CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA volume 2 finquiz item set answers, study session 6, reading 13

Question ID: 12425 Correct Answer: C Pinnacle Pharmaceuticals has a below average risk tolerance because: 2.. Question ID: 12426 Correct Answer: B The minimum return objective equals

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CFA Level III Item-set - Solution

Study Session 6 June 2018

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FinQuiz Level III 2018 – Item-sets Solution

Reading 13: Managing Institutional Investor Portfolios

1 Question ID: 12425

Correct Answer: C

Pinnacle Pharmaceuticals has a below average risk tolerance because:

Correct Answer: B

The minimum return objective equals the discount rate used to determine the present value of the pension liabilities This, for PP, is 7.5% PP plans to decrease the surplus return by 50% (this return is most likely to generate pension income or to minimize future contributions to the plan) The previous year’s surplus return percentage is 10.57-6.89= 3.68% Reducing it

by 50% and adding it to the discount rate we have a total return objective of:

7.5+1.84=9.34%

Correct Answer: A

The return objective of a foundation equals the spending rate plus the inflation rate plus investment management expenses For PLF, this equals:

4.75+0.67+2.5=7.92%

Overhead associated with grant making—for example, the salaries of program officers and other executives—counts toward the payout requirement (spending rate), so there is no need

to add it further (this will result in double counting)

Statement 1 is correct Carry-forwards and carry-backs allow a foundation to make a large grant in a single year without compromising the long-run soundness of its investment

program Hence, they make smoothing rules workable

Statement 2 is incorrect Income that is not related to a foundation’s charitable purposes is classified as unrelated business income and is subject to regular corporate taxes Hence, income from the grocery store should be taxed at the corporate tax rate However, income from real estate is also taxable as unrelated business income if the property is debt financed, but only in proportion to the fraction of the property’s cost financed with debt

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The current leverage–adjusted duration gap equals:

7.8–(243,999,452/368,460,157) 3.5 = 5.48

To immunize the balance sheet, the LADG should be reduced to zero This can be done by decreasing the duration of assets to 2.3177:

2.3177 – (243,999,452/368,460,157) 3.5 = 0

When the LADG equals zero, the market value of net worth will be unaffected

Correct Answer: C

Since the bank’s loan portfolio has low credit risk, the bank can take more credit risk with its securities portfolio However, since the bank’s liabilities have a short duration (3.5 years), the securities portfolio will have a short time horizon

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