- Kelli Blakely, a portfolio manager with the Miranda Fund, a large cap index fund, achieved a 10.2% return during the past year while the S&P 500 lost 22.5% for the same period. Her portfolio consisted of stocks and cash. Blakely was able to produce such returns through her exceptional market timing and securities selection skills. During the year, the S&P exhibited a standard deviation of 44% while Blakely’s portfolio standard deviation was 37%. The calculated beta on the Miranda Fund was 1.10. The market proxy and benchmark for performance measurement purposes is the S&P 500. Using the S&P 500 as a benchmark for the year, the allocation between stock and cash was a constant 97% and 3%, respectively. During the year, Blakely was concerned that the combination of a weak economy and geopolitical uncertainties would negatively impact the market returns. Taking a bold step, she changed her market allocation to an average of 50% in stocks and 50% in cash. Throughout the year, the risk-free rate of cash returns was 2%. What is the total value added? A) 32.70%. B) 21.26%. C) 34.70%. 2. In 30 days, a firm wishes to borrow $15 million for 90 days. The borrowing rate is LIBOR plus 250 basis points. The current LIBOR is 3.8%. The firm buys an interest-rate call that matures in 30 days with a notional principal of $15 million, 90 days in underlying, and a strike rate of 4%. The call premium is $4,000. What is the maximum effective annual rate the firm can anticipate paying? A) 0.0671. B) 0.0603. C) 0.0687. 3. Using as his universe all companies in the steel industry, Reynold Anderson analyses the performance of stock prices for the industry. He succeeds in developing a regression model with excellent statistical control measures. The extrapolation from the model shows low risk variance of the securities in this industry. Without the inclusion of non-steel stocks in the portfolio, Anderson concludes that, based on these results, every portfolio can use the steel industry securities to diversify and lower its risk. He persuades his clients to change their current portfolios. Anderson states that, as the model’s results show, some particular industries, such as car manufacturers, have underpriced stocks, and investors should take advantage of it. Anderson has violated the Standards because he: A) does not consider the suitability of the investment. B) does not distinguish the opinion, based on his model, from the fact. C) is not clear enough about the model results. 4. Using as his universe all companies in the steel industry, Reynold Anderson analyses the performance of stock prices for the industry. He succeeds in developing a regression model with excellent statistical control measures. The extrapolation from the model shows low risk variance of the securities in this industry. Without the inclusion of non-steel stocks in the portfolio, Anderson concludes that, based on these results, every portfolio can use the steel industry securities to diversify and lower its risk. He persuades his clients to change their current portfolios. Anderson states that, as the model’s results show, some particular industries, such as car manufacturers, have underpriced stocks, and investors should take advantage of it. Anderson has violated the Standards because he: A) does not consider the suitability of the investment. B) does not distinguish the opinion, based on his model, from the fact. C) is not clear enough about the model results. 5. Bison Services announced their third quarter earnings last week. The earnings were 6% greater than expected. Jill Hoover and Charles Kershaw are both following the stock. Hoover is an overconfident investor. Kershaw is a stock analyst who uses anchoring to form his expectations of earnings. Which of the following is the most likely scenario in the future? A) Hoover will be disappointed by the subsequent movements in Bison stock and Kershaw will be pleased by the subsequent movements in Bison stock. B) Both Hoover and Kershaw will be pleased by the subsequent movements in Bison stock. C) Hoover will be pleased by the subsequent movements in Bison stock and Kershaw will be disappointed by the subsequent movements in Bison stock. 6. World Wide Telecom (WWT), a troubled internet service provider recently filed Chapter 11 bankruptcy after seven unsuccessful years of operations. It was a plan sponsor in WWT Pension Plan for the benefit of its employees. The following information was available at the time of its bankruptcy filing: Employees: 500 Plan assets: $15 million Plan liabilities: $19 million Average age of workforce: 30 1% of plan assets are being paid out to retirees and no more participants are expected to retire over the next five years. Due to the company’s financial condition, the plan was under-funded. The duration of the plan liabilities is 25 years. Inflation is expected to be approximately 1% over the next five years. The bankruptcy trustee appointed Eric Geecu, CFA, as the portfolio manager overseeing the WWT Pension Plan to develop guidelines for its investment policy statement and the ultimate distribution of the proceeds of the plan upon fully funded status. Geecu believes that fully funded status could be achieved within the next five years, assuming the plan earns an expected rate of return in excess of its plan liabilities. The plan liabilities are expected to increase at the rate of inflation. In developing an investment policy statement (IPS) for WWT Pension Plan, which constraints should Geecu consider? A) A long time horizon, unique circumstances associated with the Chapter 11 bankruptcy, with no current taxes to be considered for the pension plan. B) The pension plan is governed under ERISA, unique circumstances that the plan cannot provide any funds to meet the plan’s underfunded status, and a long time horizon. C) A short time horizon, low liquidity needs, with assets managed according to the “prudent expert” rule.
