingstrengths:

•

Themodeldeliversquantitativeoutput/estimatesoftheimpactofchangesin

exogenousvariables.

•

Themodelimposesconsistencyanddisciplineontheprocessandgenerates

explicitforecasts.

Winstonusestheleadingindicator–basedLEIapproach.Winstonlikelyusesthis

approachbecause:

•

•

•

Itisintuitiveandsimpleinconstruction.

Itfocusesprimarilyonidentifyingturningpoints.

Itcanbeavailablefromthirdparties.Easytotrack.

4

-B.BasedonRoth’sassessments,determinethecapitalmarketeffects

CountryYwillmostlikelyexperienceintheshort-term.Justifyeachresponse.

BasedonRoth’sassessments,determinethecapitalmarketeffectsCountryYwill

mostlikelyexperienceintheshort-term.(Circleone)

Intheslowdownphase,the

economyisslowingand

approachingtheeventualpeak.

Rise

Fall

Inflationcontinuestorise.

Short-termrates

Short-terminterestratesbeing

procyclicalwillriseandare

likelytopeak.

Governmentbondyieldstopout

initiallyatthefirstsignsofa

slowingeconomyandmaythen

declinesharply.Theyieldcurve

mayinvert,especiallyifthe

Continuetorise

Starttodecline

Governmentbondyields

centralbankcontinuestoexert

upwardpressureonshortrates.

12/37

Businessconfidencewaversinthe

slowdownphase.Withrising

inflation,firmsarelikelytoraise

pricestostayaheadofrising

costsimposedbyotherfirms

doingthesame.Thestockmarket

mayfall,withinterest-sensitive

stocks-utilitiesand“quality”

stocksperformingbest.

Rise

Fall

StockMarket

4-C.Determinetheeffectofmonetaryandfiscalpoliciesonthenominalratesof

CountryY.Justifyyourresponse.

Determinetheeffectofmonetaryand

fiscalpoliciesonthenominalratesof

CountryY.(Circleone)

Justifyyourresponse

Lownominalrates.

Allelsethesame,loosefiscalpolicies

(largedeficits)increasethelevelofreal

interestratesbecausethedomesticprivate

sectormustbeinducedtosave

more/investinglessand/oradditional

capitalmustbeattractedfromabroad.A

persistentlytightmonetarypolicyreduces

actualandexpectedinflationresultingin

lower,nominalrates.Thecombined

impactcouldbehigherorlowernominal

rates.

Eitherhighorlownominalrates.

Highnominalrates.

13/37

QUESTION5HASTHREEPARTS(A,B,C)FORATOTALOF10MINUTES

5-A.Determinewhethertheconditionallinearfactormodelwillbethemost

appropriateapproachtoexplaintheriskexposuresperceivedbyMoranis.

Justifyyourresponse.

Response:

Theconditionallinearfactormodelisthemostappropriatemethodbecausehedgefund

strategiesaredynamic,andsuchamodelcanhelpdeterminetheeffectofcertainriskson

thehedgefund’sreturnunderaspecificmarketenvironment,e.g.,abnormalmarket

conditions.Justification:

Aconditionalmodelcanshowwhetherthefixed-incomearbitragestrategy’srisk

exposurestointerestrate,credit,orvolatilitythatareinsignificantduringcalmperiods

havebecomesignificantduringturbulentmarketperiods.

Themodelidentifiesasetofmacro-oriented,market-basedrisksandthenestimatesthe

returnbasedonthoseriskexposures.Asimpleconditionallinearfactormodelcalculates

returnsintermsofalinearcombinationof-eachriskfactorexposure,incremental

exposure,αtheinterceptforthehedgefund,andarandomerrorterm.Eachfactorbeta

representstheexpectedchangeinhedgefundreturnsforaone-unitincreaseinthe

specificriskfactor(saycreditrisk)whileholdingallotherfactorsconstant.

5

-B.Determinethemostappropriateimplementationpaththatshouldlikelybe

chosenbythehedgefundspecialiststrategy–volatilitytradingtomitigateVeek’s

andtheboard’sconcerns.Justifyyourresponsewithonereason.

