CFAIII模考2学员版（题目＋解析）

2

021LEVELIIITestExam2

ThemorningsessionoftheCFALevelIII2021PracticeExamhas7questions.For

gradingpurposes,themaximumpointvalueforeachquestionisequaltothenumberof

minutesallocatedtothatquestion.

QuestionsTopic

Minutes

1

2

3

4

5

6

PortfolioManagement–DerivativesandCurrencyManagement

PortfolioManagement–Equity

9

20

29

14

27

24

PortfolioManagement–FixedIncome

PortfolioManagement–Behavioral

PortfolioManagement–Individual

PortfolioManagement–Institutional

PortfolioManagement–Trading,PortfolioPerformance,and

Trading

7

9

Total

132

MorningSession

1

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QUESTION1HASATOTALOFTHREEPARTS(A,B,C)FORATOTALOF

9MINUTES.

ViaanNadela,CFA,isaforeignexchangeanalystataUS-basedhedgefundthatinvestsin

emergingmarketcurrencies.Nadelahasbeenaskedtoformulateaforward-looking,

sustainableinvestmentstrategy.Exhibit1providesthedetailsofthehedgefund’s

exposuretoemergingmarketcurrencies.

Exhibit1

HedgeFund’sExposuretoEmergingMarketCurrencies

Percentage

CountryofOverall

Six-MonthForwardAnnual

SpotRate

Rate

Yield

Portfolio

Brazil

Russia

India

20%

25%

25%

30%

BRL/USD=5.41

BRL/USD=5.71

1.562%

3.255%

2.356%

5.667%

RUB/USD=74.15RUB/USD=74.85

INR/USD=74.50

INR/USD=73.26

CNY/USD=6.37

China

CNY/USD=6.46

AnnualyieldforUSis2.211%

TheCOVID-19pandemicledmanyinvestorstofleefromemergingmarketcurrenciesdue

toconcernsofexchangeratevolatility.Theflighttosafetycreatedseveralshortpositions

inBRL/USD,leadingtothedepreciationoftheBrazilianreal.ZhangLei,thehedge

fund’sCEO,predictsthattheBrazilianrealwillappreciatesoonandrequeststhatNadela

createabullspreadusingoptions.

Exhibit2

OptionPricesforBRL/USD

BRL/USDStrikeCallOptionPrice

$

$

$

$

$

5.00

5.50

6.00

6.50

7.00

$1.95

$1.70

$1.50

$1.10

$0.75

Nadelainterviewsapotentialnewhire,CamilaBeth,anexternalcurrencyoverlay

manager,totakedirectionalviewsonthefuturecurrencymovementsofIndiaandChina.

ThenewlyelectedgovernmentinIndiaispromotingbusinessgrowththrough

expansionarymonetarypolicy.Chinacontinuestofacepressurefromdeveloped

countriesovertrade.However,China’sGDPisprojectedtogrowatover5%.Bethmakes

thefollowingstatementsduringherinterview:

Statement1:Usetechnicalanalysistoexamineinterestrates,inflationratesandrisk

premiumdifferentialstoprojectfutureexchangeratemovements.

Statement2:ImplementationofexpansionarymonetarypolicyinIndiacontributed

2

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totheappreciationoftheIndianrupee.

Statement3:HedgethecurrencyexposuretoChinabyusingtheCNY/USD

protectiveputexchangerateoptionstrategytoprotectagainstUSD

depreciation.

A.

B.

C.

ConstructtheCNY/USDcarrytrade,usingtheinformationinExhibit1.

Explaintworisksinvolvedinthiscarrytrade.

4

minutes(Answer1-Aonpage4)

Calculatethemaximumgainandbreakevenpriceperoptioncontractwitha

$5.00/$6.00bullspread,usingdatainExhibit2.

3

minutes(Answer1-Bonpage5)

IdentifywhichofBeth’sstatementsismostlikelycorrect.Justifyyourresponse

withonereason.