My mistake, question 4 was supposed to be: A portfolio manager has used a Treasury bond futures contract to hedge a mortgage security, which is trading at par, against a decrease in value from a 50 basis point increase in yield. If the yield were to decrease 50 basis points, the most likely result is: A) the net value of the position with the hedge will increase. B) the net value of the position with the hedge will decline. C) the net value of the position with the hedge will not change. I really need to work on my proofreading…
C -10.2+22.5+2 A - 15 million * max rate( 4+2.5)+ 4000 call option cost divided by 15 million for 90 days A B - for the new questions A B
A C A A A A? man, that is too many a’s.
cfasf1 Wrote: ------------------------------------------------------- > A > C > A > is four same as three? > A > A? Unfortunately I didn’t notice my slip up until it was too late to edit it. See the second post for question 4.
yup, i edited my answer after i saw it. unfortunately, i’d be lucky to have any of these right… especially the one you just added. fixed income will kill me. 
cfasf1 Wrote: ------------------------------------------------------- > A > C > A > A > A > A? > > man, that is too many a’s. Ah, the all too popular “answers have to be different” bias. ; )
- I have no idea - this has to be a trick question so A can’t be right… 2. C 3. A 4. A 5. A 6. B
mwvt9 Wrote: ------------------------------------------------------- > cfasf1 Wrote: > -------------------------------------------------- > ----- > > A > > C > > A > > A > > A > > A? > > > > man, that is too many a’s. > > Ah, the all too popular “answers have to be > different” bias. ; ) completely logical, right?
Some nasty social studies teacher in middle school gave us a 20 question quiz. At the end he had us pass it to the right to be graded by another student. He then told us that every answer was C. I had this huge list of Cs in front of me and said these can’t all be right (especially towards the end). So I changed a bucnch and got burned.
A A B B A A (ilvino crosses his fingers)
A C A A A B
I’m changing #2 to C. [(15,000,000 + 243,750 / 15,000,000 - 4,021 ) ^(365/90) - 1] = .06872 = C.
Was that in response to my story, ilvino?
Yes, I was hedging in case all the answers are C.
Smart move. You are a lock this year.
I can’t guarantee I’m a lock, since I forgot to assess the basis risk of my letter C hedge - who knows how effective it will be.
- C 2. C 3. A 4. B 5. A 6. C
sv102307 Wrote: ------------------------------------------------------- > A > C > A > A > A > B Either we’re both going to pass together or fail together. Are you copying my answer key??
