2012 Mock Question 8

[sharky7]

So, Question 8 asks to solve for the amount of equity and bond futures to achieve a different beta with a different portfolio amount.
The thing is that the way CFAI answered on its Guidelines is by:
1. Sell/Buy futures to adjust portfolio to the desired amount
2. Sell/Buy futures to adjust beta with the adjusted portfolio amount
I did it differently, though, by removing current positions so portfolio exposure is 0, and then calculating number of futures to the desired beta and desired portfolio amount.
Ending result is exactly the same under both, because for CFAI is something like 400 Buy and 300 Sell, so net is 50 Buy. For me was 1000 Buy and 950 Sell, so net is 50 buy.
Would this receive any credit although the process in between was different? If someone needs further info let me know…
Thanks!

 

[agulani]

How’d you do it? your method doesn’t seem correct.
You have to change exposure, duration and beta based on what the current portfolio is

 

[cpk123]

2012 AM 8 had 464 Equity sell, 63 Fixed Income Buy…
not sure where your answer matches up Sharky…
you might want to check..

 

[gad4]

The way I do it is dollar duration before=dollar duration after making both changes at once
it may not be the way the book does it, but it does work and less chance for errors.
Hopefully they give credit.

 

[S2000magician]

Should get full credit.
I usually advocate doing the value & beta adjustment in a single transaction, and have been told explicitly by a CFA Institute employee that that will garner full credit.

 

[sharky7]

S2000magician wrote:
Should get full credit.
I usually advocate doing the value & beta adjustment in a single transaction, and have been told explicitly by a CFA Institute employee that that will garner full credit.

Thanks magician, I hope you’re feeling better today. So, what do you exactly mean by “in a single transaction”? In summary, what I did was also two transactions, i) target beta 0 with current amount, so portfolio is now cash, and ii) desired target with desired amount, so beta and amounts are now the desired exposures.
Don’t know if I explained it.
Thanks!

 

[cpk123]

Equity: ((0.9*154 - 1.08 * 182)*1000000)/(129000*0.97) = -463.198273795253 (Sell 463 contracts)
Fixed Income = (((6*126 - 98 * 7.2)*1000000)*1)/(103000*7.7) = 63.54810238305 (Buy 64 contracts)

 

[sharky7]

cpk123 wrote:
Equity: ((0.9*154 - 1.08 * 182)*1000000)/(129000*0.97) = -463.198273795253 (Sell 463 contracts)
Fixed Income = (((6*126 - 98 * 7.2)*1000000)*1)/(103000*7.7) = 63.54810238305 (Buy 64 contracts)

Crystal clear.
Thanks!

 

[agulani]

interesting that the CFAI doesn’t teach the method of using dollar duration to adjust portfolio exposure.
Do you think if we used this dollar duration method in the exam but made a calculation error, would we still get some credit for understanding the underlying concept?