CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 CFA volume 2 finquiz item set questions, study session 5, reading 11

Carlin advises high net-worth clients whose accounts are concentrated by either a single-stock position or investment real estate.. Martin holds $20 million worth of DA’s stock which con

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CFA Level III Item-set - Question

Study Session 5 June 2018

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FinQuiz Item-set ID: 19274

Questions 1 (19275 ) through 6 (19280 ) relate to Reading 11

Joyce Carlin Case Scenario

Joyce Carlin is a wealth advisor at Summit Associates, a U.S based asset advisory firm Carlin advises high net-worth clients whose accounts are concentrated by either a single-stock position

or investment real estate During her annual round of meetings with clients, Carlin observes a collective need for the diversification of concentration risk Carlin jots down notes with respect

to four of her clients and their accounts

Rob Martin

Martin, aged 60, is the retired chief operating officer (COO) at DA Solutions Martin holds $20 million worth of DA’s stock which constitutes 70% of his investment portfolio Also comprising his portfolio is an equal allocation to the three categories; cash/Treasuries, commodities, and equities Carlin employs goal-based planning for managing Martin’s portfolio

Furthermore,

of $55 per share However, Martin refused to sell his stock for less than $60/share stating,

“The stock holds significant value to me I have worked hard to bring the company to where

it stands today and refuse to sell the stock at a price which disregards my efforts.”

Gus Chappell

Chappell owns a vacant warehouse located within his factory premises He is seeking to sell the property to pay off a $25 million loan due in three months’ time Carlin summarizes details on alternative strategies which may be used to generate the necessary proceeds (Exhibit 1)

The warehouse is valued at $26 million with a zero cost basis Last year Chappell had fully utilized $6 million of unused capital loss carry forwards The applicable tax rate is 30%

Exhibit 1

Alternative Strategies for Chappell’s Investment Real Estate

Leila Ali

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• She holds a concentrated position in her former employer’s stock and heavily depends on the dividend yield to cover retirement living expenses

portfolio

Based on the information gathered on Ali, Carlin devises four potential diversification strategies three of which involve options

Exhibit 2

Proposed Diversification Strategies for Ali’s Portfolio

W**

Long put Short call

$10

$12

$45

Y**

Long put Short put

$8

$6

$43

$40

*The share’s current market price is $45

**All options are identical in terms of maturity and the underlying

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FinQuiz Question ID: 19275

be most suitable for paying off Chappell’s $25 million loan?

which of the following strategies is most suitable?

appropriate diversification vehicle for Ali’s portfolio?

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