********ANSWERS from QBank********* 1. Your answer: A was correct! total value-added = overall actual fund return – overall benchmark returns = 10.2 − (-22.5) = 32.70% Blakely’s Miranda Fund was able to outperform the S&P 500 index by 32.7%. This question tested from Session 17, Reading 47, LOS l, (Part 1) 2. Your answer: A was incorrect. The correct answer was C) 0.0687. First we compute the implied net amount to be borrowed after the cost of the call: $ 14,995,979 = $15,000,000 − $4,000 × (1 + (0.038 + 0.025) × (30 / 360)) The most the firm will expect to pay is the rate associated with the strike rate: 4% plus the 250 basis-point spread equals 6.5%. This gives the nominal cost of the loan: $243,750 = $15,000,000 × 0.065 (90 / 360) The highest effective annual rate is: 0.0687 = ($15,243,750 / $14,995,979)(365/90) − 1 This question tested from Session 15, Reading 43, LOS b 3. Your answer: A was incorrect. The correct answer was B) does not distinguish the opinion, based on his model, from the fact. While any of the answers can be shown to violate CFA Institute Standards, this cannot be determined conclusively from the information given. However, the scenario clearly indicates that Anderson does not distinguish between opinion and fact in communicating to his clients. Therefore, he violates the Standards on this basis. This question tested from Session 2, Reading 4, LOS a, b 4. Your answer: A was incorrect. The correct answer was B) does not distinguish the opinion, based on his model, from the fact. While any of the answers can be shown to violate CFA Institute Standards, this cannot be determined conclusively from the information given. However, the scenario clearly indicates that Anderson does not distinguish between opinion and fact in communicating to his clients. Therefore, he violates the Standards on this basis. This question tested from Session 2, Reading 4, LOS a, b 5. Your answer: C was incorrect. The correct answer was A) Hoover will be disappointed by the subsequent movements in Bison stock and Kershaw will be pleased by the subsequent movements in Bison stock. When overconfident investors revise their forecasts based on new information, they tend to overestimate the impact. As an overconfident investor, Hoover will be disappointed by the subsequent movements in Bison stock because of her initial overoptimism after the earnings announcement. Investors who use anchoring tend to underestimate the impact of new information because they are anchored in their old beliefs. Kershaw will be pleased by the subsequent movements in Bison stock because he will have initially underestimated the impact of the positive earnings announcement. This question tested from Session 3, Reading 9, LOS a 6. Part 1) Your answer: A was incorrect. The correct answer was C) A short time horizon, low liquidity needs, with assets managed according to the “prudent expert” rule. Time horizon – The time horizon for this plan is short. Since the plan sponsor, WWT, is currently in bankruptcy and would not be considered a going concern, it cannot provide any funds to minimize the plan deficit. Since there is only a 5-year time horizon for the plan coupled with the uncertainty on the disposition of available funds in five years, the primary goal of this plan is on capital preservation with a secondary focus on income and a third goal of some growth over the time horizon. Five years is a short time frame to achieve these goals. Any IPS developed must consider capital preservation first and then consider a total return approach to preserve the plan from the effects of inflation. Liquidity – The liquidity needs of this portfolio are low primarily because only 1% of the plan assets are currently being paid out and no more employees are expected to retire over the next five years. The average age of the workforce is 30 and young and will not require any distributions until the expected termination upon its fully funded status. Therefore, the plan only has to provide for its current retirees at a rate of 1% per year. Laws and regulations – This pension plan is governed by ERISA and must adhere to the prudent expert rule. As such, diversification is necessary to minimize the risk of large losses to the plan and capital preservation. Taxes – There are none to be considered for the pension plan. However, upon the distribution of the plan assets after five years, there could be a tax impact on the plan participants. Tax counsel is advised here for the plan and its participants to also do some tax planning for the ultimate distribution of the proceeds of the plan in five years. Unique circumstances – WWT, the plan sponsor, is in a Chapter 11 bankruptcy filing and, therefore, cannot provide any funds to meet the plan’s underfunded status. The plan must also consider the administration of the distribution of the proceeds of the plan after five years to its plan participants. Should the underfunded status remain (assuming a higher than expected level of benefits are paid out to retirees or the expected rate of return does not meet the level of the plan liabilities) special policies and procedures may need to be considered at the time of the distribution of the plan assets. This question tested from Session 5, Reading 21, LOS j