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

FinQuiz Item-set ID: 16910 Questions 1 16911 through 616916 Roseanna Bright Case Scenario Roseanna Bright recently established an asset management firm by the name of Bright Investment

Trang 1

FinQuiz.com

CFA Level III Item-set - Question

Study Session 3 June 2018

Trang 2

FinQuiz Item-set ID: 16910

Questions 1 (16911) through 6(16916)

Roseanna Bright Case Scenario

Roseanna Bright recently established an asset management firm by the name of Bright

Investments (BIN), a firm that specializes in both stock and bond markets Bright worked as a financial advisor for fifteen years at numerous investment management firms before establishing her own firm Since BIN is relatively young, it offers only a few products to its clients and has a total of nine senior portfolio managers One of the products offered by BIN is the “Growth Fund” and Quinn Walter is in charge of the fund’s management According to Walter, to qualify for inclusion in the fund, a company needs to have a five-year cumulative forecasted growth rate

of more than 10%, R&D expenditure that increases by 2% or more every year, a high P/E ratio, and should belong to a growth industry Any company not meeting these criteria is not eligible for further analysis Recently, Bright recommended a stock to Walter for the Growth Fund, which he believes (based on an analysis of fundamentals), has a high probability of achieving an above-normal growth rate in the future Walter stated that since the stock does not belong to a growth industry, it cannot serve as an attractive investment for the fund

Walter recently purchased a stock for the fund after considerable analysis of the company’s fundamentals and expected future growth rate However, a few months back, the company

announced that its future growth rate might be 7%-8% lower than expected because of the

interaction of certain industry factors and company fundamentals When discussing these

changed circumstances with Bright, Walter made the following comment:

“I don’t think that the value that will be derived from interpreting this new information with be worth the cost and efforts involved in processing the information and making a decision

accordingly.”

Walter continued his day with an assessment of two of his clients’ portfolios; one of Jeremy Jack, and the other of Ellen Cross Walter discovered that over the past few years, Jack’s

portfolio has been inadequately diversified leading to an excessive exposure to risk Walter decided to hold a meeting with Jack to discuss the consequences of such an under-diversified portfolio

Walter also examined Cross’s portfolio’s returns over the past three years He discovered that the portfolio’s returns were considerably lower than a broad-market based index return measured over the same period Upon further assessment, Walter ascertained that the cause of such an inferior performance was excessive trading and a high turnover

Trang 3

After the analysis, Walter met with Bright to talk about behavioral biases He made the following comments:

Statement 1: “Individuals subject to the conservatism bias tend to overweight the base rates,

and those subject to the representativeness bias tend to underweight the base rates.”

Statement 2: “A useful step in correcting for the confirmation bias is to get corroborating

support for an investment decision.”

Bright is assessing the performance of equity mutual funds over the past seven years Bright determined that investors tend to buy into a fund immediately following rapid price appreciation Also, these periods tend to precede a subsequent decline in the fund’s performance Bright is analyzing the reasons for such investor behavior

FinQuiz Question ID: 16911

likely subject to the:

the:

Trang 4

Trang 5

FinQuiz Item-set ID: 17018

Questions 1 (17019) through 6(17024)

Neil Brown Case Scenario

Neil Brown works as a portfolio manager at Money-Wise Investment Management (MWIM), an asset management firm established in Florida, USA Brown works with a team of research

analysts and financial advisors to determine appropriate asset allocations for the firm’s clients About a year ago, Brown invested in the stock of Agricultural Group of Industries (Agri-Group)

at a time when its price was $67/share When determining the investment’s current value, Brown found out that the share price had risen significantly resulting in a holding period return of 18% When Stacey Turner, one of Brown’s colleagues, found out about the remarkable performance, she requested Brown to give her some details about the stock’s characteristics She then used that information to select stocks for her own portfolio

Brown had also invested in a technology stock about the same time he invested in the stock of Agri-Group Based on analysis of the company’s industry, competition, and fundamentals,

Brown had set a target price of $88/share for the stock Just recently, Brown’s broker called to inform him that the share price had risen to $90/share, and asked if he should sell the stock Thinking that the share price had already exceeded the target he set, and that chances of the price rising even more were high, Brown decided to wait further before selling the stock

Turner is responsible for the management of a private wealth fund worth seven million dollars The fund came under the management of Turner around six months ago, at which time she performed a thorough analysis of the portfolio’s composition and the client’s objectives and constraints Turner found out that the portfolio had experienced little or no turnover over the past seven years, and the frequency of trading was very low This was true even though the return and risk objectives of the client altered significantly over the same period When Turner brought this

to the attention of the client, he asked her to identify only those investments in his portfolio that had gained and to sell them immediately

After her meeting with the client, Turner met Brown to discuss the effects of behavioral biases

on optimal portfolio construction She posed the following question:

“What kind of behavioral biases lead individuals to engage in the tendency of ascribing their successes to personal skills and failures to exogenous factors, and to engage in herding

behavior?”

Brown then stated comments made by two of his clients:

Trang 6

Client B: “When any of my investments drops in value and I am unsure if it will come

back, I usually wait for the share price to rise at least to my purchase price before

I sell the stock.”

Brown just decided to invest $15,000 in one of the following two companies: White Inc and Black Inc White Inc is a large, well-established firm that has been in business since the past ten years Most of the firm’s shareholders are institutional investors Black Inc., on the other hand, is

a newly established firm, and although it has managed to generate high profits in the past two years, it still has a long way to go before acquiring the public profile that White Inc has

achieved Brown performed a few calculations using information about each company’s

fundamentals and was surprised to find that, according to his calculations, the two firms had equal risk and return payoffs Brown decided to invest in White Inc because it was backed by large institutional investors

likely subject to:

Trang 7

risk, for whom should the appropriate approach to asset allocation include adapting to the bias?

Định dạng
Số trang	7
Dung lượng	37,32 KB