2

minutes(Answer1-Conpage6)

3

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AnswerQuestion1Aonthispage

ConstructtheCNY/USDcarrytrade,usingtheinformationinExhibit1.Explain

tworisksinvolvedinthiscarrytrade.

Carrytrade

Risk1

Risk2

4

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AnswerQuestion1Bonthispage

Calculatethemaximumgainandbreakevenpriceperoptioncontractwitha

$

5.00/$6.00bullspread,usingdatainExhibit2.

5

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AnswerQuestion1Conthispage

IdentifywhichofBeth’sstatementsismostlikelycorrect.(circleyouranswer)

Statement1

Statement2

Statement3

Justifyyourresponsewithonereason.

6

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QUESTION2HASATOTALOFFOURPARTS(A,B,C,D)FORATOTAL

OF20MINUTES.

EllaFitzisamanagingpartneratStaysailAssociates,aninvestmentconsultingfirmbased

inNewYorkCity.FitzplanstomeetwithOliveDuggan,thechiefinvestmentofficerof

TheKibbleFoundation,acharitableorganizationfocusedoncaringforstraycatsanddogs.

DugganretainedFitz’sfirmtoobtainindependent,objectiveadviceonhowthe

foundationcanimproveitsUSequityportfolioreturns.FitzleadsStaysail’sUSequity

practiceandisexcitedtoshareherstrategicrecommendationswithDuggan.

FitzbeginsthediscussionbyreviewingtheSpencerFund,oneofthefoundation’stwo

activelymanagedUSequityfundholdings.DugganaskedFitztoexaminetheSpencer

FundandsharesomethoughtsonitsroleinKibble’soverallUSequityportfolio.Fitz

sharestheresultsofareturns-basedstyleanalysissheperformedbyregressingthe

SpencerFund’sdailyreturnsonseveralUSequitystyleindicesoverthetrailingten-year

periodendingDecember31,2020.

Eagertounderstandhowthefund’sinvestmentstylemayhaveevolvedoverthelast

decade,Fitzrepeatedthisprocessfortheten-yearperiodendingDecember31,2010.

ResultsarepresentedinExhibit1.DugganisappreciativeofFitz’sworkbutwishesshe

hadproducedaholdings-basedstyleanalysisaswell.

Exhibit1

ExposureCoefficients

December31,2010

December31,2020

Russell1000GrowthIndex

Russell1000ValueIndex

Russell2000GrowthIndex

Russell2000ValueIndex

DowJonesSelectDividendIndex

MSCIUSAQualityIndex

MSCIUSAMomentumIndex

CBOEVolatilityIndex

0.73

0.17

0.52

0.08

0.38

0.69

0.51

0.84

0.51

0.07

0.87

0.14

0.12

0.49

0.80

0.84

AfterreviewingtheSpencerFund,FitzshiftsthediscussiontotheArtieFund,the

foundation’sotheractivelymanagedUSequityfundholding,theArtieFund.Fitzpoints

outthattheArtieFund’sassetshaveexperiencedtremendousgrowthoverthelastdecade,

climbingfrom$280millionto$1.285billion.However,thefundhasstruggledto

outperformitsbenchmarkduringthisperiod,averagingzeroalphaonagross-of-feebasis.

Thisiswellbelowthe3%annualoutperformanceaveragedbytheArtieFundintheprior

decade,whenthefundwasmuchsmaller.TheArtieFundholdsjust40stocksand

exhibitsannualturnoverof70%.FitzexpressesherconcerntoDugganthattheArtie

Fund’sstronggrowthinassetshascausedtheimplicitcostsassociatedwiththefund’s

strategytoweighonperformance.

Fitztransitionsthediscussiontothetopicofriskbudgeting.Beforetheirmeeting,

DugganexpressedconcerntoFitzaboutthehighlevelofabsoluterisk,asmeasuredby

portfoliovarianceexperiencedbyKibble’sUSequityportfoliooverthelastseveralyears.

