Reading 18, Practice Problem 3: "asset classes should be relatively homogeneous", seriously???

CFA Level III Portfolio Management
#1

In reviewing a financial plan written by the Laws’ previous adviser, Raye notices the following asset class specifications.

Equity: US equities Debt: Global investment-grade corporate bonds and real estate Derivatives: Primarily large-capitalization foreign equities

The previous adviser’s report notes the asset class returns on equity and derivatives are highly correlated. The report also notes the asset class returns on debt have a low correlation with equity and derivative returns

(Institute, 5/2018, p. 223)

Institute, C. (5/2018). 2019 CFA Program Curriculum Level III Volume 3 [VitalSource Bookshelf version]. Retrieved from https://bookshelf.vitalsource.com/books/9781946442451

Raye believes the previous adviser’s specification for debt is incorrect given that, for purposes of asset allocation, asset classes should be:

  1. diversifying.
  2. mutually exclusive.
  3. relatively homogeneous.

(Institute, 5/2018, p. 224)

Institute, C. (5/2018). 2019 CFA Program Curriculum Level III Volume 3 [VitalSource Bookshelf version]. Retrieved from https://bookshelf.vitalsource.com/books/9781946442451

C is correct. In order to effectively specify asset classes for the purpose of asset allocation, assets within an asset class should be relatively homogeneous and have similar attributes. The previous adviser’s specification of the debt asset class includes global investment-grade corporate bonds and real estate. This definition results in a non-homogeneous asset class.

(Institute, 5/2018, p. 226)

Institute, C. (5/2018). 2019 CFA Program Curriculum Level III Volume 3 [VitalSource Bookshelf version]. Retrieved from https://bookshelf.vitalsource.com/books/9781946442451

Why not B mutually exclusive???

#2

This is how I understood it: the previous adviser had listed RE and bonds as ‘‘Debt’’. Therefore, mutual exclusiveness is not violated as the previous adviser thinks that RE is indeed debt. However, homogeneity is violated as they don’t share similar characteristics.

#3

Well, those not sharing similar characteristics are assets (the bonds and real estate) within the asset class, not asset classes, aren’t they?

#4

I think you need to assume that in the eyes of the previous manager, they have similar characteristics. It’s a weird question and the wording is terrible.