Grab Bag of 4 Questions

CFA Level III
#1

I have completed my first pass through the level three material. Even after reading through the following concepts at least a couple of times, I still do not feel that I have an adequate understanding to answer questions on the exam. Thank you in advance for the help.

  1. Study Session 3: Why are “layered pyramids” considered a psychological bias? Isn’t this just a version of a constant proportion portfolio?
  2. Study Session 4: Deferred taxes equation. TECG = TCG [(1-PI+PD+PCG))/1-(PITI+PDTD+PCGTCG)] The numerator in this equation appears to be zero.
  3. Study Session 5: How does the economic balance sheet effect beta? Does the economic balance sheet effect beta more than the “actual” balance sheet?
  4. Study Session 12: How are differential voting rights and dual class shares different?
#2

  1. Correlations between assets within each layer are not considered when you allocate by “pyramiding” . This is going to create sub-optimal or sub-utilitarian portfolios

  2. Numerator cannot be zero .There is always a portion left over that has unrealized capital gains.

  3. Share prices reflect the effect of pension risk. But company balance sheets frequently do not . For example calculating the WACC using balance sheet data ( i.e. asses and liabilities and therefore equity capital ) may understate or overstate risk taken if pension allocation is heavily in risky assets versus not.

  4. dual class shares are how the founders implement differential voting rights. Even when the founders proprtional share of risky capital is smaller , they can excercise effective control by using dual class provisions

#3

janakirsi,

Thank you for your help! It is much appreciated. Sometimes it just takes someone presenting the material in a slightly different way to facilitate understanding.