7

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DugganaskedFitztodiscussthekeydriversofabsoluteriskintheUSequityportfolio

andtomakesuggestionsonhowKibblecouldreduceit.FitzpresentsDugganwith

Exhibit2,ariskanalysissheperformedonKibble’sUSequityportfolio,whichdisplays

fund-leveldata.AlthoughsheissurprisedbyFitz’sfindings,Duggannowfeelsshehasa

bettergraspofthekeysourcesofvolatilityfortheUSequityportfolio.

Exhibit2

Correlation

PortfolioStandardSpencer

Artie

Fund

S&P500

IndexFund

WeightDeviation

Fund

1.00

0.30

0.65

SpencerFund

ArtieFund

35%

25%

17.0%

24.0%

12.0%

12.51%

0.30

1.00

0.20

0.65

0.20

1.00

S&P500IndexFund

TotalPortfolio

40%

100%

Covariance

SpencerFundArtieFundS&P500IndexFund

SpencerFund

ArtieFund

0.032

0.004

0.003

0.025

0.004

0.048

0.004

0.030

0.003

0.004

0.040

0.036

S&P500IndexFund

TotalPortfolio

FitzconcludesthediscussionbyrecommendingthatDugganconsiderinvestinginanew

factor-basedstrategymanagedbyLeashCapital.Thestrategycreatesahedged

long/shortportfoliofocusedontheQualityfactor.ItranksRussell1000constituentsfrom

besttoworst,basedonthisfactor,anddividesthemintodecileportfolios.Thetopdecile

portfolioisthenpurchased,whilethebottomdecileportfolioisshorted.

A.

DescribethreewaysinwhichtheSpencerFund’sinvestmentstyleevolved

between2010and2020basedonthedataprovidedinExhibit1and

identifyonelimitationofusingareturns-basedstyleanalysisrelativetoa

holdings-basedanalysis.

6

minutes(Answer2-Aonpage10)

B.

C.

IdentifytwochangesthatcouldbeappliedtotheArtieFundthatwould

mitigatetheimpactofimplicitcostsonperformance.

3

minutes(Answer2-Bonpage11)

Calculatethepercentagecontributiontototalportfolioriskforeachofthe

threefundsheldinKibble’sUSequityportfolioandidentifyonechange

thatcouldbemadetotheportfolio’sholdingstoreduceitsabsoluterisk.

8

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8

minutes(Answer2-Conpage12)

D.

Identifytwopotentialdrawbackstothehedgedportfolioapproachutilized

byLeashCapital.

3

minutes(Answer2-Donpage13)

9

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AnswerQuestion2Aonthispage

DescribethreewaysinwhichtheSpencerFund’sinvestmentstyleevolvedbetween

2

010and2020basedonthedataprovidedinExhibit1

1

.

2

3

.

.

andidentifyonelimitationofusingareturns-basedstyleanalysisrelativetoa

holdings-basedanalysis.

Limitation

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AnswerQuestion2Bonthispage

IdentifytwochangesthatcouldbeappliedtotheArtieFundthatwouldmitigatethe

impactofimplicitcostsonperformance.

Change1

Change2

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AnswerQuestion2Conthispage

Calculatethepercentagecontributiontototalportfolioriskforeachofthethree

fundsheldinKibble’sUSequityportfolio

andidentifyonechangethatcouldbemadetotheportfolio’sholdingstoreduceits

absoluterisk.

Change

12/76

AnswerQuestion2Donthispage

IdentifytwopotentialdrawbackstothehedgedportfolioapproachutilizedbyLeash

Capital.

Drawback1

Drawback2

13/76

QUESTION3HASATOTALOFSIXPARTS(A,B,C,D,E,F)FORATOTAL

OF29MINUTES.

