I've been going through the previous years' exams and I've got a couple of questions about the guideline answers on the 2010 AM exam.
Q1 A(i) asks what are the liquidity constraints in Elisa Lima's IPS.
I wrote my answer based on the framework @sophie had suggested in her comments on tackling IPS problems -- Immediate (current one offs), Ongoing (living/medical expenses), Other (e.g. house in future, expected receipt of large cash flow). I mentioned her immediate need in the next year to fund her children's education (USD 50,000) and since Lima expects to receive USD 1,000,000 when she retires, and expects to pay USD 3,000,000 to buy an annuity upon retirement, I mentioned those as part of the 'Other' liquidity needs.
But the guideline answer just says, "Lima will fund education expenses for her children in one year at a cost of USD 50,000. Lima has no other liquidity needs."
What are your thoughts on that - is it still okay to mention the long-term liquidity need in the future?
Q1 E: This question is about the amount of bonds to buy and sell in order to achieve the most tax-efficient allocation. I did not understand the guideline answer for this at all -- is there a worked example or EOC problem I can refer to in order to understand?
Q8 A: This question is about rebalancing schedules. There are two methods ---- calendar and percentage-of-portfolio (with tolerance band +/- 10%).
The guideline answer says," Although the 28% weighting in international equities is within the tolerance band under the percentage of portfolio rebalancing approach, the 45% weighting in UK fixed income is outside the tolerance band. Thus, all asset classes would be rebalanced to target weights."
But the thing is that the UK fixed income target weighting is 40%, so if it was 45% as of 31st March, it would be well within the 10% corridor, wouldn't it?
Or do they mean to say that 45-40 = 5 which makes it greater than 10% of the target allocation 40% and that's why we have to rebalance?
Q1 A(i) asks what are the liquidity constraints in Elisa Lima's IPS.
I wrote my answer based on the framework @sophie had suggested in her comments on tackling IPS problems -- Immediate (current one offs), Ongoing (living/medical expenses), Other (e.g. house in future, expected receipt of large cash flow). I mentioned her immediate need in the next year to fund her children's education (USD 50,000) and since Lima expects to receive USD 1,000,000 when she retires, and expects to pay USD 3,000,000 to buy an annuity upon retirement, I mentioned those as part of the 'Other' liquidity needs.
But the guideline answer just says, "Lima will fund education expenses for her children in one year at a cost of USD 50,000. Lima has no other liquidity needs."
What are your thoughts on that - is it still okay to mention the long-term liquidity need in the future?
Q1 E: This question is about the amount of bonds to buy and sell in order to achieve the most tax-efficient allocation. I did not understand the guideline answer for this at all -- is there a worked example or EOC problem I can refer to in order to understand?
Q8 A: This question is about rebalancing schedules. There are two methods ---- calendar and percentage-of-portfolio (with tolerance band +/- 10%).
The guideline answer says," Although the 28% weighting in international equities is within the tolerance band under the percentage of portfolio rebalancing approach, the 45% weighting in UK fixed income is outside the tolerance band. Thus, all asset classes would be rebalanced to target weights."
But the thing is that the UK fixed income target weighting is 40%, so if it was 45% as of 31st March, it would be well within the 10% corridor, wouldn't it?
Or do they mean to say that 45-40 = 5 which makes it greater than 10% of the target allocation 40% and that's why we have to rebalance?