Determinethemostappropriateimplementationpaththatshouldlikelybechosenby

thehedgefundspecialiststrategy–volatilitytradingtomitigateVeek’sandthe

board’sconcerns.(Circleone)

VIXIndex

futures

over-the-

counter(OTC)

options

exchange-

variance

swaps

tradedoptions

contracts

Justifyyourresponsewithonereason.

Theexchange-tradedoptionsarethemostappropriateinmitigatingVeek’sandthe

board’sconcerns.Thematurityofsuchoptionstypicallyextendstotwoyears.The

reasonsforchoosingthesimpleexchange-tradedoptionsasthemostsuitableare:

VIXfuturesareoftenpronetomeanreversionbecausevolatilityisnon-constant,high

levelsofvolatilitytypicallydonotpersistoverlongperiodsasmarketseventuallycalm

aftersurges.

14/37

Also,VIXfuturespricestypicallyslidedownapositivelyslopedimpliedvolatilitycurve

asexpirationapproaches,hencetradingsimpleexchange-tradedoptions,OTC

options,varianceswaps,andvolatilityswaps,arepreferred.Thegeneralmean-

revertingnatureofvolatilitystillimpactstheseproducts,butlessexplicitlythanwith

thefutures.

OTCoptions,aswellasvolatilityandvarianceswaps,arenotexchange-traded,they

mustbenegotiated.Theycarrymorecounterpartyrisk,andliquidityrisktoboth

establishandliquidatethantheexchange-tradedoptions.

5

-C.Identifythemulti-managerstrategythathastheattributesrequiredbytheboard.

Justifyyourresponse.

Identifythemulti-managerstrategythathastheattributesrequiredbytheboard.(Circle

one)

Fund-of-funds(FoF)

Multi-strategyfund

Justifyyourresponse.

Amulti-strategyfundinvestsinasinglefundthatincludesmultipleinternalteams

managingdifferentstrategiesunderthesameroof;afund-of-fundsinvolvesinvestingina

singlemanagerwhothenallocatesacrossasetofindividualhedgefundmanagers

runningdifferentstrategies.Theadvantages/positiveattributesofthemulti-strategy

managerareduetoitsstructurerelativetothatoftheFoF.Asaresult

•

•

•

Itcanreallocatecapitalintodifferentstrategiesmorequicklyandefficientlythanthe

FoFmanager.

Ithasfulltransparencyandabetterpictureofthedifferentteams’risksthantheFoF

manager.

Thefeestructureismoreinvestor-friendly;1)theGPisresponsiblefornettingrisk;

2

)theonlyinvestor-levelincentivefeespaidarethosedueonthetotalfund

performanceafternetting.

15/37

QUESTION6HASFOURPARTS(A,B,C,D)FORATOTALOF14MINUTES

6-A:Discussthreepotentialhurdlesinvolvedinaddingquantitative

modelstoafundamentalinvestmentapproach.

Response:

Theprocessesbehindquantitativeandfundamentalinvestingarequitedifferent,

combiningthesetwoapproachesisnotalwaysstraightforward.Thefollowingarethe

threepotentialhurdlesofaddingaquantitativeoverlay:

1

.

Quantitativeinvestingrequiresalargeupfrontinvestmentindata,technology,

andmodeldevelopment.

2

.

Itisgenerallydesirabletousefactorsandmodelsthataredifferentfromthose

usedbymostotherinvestorstoavoidpotentialcrowdedtrades.Ifseveral

quantitativemanagersusethesamestandardfactors,theywillexecutesimilar

trades,causingcrowdingofaninvestmentstrategy.Thismayresultinsignificant

lossesbecauseofthecrowdingofsimilartrades.

3

.

Resultsfromthequantitativeinvestmentprocesscansufferfromlook-aheadand

survivorshipbiasesifmanagersarenotcarefulwiththeirback-testing.Further,

transactioncostsandshortavailability(ifthefundinvolvesshorting)shouldbe

incorporatedintotheback-testing.

6

-B:DeterminewhetherFundI’scharacteristicsareconsistentwithapure

indexed,multi-factororasectorrotatorfund.Supportyourresponsewith

tworeasons.