BaileyHarwich,CFA,isafixedincomeportfoliomanageratWoodlandAsset

Management.Woodlandspecializesinmanagingglobalbondportfoliosforlarge

institutionalandprivatewealthmanagementclients.Harwichbasesinvestmentdecisions

onhisviewofeconomicgrowth,defaultratesandindustrytrends.

HarwichmanagestheglobalcorporatebondportfolioofFenwayInc.,aclientof

Woodland.HarwichhasbeenaskedbyFenwaytoforecastexpectedexcessreturnsand

qualitysectorsthatwillperformbestoverthecomingyear.Harwichcompilesthe

followingdatainExhibit1,whichcontainscreditspreadforecastsfromhisstrategyteam.

Harwichalsowantstoconsiderascenarioinwhichspreadsremainconstantoverthenext

twelvemonths.

Exhibit1

Current

OAS

(bps)

Current

DurationTimes

Spread(DTS)

One-Year

OASForecast

(bps)

Expected

CreditLoss

(p×L)

Rating

Sector

Aa

A

80

720

840

70

90

0.00%

0.05%

0.08%

0.20%

105

195

295

Baa

Ba

1560

1180

165

265

Duringaquarterlyinvestmentreview,Fenway’streasurerasksHarwichaboutthe

portfolio’slargeoverweightinmetalscompanies.Harwichstatesthat,giventheincreased

demandfromautomotivecompanies,heexpectsmetalspricestoremainhigh.Harwich

alsonotesthatautomotivecompanyspreadsaremoderatelyattractiveandprofitsforthe

sectorwillbesteadyregardlessofoveralleconomicgrowth.Givenaknownlargesupply

ofmetalscomingtothemarket,Fenway’streasurerisstillconcernedaboutthe

concentrationriskintheportfolioandasksHarwichtoexplorewaystomitigatethetail

riskoffallingmetalprices.

Fenway’spensionmanageralsochoosesWoodlandtoactivelymanageaUSTreasury

portfolioagainsttheBloombergBarclaysUSTreasuryindex.SandraGeorgeisaUS

interestrateportfoliomanageratWoodland.Georgehasbeenaskedtorecommenda

portfoliobasedontheoutlookforaninstantaneous50bpsparallelshifthigheracrossthe

USTreasuryyieldcurve.Georgebuildstwomodelportfoliosandconstructsthesummary

informationpresentedinExhibit2.

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Exhibit2

MarketValue

USTreasuryYieldtoEffectiveEffective

NotesandMaturityDurationConvexity

Bonds

PortfolioPortfolio

Index

A

B

2

5

7

-Year

-Year

-Year

0.50%

0.85%

1.20%

1.35%

2.50%

1.9

4.8

0.05

0.28

0.49

0.95

6.40

30%

23%

18%

17%

12%

75%

30%

25%

45%

6.6

1

3

0-Year

0-Year

9.1

22.9

25%

Woodland’sinvestmentcommitteemetearlierinthemonthtoformulateanannual

outlookforUSTreasuryinterestrates.ThecommitteebelievesthattheFederalReserve

willremainaccommodativeandfront-endrateswillbemaintainedatcurrentlevels.They

alsonotedthatimprovingeconomicgrowthexpectationswillcauselongerendratesto

risemodestlyandinterestratevolatilitywilldecreaseoverthecomingyear.

AprospectiveclientasksGeorgetoevaluatetheexpectedreturnfortwogovernment

bondportfolios,bothwithatimehorizonofoneyear.Georgehasbeenaskedtousean

expectedyieldchangeof–0.95%inanyappropriatecalculation.Theclientprovides

GeorgewiththedatasummarizedinExhibit3,whichcontainsprospectivestatisticsfor

thetwoportfolios.

Exhibit3

Portfolio

X

Portfolio

Y

Expectedmodifiedduration(athorizon)

Averagecouponrate

4.12

1.80%

95.60

97.00

4.35

1.65%

99.00

Currentaveragebondprice

Averageendingbondpriceforportfolio(assumingstable

yieldcurve)

100.50

Expectedconvexityforportfolio(athorizon)

14.68

24.98

A.

