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1、TheMorningSessionofthe2016LevelIIICFAExaminationhas10questions.Forgradingpurposes,themaximumpointvalueforeachquestionisequaltothenumberofminutesallocatedtothatquestion.MinutesQuestionTopic1PortfolioManagement-Institutional202PortfolioManagement-FixedIncome223PortfolioManagement-Equity】94PortfolioMan
2、agement-AssetAllocation135PortfolioManagement-Trading,Monitoring,Rebalancingi36PortfolioManagementIndividual227PortfolioManagementIndividualH8PortfolioManagementRiskManagement209PortfolioManagementEconomics1810PortfolioManagement-IndividuaIZBehavioral16Total:180THISPAGEINTENTIONALLYLEFTBLANKMARKSMAD
3、EONTHISPAGEARENOTGRADEDQUESTION1HASFOURPARTS(A,B,C,D)FORATOTALOF20MINUTES.SophoCollegeisasmall,privateuniversity.TheuniversitylibraryhasanendowmentcurrentlyvaluedatUSD21,000,000.Theendowmentsonlypurposeistofullyfundthelibrary,sannualsubscriptionexpenseforonlineacademicjournals.Thejournalsareconsider
4、edessentialtokeepSophocompetitive.Sophoischangingthelibraryssubscriptionservicetoanewprovider.TheproviderofferstwosubscriptionoptionsasshowninExhibit1.Theadministrationdesiresthehighestlevelsubscriptionthattheendowmentcanfundinperpetuity.MarkMadison,afinancialadvisortotheendowmentsboard,isanalyzingt
5、hesubscriptionoptionsandreviewingtheIPS.Exhibit1SUmmaryofSubscriptionOptionsOptionOne-timeInitiationFee(dueimmediately)AnnualSubscriptionExpense(dueatyearend)ExpectedIncreaseinAnnualSubscriptionExpenseBasicUSD500,000USD800,000Inflationplus1%PremiumUSD1,000,000USD1,000,000Inflationplus1%Theobjectiveo
6、ftheendowmentistofullyfundthesubscriptioncostsinperpetuityandmaintainthepurchasingpoweroftheinvestableassetbaseafterpaymentoftheone-timeinitiationfee.TheendowmentsriskmanagementpracticesrequireMadisontouseMonteCarlosimulationstoaccountforreturnvolatilityinevaluatingtheriskofpurchasingpowererosion.Gi
7、vencapitalmarketexpectationsandtheendowmentsassetallocation,theexpectedlong-termtotalreturnoftheendowmentis8.5%peryearwithanexpectedstandarddeviationof18.0%.Annualmanagementfeesarc0.5%ofthemarketvalueoftheendowmentsassets.Theendowmentsboardunderstandsthatthespendingrateaffectsrisktolerance,andtheyar
8、ecomfortablewithanabove-averageriskexposure.Theendowmentreinvestsanyportfoliosurplus.Nodonationsareexpectedintheforeseeablefture.Economy-wideinflationisforecasttobe2.0%peryear.A.Calculatethereturnrequirementtofullyfundeachsubscriptionoption.Determinewhichsubscriptionoptionismostappropriatefortheendo
9、wment,givenitsobjectiveandriskmanagementpractices.Justifyyourresponse.Note:Usearithmeticreturns,ratherthangeometricreturns,forthereturnrequirementcalculations.8minutes(AnswerI-Aonpage5)B.Discuss,otherthantheportfolioreturnrequirement,onefactorthat:i.decreasestheendowment,sabilitytotakerisk.ii.increa
10、sestheendowmentsabilitytotakerisk.Note:Restatingcasefactswithoutadditionalsupportwillnotreceivecredit.4minutes(AnswerI-Bonpage6)MadisonalsoadvisestheboardofPrairicFoundation.Thefoundationfundsannualresearchgrantsonadiscretionarybasisforthedevelopmentofagriculturaltechnologies.Thefoundationsreturnobj
11、ectiveistoearnthehighesttotalreturnconsistentwithitsriskobjectivewhilemaintainingthepurchasingpoweroftheinvestableassetbase.Thelegallyrequiredminimumspendingrateforthefoundationtomaintainitstax-exemptstatusis4.0%.Thefoundation,sspendingrateisslightlyabovethatat4.3%.Annualmanagementfeesare0.2%ofthema
12、rketvalueofassetsandarenotincludedintheminimumspendingratecalculationfortaxpurposes.ThecurrentmarketvalueofthefoundationportfolioisUSD20,000,000.ThefoundationrecentlyreceivedadonationcommitmentofUSD2,000,000foreachofthenextfiveyears.Followingthisnewdevelopment,MadisonreviewsthefoundationIPS.C.Determ
13、inewhetherthefoundationsabilitytotakeriskislowerthan,thesameas,orhigherthanthatoftheSophoCollegelibraryendowment.Justifyyourresponsewithfworeasons.5minutes(AnswerI-Conpage7)Threeyearslater,thefoundation,sportfoliovaluehasdecreased.Atthebeginningoftheyear,theboarddecidestoswitchfromthecurrentfixedtar
14、getspendingratetoarollingthrcc-ycaraveragespendingrule,withthesamespendingrateof4.3%.D.Determinewhetherthefoundationstargetspendingforthecomingyearwillbelower,thesame,orhigherusingthenewspendingruleinsteadoftheoldspendingrate.Justifyyourresponse.3minutes(AnswerI-DonPage8)AnswerQuestionI-AonThisPage1
15、-A.Calculatethereturnrequirementtofullyfundeachsubscriptionoption.Determinewhichsubscriptionoptionismostappropriatefortheendowment,givenitsobjectiveandriskmanagementpractices.Justifyyourresponse.Note:Usearithmeticreturns,ratherthangeometricreturns,forthereturnrequirementcalculations.AnswerQuestionI-BonThisPage1-B.Discuss,otherthantheportfolioreturnrequirement,onefactorthat:(seei.andii.below)Note:Restatingcasefactswithoutadditionalsupportwillnotreceivecredit.i.decreasestheendowmentsabilitytotakerisk.ii.increasestheendowmentsabilitytotakerisk.AnswerQuestiononThisPageDetermi