Response:

FundI’scharacteristicsareconsistentwithasectorrotator.Ifafundisasector-

rotator,itcanchoosetohaveaconcentratedportfolio,withhighActiveShare.Orit

candiversifyitsportfolioandreduceActiveShare.FundI’sActiveShareisrelatively

lowerthereforesecurityconcentrationislow.

Reasons:

1

.

Itwouldnotbeuncommonforasectorrotator—typicallyahigh-activerisk

strategy—tohaveanactiveriskabove8%.FundI’sactiveriskis9.5%.

Ittoleratessectordeviationsupto20%.

2

.

Thesignificantactiveriskandhightoleranceforsectordeviationsandsecurity

concentrationarewhatonewouldexpecttofindwithasectorrotator.

16/37

6

-C:BasedonExhibit1,calculateAssetZ’scontributiontototalportfolio

variance.Showyourcalculations.

Response:

Contributionofeachassettoportfoliovariance=퐶푉푖=∑푛푗=1푥푖푥푗

퐶푖푗=푥푖퐶푖푝

ThecontributionofAssetZtoportfoliovarianceiscomputedasthesumofthe

followingproducts:

WeightofAssetZ×WeightofAssetX×

CovarianceofAssetZwithAssetX,plus

WeightofAssetZ×WeightofAssetY×

CovarianceofAssetZwithAssetY,plus

WeightofAssetZ×WeightofAssetZ×

CovarianceofAssetZwithAssetZ

0.3×0.4×0.00420=0.000504

0.3×0.3×0.00220=0.000198

0.3×0.3×0.01000=0.000900

0.001602

=

AssetZ’scontributiontototalportfolio

variance

17/37

QUESTION7HASFOURPARTS(A,B,C)FORATOTALOF11MINUTES.

-A.Discusstheappropriatenessofthecurrentassetallocationstrategyforthe

7

Endowment,andjustifyRiney’sconcernswithtworeasons.

Response:

Endowmenthastwomajorconstraints,i.e.,assetsizeandlimitedgovernance

resources.TheCapexrequirementinthenext2–3yearsindicatesaneedforhigher

liquidityinvestments.Assetallocationshouldbeinlargeandliquidinvestmentssuch

ascashequivalents,developedandemergingmarketequity,andsovereignand

investment-gradebonds.Investmentsinprivateequityandprivaterealestateequity

maybeunsuitablefortheEndowmentgiventheirlessliquidnatureandlimitedstaff

resourcesavailabletotheUniversity.

7

-B.DiscusshowthechangedcircumstancesarelikelytoinfluenceDaffodil’s

PensionPlanassetallocation.

Response:

Thedistributionsfromtheplanwillchange(astheproportionofactivelives

decreases).Thelowertheproportionofactivelives,thegreatertheplan’sliquidity

requirement.

Introductionofanearlyretirementoptionwithalump-sumpaymentincreasesthe

liquidityrequirementforthePlanbecause15%oftheworkforceacceptedtheoption

andwillreceivealump-sumpaymentwithinoneyear.

Anearlyretirementoptionwithalump-sumpaymentlowerstheweightedaverage

durationofPlanliabilities.Beforetheintroductionofthisoption,paymentsto

retireeswouldhavebeenmadeovermanyyearsinthefuture.However,withtheearly

retirementoption,forthat15%oftheworkforcewhoselectedthisoption,thesefar-

datedliabilitieswillnowbepaidoutofthePlanthroughalumpsumpayableinone

year.Theliabilitydurationforthis15%oftheworkforcehasthusdeclined.This

meansthatatthetimetheearlyretirementoptionisintroduced,theweightedaverage

durationofPlanliabilitieshasdeclined.

Asaresult,theplan’sassetallocationneedstoberevisedandtheproportionof

illiquidassetclass(i.e.privateequity)shouldbereducedwhileliquidassets(i.e.

cash)shouldbeincreased.

18/37

7

-C.Selectthemostappropriateproposedallocationforthepensionfundof

RIBsInsuranceCompany.Justifyyourresponsewithonereason.