B.

IdentifyHarwich’screditstrategyapproach.Identifyoneadvantageandone

limitationofusingthisapproach.

3

minutes(Answer3-Aonpage17)

Calculatetheexpectedexcessreturnforeachratingsectorovertheone-year

timehorizon(assumethatspreaddurationremainsconstant).Determine

whichqualitysectorwillmostlikelyhavethehighestexpectedexcessreturnif

currentOASlevelsdonotchangeoverthenextyearforeachoftheratings

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sectors.

8

minutes(Answer3-Bonpage18)

C.

D.

RecommendoneapproachHarwichcanusetomanagethetailriskoffalling

metalpricesinhisportfolio.Explainonepotentialdrawbackorlimitationof

theapproach.

6

minutes(Answer3-Conpage19)

DeterminewhetherPortfolioAandBinExhibit2aremostlikelytooutperform

orunderperformtheindexintheeventofaninstantaneous50bpsparallelshift

higherinrates.Justifyyourresponseforeachusingonekeycharacteristicof

theportfoliocomparedtotheindex(overallduration,convexity,curve

positioning).

4

minutes(Answer3-Donpage20)

E.

F.

DeterminewhichportfolioinExhibit2ismostlikelytooutperformrelativetothe

index.Justifyyourresponsewithonereason.

3

minutes(Answer3-Eonpage21)

CalculatetherollingyieldforeachportfolioinExhibit3.Determine

whichportfoliotorecommendtotheclientusingthestatisticscontainedin

Exhibit3andbasedontheexpectedtotalreturnforoneyear.

5

minutes(Answer3-Fonpage22)

16/76

AnswerQuestion3Aonthispage

IdentifyHarwich’screditstrategyapproach.Identifyoneadvantageandonelimitation

ofusingthisapproach.

Approach

Advantage

Limitation

17/76

AnswerQuestion3Bonthispage

Calculatetheexpectedexcessreturnforeachratingsectorovertheone-yeartime

horizon(assumethatspreaddurationremainsconstant).

Aa

A

Baa

Ba

Determinewhichqualitysectorwillmostlikelyhavethehighestexpectedexcess

returnifcurrentOASlevelsdonotchangeoverthenextyearforeachoftheratings

sectors.

Sector

18/76

AnswerQuestion3Conthispage

RecommendoneapproachHarwichcanusetomanagethetailriskoffallingmetal

pricesinhisportfolio.Explainonepotentialdrawbackorlimitationoftheapproach.

Approach

Potentialdrawbackorlimitation

19/76

AnswerQuestion3Donthispage

DeterminewhetherPortfolioAandBinExhibit2aremostlikelytooutperformor

underperformtheindexintheeventofaninstantaneous50bpsparallelshifthigherin

rates.(circleyouranswer)

Outperform

PortfolioA

Underperform

Outperform

PortfolioB

Underperform

Justifyyourresponseforeachusingonekeycharacteristicoftheportfoliocompared

totheindex(overallduration,convexity,curvepositioning).

PortfolioA

PortfolioB

20/76

AnswerQuestion3Eonthispage

DeterminewhichportfolioinExhibit2ismostlikelytooutperformrelativetothe

index.(circleyouranswer)

PortfolioA

PortfolioB

Justifyyourresponsewithonereason.

Reason

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AnswerQuestion3Fonthispage

CalculatetherollingyieldforeachportfolioinExhibit3.

PortfolioX

PortfolioY

Determinewhichportfoliotorecommendtotheclientusingthestatisticscontainedin

Exhibit3andbasedontheexpectedtotalreturnforoneyear.

22/76

QUESTION4HASATOTALOFFOURPARTS(A,B,C,D)FORATOTAL

OF14MINUTES.

