IN HIS RESPONSE TO BRUCH’S STATEMENT 3, SEVERN IS LEAST LIKELY COR...

48. In his response to Bruch’s Statement 3, Severn is least likely correct with respect to: A. economic growth and equity returns. B. integration and equity market returns. C. the spread of crises and market correlations. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose. Daksa Kapoor Case Scenario Daksa Kapoor, CFA, lives in London, where she works as the fixed income portfolio manager for the Cray Investments pension fund. Kapoor’s portfolio holds £60 million in U.K. sovereign bonds, £110 in U.K. corporate bonds, and £85 million in U.K. mortgage-backed securities. The duration of this £255 million portfolio is 6.25 years. The board of directors has established a policy prohibiting investment in any security rated below A by any of the major rating agencies. Recently, a bond held in the portfolio was downgraded to A3 by Moody’s. The A3 rating is Moody’s lowest A rating. Kapoor is worried about the possibility of another downgrade (to Baa1), which would require an immediate sale with significant transactions costs due to poor liquidity. Kapoor is considering adding leverage to the portfolio by borrowing £55 million in a two-month repo agreement involving physical delivery of the portfolio’s holdings of AAA-rated U.K. sovereign bonds. The duration of this liability is 0.17 years. The proceeds of the repo agreement would be invested in additional U.K. corporate bonds and the resulting £310 million portfolio would have a duration of 5.82 years. If the repo agreement is not entered into, Kapoor intends to reduce the portfolio’s duration to 4.00 years. She is considering using an interest rate futures contract. The futures contract is priced at £97,800 and the duration of the cheapest-to-deliver bond is 8.35 years. The conversion factor for the futures contract is 1.15. The fixed income portfolio is benchmarked against the U.K. total bond market index. Kapoor has proposed adding non-U.K. bonds to the portfolio. In a presentation to the board of directors, she explains that her goal is to seek excess returns from international bonds. To achieve this goal, she will seek bond markets: I: that have the lowest correlations with U.K. bonds; and II: whose currencies are expected to appreciate relative to the British pound. Kapoor is evaluating a £25 million block of German, euro-denominated bonds for possible inclusion in the portfolio. The duration of these bonds is 14.7 years. She has estimated the return correlation between German and U.K. bonds as 0.66 and the German country beta as 0.44.