QUESTION 13, INCLUDING GUIDELINE ANSWER, 1996 CFA LEVEL III EXAMINA...
7. Question 13, including Guideline Answer, 1996 CFA Level III Examination (AIMR) Purpose: To test the candidate’s understanding of the relationship between economic changes and investment strategy, the investment policy statement, and asset allocation. LOS: The candidate should be able to “Developing a Recommendation for a Global Portfolio” (Study Session 4) a) explain the effects of macroeconomic factors—money and credit conditions, demographic trends, unit labor costs, trade and capital flows, and government policies—on expected returns and risks of the bond and stock markets in the United States and other countries; b) recommend and justify an investment portfolio based on expected changes in macroeconomic factors. “Economic Forecasts and the Asset Allocation Decision” (Study Session 4) b) contrast consumer and business behavior in an environment of high inflation expectations with behavior in an environment of low inflation expectations; c) discuss the relationship between equity price-to-earnings (P/E) multiples and inflation and between dividend yields and inflation; d) relate structural changes in the economy to sector performance; f) relate funds flows in international securities markets to economic activity and capital market returns. “Determination of Portfolio Policies: Institutional Investors” (Study Session 10) c) differentiate among the return objectives, risk tolerances, constraints, regulatory environment, and unique circumstances of endowment funds, pension funds, insurance companies, and commercial banks. Cases in Portfolio Management (Study Session 10) a) appraise the investment policy implications, especially for risk management, of the relationship between the financial condition of a corporate pension fund and the corporation itself; b) evaluate the potential effects of a corporate pension fund investment policy on plan surplus, the corporation’s valuation, and the corporation’s constituents; c) appraise the pension fund investment policy when risk is considered from the perspective of the (1) asset value, (2) plan surplus, or (3) financial position of the corporation. “Pension Investing and Corporate Risk Management” (Study Session 10) a) formulate the overall portfolio management process leading to an investment policy statement and an asset allocation decision for an institutional investor, including developing objectives and constraints and analyzing capital market expectations; b) compare and contrast the investment objectives and constraints of institutional investors in different economic circumstances; c) create a formal investment policy statement for an institutional investor; d) recommend and justify an asset allocation that would be appropriate for an institutional investor. Question 13, including Guideline Answer (Study Session 10) d) recommend and justify a general asset allocation that would be appropriate for an institutional investor.