EndaWinters,CFA,hasrecentlyjoineda401(k)managementcompanyasasenior

financialadvisor.Wintersismeetingwiththreeclientstopresenttheiryearlyportfolio

performance,andtoupdateinvestmentpolicystatementsregardinganypotentialchanges

inreturnobjectivesandriskpreferences.Wintersalsowantstoexaminethe

characteristicsoftheclientsanddetermineifanyofthosecharacteristicsmaybedriven

bybehavioralbiases.

Tsu-JuiCheng考前密训务必加微信

：xuebajun888s

Tsu-JuiCheng,45yearsofage,isasupervisoratamanufacturingfirminNewHampshire.

Chenghasaccumulatedaportfolioof$1.2million,ofwhich$800,000isincash.Cheng’s

salaryistheprimarysourceofincomeforCheng’sfamilyashereinvestsallthedividend

andinterestincomefromtheportfolio.Exhibit1showstheallocationofCheng’s

portfolio.Winterssuggeststhattheportfolioshouldcontainagreaterallocationto

equities.Chengisreluctanttochangethepercentageallocationofmoney.

Exhibit1

Percentage

Allocated

Fund

MoneyAllocatedStandardDeviation

ABC(USEquity)

XYZ(USBond)

PQR(REIT’s)

IEQ(Int’lEquity)

Cash-USD

8.33%

$100,000

$100,000

$100,000

$100,000

$800,000

8%

2.5%

12%

18%

NA

8.33%

8.33%

8.33%

66.67%

WinterspresentstheyearlyreturnsoftheCheng’sfunds.Heexplainsthatthereisa

greaterchanceofachievinghigherreturnsandcapitalgrowthbyinvestingalarge

percentageofthe$800,000cashpositionintheABCEquityFund.Themostrecentannual

performancebyassetclassandthenewpercentageallocationsrecommendedbyWinters

areshowninExhibit2.Afterreviewingtheequityfundreturnstatistics,Chengagreesto

ahigherallocationtotheABCFund.

Exhibit2

NewPercentage

Allocation

Fund

YearlyReturn

StandardDeviation

ABC(USEquity)

XYZ(USBond)

PQR(REIT’s)

10.65%

3.26%

5.5%

75%

8%

2.5%

12%

18%

10%

10%

IEQ(Int’lEquity)

-4.9%

5%

MichaelRusso

MichaelRussoisa32year-olddatabaseanalystworkingforabluechipsoftwarefirm.

Russohasaccumulatedaportfolioof$500,000byinvestinginsoftwarestart-upsand

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claimsthathisindustryknowledgeisresponsibleforthesuccessofhisinvestments.

DuringthemeetingwithWinters,Russoexpresseshisdesiretomaintaincontroloverhis

portfolioandtoassumeahigherrisktoleranceinordertocapitalizeonanynew

opportunitiesinthesoftwaresector.However,Russoagreestomorecloselyexaminethe

yearlyperformancesandSharpeRatiosoftheinvestmentsandtomodifytheasset

allocationsofhisexistingportfolioassuggestedbyWinters.

LindaMoylan

LindaMoylanisa56year-olddivorceeandiscurrentlyunemployed.Moylanmaintainsa

simplelifestylewithexpensesofapproximately$40,000peryear.Moylanholdsan

inheritedportfoliowithapresentvalueof$2million.

WhilereviewingMoylan’sportfolioandherexpenses,WintersnoticesthatMoylanhas

structuredmostofherportfoliointovariousfixedincomeinvestmentsinsuchawayasto

receivequarterly,bi-annualandannualincomestreamstomeetherexpenses.Moylanre-

emphasizesthatcapitalpreservationisoneofherimportantobjectives.Shehasnoappetite

forlosses.Duringtheirmeeting,Winterssuggeststoslightlyaltertheportfoliotoreflect

recenttaxchangesandtoachievemoderatecapitalgrowth.