Response:

Proposal1isthemostappropriatechoicebecausetheextensionofdurationinthe

bondportfolioinProposal1reducesthebalancesheetandsurplusriskrelativetothe

pensionliabilities.

Proposal2hasahigherallocationtoequitiesascomparedwithcurrentallocation

andProposal1.Higherallocationtoequitieswouldhelpinreducingfuture

contributions,whichisnottheobjectiveofthepensionplan.

19/37

QUESTION8HASSIXPARTS(A,B,C,D,E)FORATOTALOF18MINUTES.

-A.ExplainwhytheOASisdifferentfromotherspreads,whatdoesthe

8

differenceimply,andwhyOASisthebestmeasureofrelativevalueforthe

TRGWirelessbond.Justifyyourresponsesbygivingareasoneach.

Response:

TheTRGWirelessbondistradingatapremium,abovethecallableprice,hencethe

probabilityofbeingcalledonitsnextcalldateisquitehigh.Thebond’sOASof250

bpsisdifferent(lower)thanitsG-spread,I-spread,orZ-spreadbecauseofthecall

optiononthebond.

ThedifferencebetweentheOASandtheotherspreadmeasuresimpliesthatthevalue

ofthecalloptionisabout60bps.

TheTRGWirelessbondisacallablebondratherthanaplainvanillabondtherefore

option-adjustedspreadisthebestmeasureforitsvaluecomparedwiththeother

spreadmeasuresbecauseitshowsthevalueoftheembeddedoption.

8

-B.DeterminethemostsuitablebondforKhawaja’sportfoliobasedoneachbond’s

expectedexcessreturn,giventhatspreadswillremainunchangedinthefuture.

Response:

CalculatingtheexpectedexcessreturnofeachbondusingEquation2:EXR≈(s×

t)–(Δs×SD)–(t×p×L)

Where

EXR=expectedexcessreturn

s

t

=spreadatthebeginningoftheholdingperiod

=holdingperiodexpressedasafractionofayear

=changeincreditspread

∆

s

SD=spreadduration

p

=probabilityofdefault

=expectedlossseverity

L

BondI:EXR=(2.2%×0.5)−(0×3)−(0.5×0.61%×60%)=0.917%≈0.92%.

BondII:EXR=(1.1%×0.5)−(0×6)−(0.5×0.31%×60%)=0.457%≈0.46%.

Similarly,BondIII=0.66%approx.BasedonexpectedexcessreturnBondIisthe

mostsuitableforKhawaja’sportfolio.

20/37

8

-C.Giveareasonwhyaninvestorwouldconsiderfactorsotherthanexpected

excessreturninsecurityselectiondecisions.

Response:考前密训务必加微信

：xuebajun888s

Aninvestormayconsiderotherfactors,suchasliquidity,portfoliodiversification,

andriskforselectingthesecuritiesbesidesexcessreturnexpectations.Bondsare

chosenandmanagedinthecontextofanoverallportfolio.Becausebondsvaryin

theirriskiness,liquidity,andcorrelationwithotherportfolioassets,aninvestormay

considerabondwithlowerriskorgreaterliquidity,orabondthatprovidesbetter

portfoliodiversification,evenifitprovidesaloweraverageexpectedreturn.

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-D.DeterminewhetherGerbershouldincludeBondYintherelativevalueanalysis.

JustifybygivingthreereasonswhyBondY’sspreadishigherthanotheroutstanding

bonds.

Response:

BondY’sspreadissignificantlyhigherthanGTX’sotherbonds.Thecausesofthis

differencebeforeincludingBondYintherelativevalueanalysisshouldbeanalyzed.

BondY’shighercouponandlowercreditratingsuggestthatitisriskierthanthe

otherbonds.Itmaybesubordinatedinthecompany’scapitalstructure.BondYhasa

muchsmallerissuesizethatmayreflectlowerliquiditythanthecompany’sother

bonds.Illiquidbondsusuallyhavegreaterspreadstocompensateinvestorsforthis

disadvantage.Lastly,BondY’stradingatapremiumwhichmeansthatthelossinthe

eventofdefa