There’s no bigger curveball I encountered in my quest.
Refererring to the chapter from Schwesers first, Let me jot all the important pointers:
1. Life Insurance is complimentary to HC and serves well as Life Insurance is the hedge against the potential loss in the HC due to sudden demise. At HC nearing 0 there is no need for Life Insurance and the Investor should only focus on FC. FC Takes care of the living expenses and also of Demise. Till HC becomes 0 , whetever be the accumulated Insurance amount, that gets transferred to FC and adds onto the Bequest part.
2.Need for Life Insurance is a function of 11 factors (Ualive, Udead, Risk Aversion, HCi,FCi, Age, Stage in life, Circumstances, Life in retirement, Conditional Probability of Survival, Correln. (HCi,Captial Market))
3. At retirement and Investor faces 3 major risks : Financial Risk, Longevity, Spending Requirement
4.Then there are strtategies defined for different set of Investors.
With the above, let me dwell on the EoCs first :
1. Ans c. Can’t make a head or tail of it.
5-7 Case study of Retired Tenured Professor
5. Risk Tolerance Ans. C. Again can’t understand. Risk Tolerance is the ability and not willingness(it may be a fn. of both but definately capped and maily controlled by ability) . Given her 80% allocation to Bond and MM Instruments, She definately has ‘more risk tolerance’. Why below Average?
6. Similary based on the above the proposed investment has been favoured for Fixed Income and other safe instruments. Why? All along her life, she has only demonstrated higher risk aversion that is sub optimal.
7. Strong Demand for Life Insurance- Why?
8. Logically correct. Bequest is not fundamentally important here. But why should not he provide for his son’t education in College? That is part of his obligation, otherwise this piece of information makes no sense. From that angle, he should have a higher insurance corpus.
CFAI (Practice Problems)
Qs. 3 Case study of Hernandez and Lee
Answer given : Strategy C for Hernandez and B for Lee.
While ageering for C for Hernandez is sub optimal but still is acceptable (i don’t know what to make of it in exam). Hernandez typically is low on FC and high on HC with HC showing higher correln. with bond like. I choose Strategy B for him.
But B for Lee is a complete stunner! Lee is supposedly high on HC with high positive correln. with Equity market. Should not he be advised for a relatively stable and safe investment and thus choose C or even D. ( I can understand D may be too safe given his age and will surely ladn him in Financial risk if he plays safe at retirement, but can’t fathom B. Too risky!)
Qs. 4(ii). Sanchez’s Life Insurance need : Shown less!. I believe with moderate risk aversion and moderate correln. of HCi with Captial Market, he should exhibit more requirement of Life Insurance
5 Answer given B. Again baffles me hell lot. Note 5 purely states that the Sampsons fear facing Financial risk and Longevity risk. Why should they must then invest in Risk Free Asset?
Qs. 6. Tom is likely to invest in Bonds (A)- Why?
Tom is young and though he may exhibity strong positive correln. of his HCi with Capital market , his age is the biggest asset. He could weather the future storm if any since he started working at ayoung age.To build the corpus he must invest in equity, should not he??
I know I have been verbose, but I am thoroughly confused. Looks like CFAI and Schwesers have certain pattern of thinking that are both elusive, flirts with logic and are mutually conflicting at places.
On the other hand, it forces me to think if there is a hierarchy of risk factors, that come into play, wherein one is given preferance to other.
Any body to enlighten?
Thanks.
Refererring to the chapter from Schwesers first, Let me jot all the important pointers:
1. Life Insurance is complimentary to HC and serves well as Life Insurance is the hedge against the potential loss in the HC due to sudden demise. At HC nearing 0 there is no need for Life Insurance and the Investor should only focus on FC. FC Takes care of the living expenses and also of Demise. Till HC becomes 0 , whetever be the accumulated Insurance amount, that gets transferred to FC and adds onto the Bequest part.
2.Need for Life Insurance is a function of 11 factors (Ualive, Udead, Risk Aversion, HCi,FCi, Age, Stage in life, Circumstances, Life in retirement, Conditional Probability of Survival, Correln. (HCi,Captial Market))
3. At retirement and Investor faces 3 major risks : Financial Risk, Longevity, Spending Requirement
4.Then there are strtategies defined for different set of Investors.
With the above, let me dwell on the EoCs first :
1. Ans c. Can’t make a head or tail of it.
5-7 Case study of Retired Tenured Professor
5. Risk Tolerance Ans. C. Again can’t understand. Risk Tolerance is the ability and not willingness(it may be a fn. of both but definately capped and maily controlled by ability) . Given her 80% allocation to Bond and MM Instruments, She definately has ‘more risk tolerance’. Why below Average?
6. Similary based on the above the proposed investment has been favoured for Fixed Income and other safe instruments. Why? All along her life, she has only demonstrated higher risk aversion that is sub optimal.
7. Strong Demand for Life Insurance- Why?
8. Logically correct. Bequest is not fundamentally important here. But why should not he provide for his son’t education in College? That is part of his obligation, otherwise this piece of information makes no sense. From that angle, he should have a higher insurance corpus.
CFAI (Practice Problems)
Qs. 3 Case study of Hernandez and Lee
Answer given : Strategy C for Hernandez and B for Lee.
While ageering for C for Hernandez is sub optimal but still is acceptable (i don’t know what to make of it in exam). Hernandez typically is low on FC and high on HC with HC showing higher correln. with bond like. I choose Strategy B for him.
But B for Lee is a complete stunner! Lee is supposedly high on HC with high positive correln. with Equity market. Should not he be advised for a relatively stable and safe investment and thus choose C or even D. ( I can understand D may be too safe given his age and will surely ladn him in Financial risk if he plays safe at retirement, but can’t fathom B. Too risky!)
Qs. 4(ii). Sanchez’s Life Insurance need : Shown less!. I believe with moderate risk aversion and moderate correln. of HCi with Captial Market, he should exhibit more requirement of Life Insurance
5 Answer given B. Again baffles me hell lot. Note 5 purely states that the Sampsons fear facing Financial risk and Longevity risk. Why should they must then invest in Risk Free Asset?
Qs. 6. Tom is likely to invest in Bonds (A)- Why?
Tom is young and though he may exhibity strong positive correln. of his HCi with Capital market , his age is the biggest asset. He could weather the future storm if any since he started working at ayoung age.To build the corpus he must invest in equity, should not he??
I know I have been verbose, but I am thoroughly confused. Looks like CFAI and Schwesers have certain pattern of thinking that are both elusive, flirts with logic and are mutually conflicting at places.
On the other hand, it forces me to think if there is a hierarchy of risk factors, that come into play, wherein one is given preferance to other.
Any body to enlighten?
Thanks.