Moylandecidesnottomakeanychangetoherinvestments,asthecurrentportfolio’s

returnmeetsherexpenseexpectations.ShealsorejectsWinters’advicetosellsomeof

thelosinginvestments,insteadofclaimingtheadvantageoftaxlossharvesting.Moylan

alsostatesthatherdesiretokeeptheseinvestmentsisbecausesheinheritedthemfrom

herparents.

A.

B.

C.

D.

IdentifythebehavioralbiasexhibitedbyCheng.Discusstwoconsequences

ofholdingtheportfolioinExhibit1.

3

minutes(Answer4-Aonpage25)

IdentifyanddescribethebehavioralbiasinfluencingCheng’sdecision

toacceptWinter’srecommendations.

3

minutes(Answer4-Bonpage26)

ClassifyRusso’slikelyBehavioralInvestorType.Determinethree

behavioralbiasesexhibitedbyRussopriortohismeetingwithWinters.

3

minutes(Answer4-Conpage27)

IdentifytwobehavioralbiasesexhibitedbyMoylan.Recommendhow

Moylanmightovercomeeachofthesebiases.

4

minutes(Answer4-Donpage28)

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AnswerQuestion4Aonthispage

IdentifythebehavioralbiasexhibitedbyCheng.Discusstwoconsequencesofholding

theportfolioinExhibit1.

Behavioralbias

Consequence1

Consequence2

25/76

AnswerQuestion4Bonthispage

IdentifyanddescribethebehavioralbiasinfluencingCheng’sdecisiontoaccept

Winter’srecommendations.

26/76

AnswerQuestion4Conthispage

ClassifyRusso’slikelyBehavioralInvestorType.(circleyouranswer)

PassivePreserver

FriendlyFollower

IndependentIndividualist

ActiveAccumulator

DeterminethreebehavioralbiasesexhibitedbyRussopriortohismeetingwith

Winters.

Bias1

Bias2

Bias3

27/76

AnswerQuestion4Donthispage

IdentifytwobehavioralbiasesexhibitedbyMoylan.RecommendhowMoylanmight

overcomeeachofthesebiases.

Bias1

Overcome

Bias2

Overcome

28/76

QUESTION5HASSEVENPARTS(A,B,C,D,E,F,G)FORATOTALOF27

MINUTES.

AkselSerensen,a37year-oldwidower,residesinacountrywhichusestheeuroasits

monetaryunit.Hiswife,aCFAcharterholder,diedrecently,leavinghimalonetoraise

theirthreechildren:an8-year-oldand2-year-oldtwins.Hehasdecidedthathewillnot

remarryandwilldevotehimself,asmuchashisworkpermits,tothechildren’scareand

upbringing.Serensenhasarrangedforsupplementalchildcarethroughalocalaupair

agency.

Serensenearns€50thousandannually.Heiscoveredbyapensionplanthatusesa

formulabasedonyearsofserviceandfinalcompensationtodeterminehismonthly

pensionbenefit.Becauseofhisshorttenurewithhisemployer,hispresentvestedpension

benefitismodest.

Serensen’ssalaryandpensionbenefitsareindexedtoinflation,butnoincreaseinreal

termsisexpectedforeither.Inflationoverthelongtermisexpectedtobe2.5%annually.

Serensenpaystaxonallincomeatanannual30%rate.Capitallossesmaybeusedto

offsetotherincomeofanynature.Serensenandthechildrenareallinexcellenthealth

andhavecomprehensivemedicalcoveragethroughSerensen’semployer.Serensenhasno

insurancecoverageotherthanhisemployer-providedhealthandlifeinsurance.

Withouthiswife’searnings,Serensenbelievesthathewillstrugglefinanciallytomeetthe

household’scurrentexpenses,includingchildcare,withlittleremainingfromhissalaryto

saveforthechildren’seducationsandforhisownretirement.

Throughheremployer,hiswifewascoveredbya€400thousandlifeinsurancepolicy

withSerensennamedasthebeneficiary.Hereceivedtheproceedsrecentlywithnotaxes

due.

