Topic Test Fixed Income - Chung #6

CFA Level III Fixed Income
#1

Hi everyone.

I tried Topic Test Fixed Income - Chung and #6 is killing me.

The question boils down to computing the portfolio’s reporting currency return given the portfolio’s local return (8.5%) and the currency return (-3.16%). I obtained (1+8.5%) * (1-3.16%) - 1 = 5.07%.

When I looked at the multiple choices it gave:

A. 5.20%

B. 5.34%

C. 3.90%

According to CFAI, the answer is B. 5.34% (= 8.5%-3.16%). I thought that using geometric link is safer but it doesn’t seem so. I start hating CFA.

Anybody have the same issue on when to use geometric link or simple addition?

Thanks,

Tokyo

#2

CFA uses simple addition in this specific topic(r+f) in book and topic tests so we should use the same.

I think simple addition also applies to return calculation for individual investors and geometric link for institutional investors unless stated otherwise in the question.

#3

OK, now you know. Try first if is not succeed, try another approach by solving vignettes.:slight_smile: One benefit of AM session, seems both approaches are graded if there is not strictly mentioned which one to use.

Schweser says, use compounding for institutional, and adding at individuals but I doubt how is this relevant.

#4

I thought the exact formula was presented in the material, I.e. 0.085 - 0.0316 - 0.085*0.0316. :confused: Otherwise, simple addition is an approximation.

#5

Hi lyk, Flashback, and breadmaker.

Thanks for your inputs and sympathy. I appreciate it. It’s true that for multiple choice questions, if one way does not work I can try another. Will do that.

Thanks!

#6

Hi Tokyo…your status indicating you already passed L3…

are you on the way preparation for Level IV ?

#7

hmmm… we must be helping with a work presentation or a job interview test question