BecauseSerensenisnotasfamiliarwithfinancesashiswifewas,heisuneasyabout

managingsuchalargesumonhisown.Hehasvowedtoapproachallfinancialmatters

cautiouslyandprudentlyashedoesnotwishtoputthechildren’swelfareatrisk.Asa

result,hehassoughtthecounselofawell-respectedfinancialadvisor.

Exhibit1CurrentBalanceSheetofAkselSerensen(ThousandEUR)

Assets

Liabilities

Cash

2

23

Mortgage5

Short-termdebt

240

35

Stock1

DBpension2

Insurance3,4

50

400

Residence

Householdfurnishings

TotalAssets

300

25

800

NetWorth

TotalLiabilities

525

800

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FootnotestoExhibit1:

1

non-dividendpayingemployerstockheldinataxableaccount.Therearenotrading

restrictionsonthestock,whichpresentlyhasaFMVwellbelowSerensen’sacquisition

cost.

2

presentvalueofvestedpensionbenefittostartatage60

3

proceedsofwife’slifeinsurancepolicycurrentlyheldinanon-interestbearing,insured

bankaccount.

4

Serensenhasa€50thousandtermpolicyonhislife,providedbyhisemployer,withthe

childrennamedasequalbeneficiaries.

5

Obtainedseveralyearspriortohiswife’spassingathigherprevailinginterestrates.

Serensen’sfinancialadvisorrecommendsthatSerensenchangethebeneficiarydesignation

onSerensen’semployer-providedlifeinsurancefromthechildreninequalsharestoan

irrevocabletrustestablishedforthecollectivebenefitofthechildren.

ThefinancialadvisorstronglyrecommendsthatSerensen:

usetheinsuranceproceedstopayofftheshort-termdebtandhalfofthe

mortgageimmediatelybecausethesedebtsincurrelativelyhighinterestcharges,

sendthechildrentopublicschoolsandpublicuniversityinordertoreduce

immediatefutureeducation-relatedexpenses,

setaside€60thousand(€20thousandperchild)inatax-exempteducation

accounttomeetthefuturemiscellaneousandincidentaleducationalexpensesof

thechildren,and

investtheremaininginsuranceproceedstomeettheexpectedretirement

spendingrequirementthatwilllikelynotbemetbyhisemployer’scurrent

pensionformula.

Serensentellshisadvisorthata30-yearretirementperiodshouldbethebasisfor

planningpurposes.TheadvisorestimatesthatSerensen’spension,includingfuture

serviceandsalarycredits,willlikelynotcoverhisretirementspendingneedsandthat

Serensenwillprobablyexperienceashortfall.Thisprojectedshortfallcouldbeoffset

entirely,however,bypurchasinganimmediate,inflation-indexedannuityatage60ata

costof€450thousand(intoday’s€).

Serensen’sadvisorpreparesreturnandriskdataforseveralassetclassesinpreparation

forselectinginvestmentsforthechildren’stax-exempteducationaccountandSerensen’s

taxableretirementaccount.

30/76

Exhibit2

AssetClassCharacteristics(%)

AssetClass

E(r)

σ

0

Cash

1

DomesticCorporateBonds

DomesticTax-ExemptBonds

GlobalLarge-CapEquity

GlobalSmall-CapEquity

FundofHedgeFunds

3

2

6

6

5

12

16

25

20

6

15

12

LeveragedGlobalRealEstate

TheadvisorrecommendsthattheGlobalLarge-CapEquitybeplacedintheeducation

accountandthattheGlobalSmall-CapEquitybeplacedintheretirementaccount.

A.

B.

C.

IdentifythreeadditionalinsuranceproductsSerensenshouldconsider

purchasingatthistime.Supporteachofyourselectionswithonereason.

5

minutes(Answer5-Aonpage33)

Justifytheadvisor’srecommendationtoestablishatrustasthebeneficiaryof

Serensen