@cfachris
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Real exchange rates take into account of effects of inflation, so it is a measure of what you can actually buy (i.e. purchasing power). So in this case, say 1 USD = 1 EUR at first, then if real exchange rates increase USD/EUR, it means 1 EUR can buy 3% more USD, i.e. purchasing power increases for EUR.
So when looking at the equation:
USDreal = USDnom / CPI-USD , where CPI represents consumer price index (a measure of inflation)
and
EURreal = EURnom / CPI-EUR
Thus, the real exchange rate (USDreal / EURreal) relates to the nominal exchange rate (USDnom / EURnom) by:
USDreal / EURreal = (USDnom / CPI-USD) / (EURnom / CPI-EUR)
= (USDnom / CPI-USD) × (CPI-EUR / EURnom)
= (USDnom / EURnom) × (CPI-EUR / CPI-USD)
So when real exchange rates increases by 3% – and if that is the only information – we can’t tell what direction and size of changes are happening with nominal exchange rates and ratio of inflation between those countries. That’s what the last 2 sentences in the explanation meant.
Does this help?
OK I get that you’re compounding the 2 period returns to get 21% total return, whereas I annualized the TWRR since it is a geometric mean calculation. This bugs me as I can’t quite figure out the adjustment needed as well, although it may be something to do with the weighting adjustment is my gut feel.
I wonder if scrolling through the CIPM notes on this would help, check out page 273 onwards on the examples https://www.cfainstitute.org/-/media/documents/support/programs/cipm/2019-cipm-l1v1r4.ashx
ugh I know what you mean, it can be confusing.
Yes, data mining is NOT sampling. Sample selection means exactly that, you CHOOSE the right sample data set (by excluding a subset of data in the population), so it shows biased results and cannot be relied on.
Data mining on the other hand, includes a relevant dataset, but instead trying to find a random mix of variables that correlate significantly with that dataset, without an economic rationale behind it in the first place.
Like to give an extreme example, if the weather in a local town somehow correlates highly with a person’s income (economically doesn’t make sense as a theory, but say it is somehow statistically significant in a dataset for a random reason and included). Unless you’re a fisherman perhaps that may make sense…
Hey @pcunniff – so sample selection EXCLUDES subset of the data in the population, so it’s not truly random or representative of the population
Whereas data mining is just blindly searching for highly correlated patterns/relationships in the dataset (“fitting”), without a proper economic significance to it in the first place.
hey J, not sure if I’m right here, but time weighted return should have a square root in this case, as it is over 2 period, i.e. ^1/2
Time weighted return for portfolio should be (1.1 * 1.1)^(0.5) – 1 = 10%
Time weighted return for underlying assets over 2 months:
asset A: (1.04*1.021)^(0.5) – 1 = 3.05%
asset B: (1.03*1.0157)^(0.5) – 1 = 2.28%
asset C: (1.02*1.0105)^(0.5) – 1 = 1.52%
asset D: (1.01*1.0052)^(0.5) – 1 = 0.76%
asset E: (1.0475)^(0.5) – 1 = 2.35%
The total is 9.96%, probably due to rounding as I used 2 d.p. input rather than the usual 4 decimals.
If it is DB pensions, the ‘risk’ aspect is to minimize the downside of needing to top-up the fund with cash contributions, if the assets of the fund is lower than the future defined obligations (liability).
The DB pension fund sponsors want to maximize returns (to improve and maintain a surplus status), but also have downside protection and reduce the volatility of that funded status. One of the ways they do the latter is by matching the liability risk with longer duration bonds, i.e. Portfolio D, which shows a shift to the left. Ideally they want low risk, high return portfolio mix, i.e. top left of the chart if feasible, but there is a trade off.
I would imagine they use monte carlo simulations with various market assumptions to run complicated scenario modellings for this and build this efficient frontier.
Hi @tmcd123, I’m not sure what others are saying, but Kaplan materials are all inclusive, i.e. can be viewed as a replacement/summary of the curriculum. I can understand your concern though if otherwise.
As for your other questions:
I’m not sure for the general candidate population, I didn’t buy that. I just used third party study material, and for tricky sections of Ethics which I need more understanding/examples, I check the Ethics section of the curriculum to supplement. The curriculum is great for end-of-chapter questions to practice and test your understanding before you move on to the next reading.I don’t think so. I doubt you’ll have much time going through two sources. Your time is better spent doing practice questions, and referring to relevant study materials as needed to refresh your understanding. Yes your understanding is correct that Kaplan’s stuff essentially summarizes the CFA curriculum.again, can’t speak for the general candidate population as everyone has different learning styles, I found practice exams useful in solidifying concepts in my mind (especially when getting them wrong). So doing up to 6 (preferably timed) practice papers would be useful in your preparations after reading the notes.
Hi @pcunniff , when you increase the number of stocks in your portfolio, unsystematic risk (diversifiable risk) reduces, but at a slower/decreasing rate. I presume you meant this chart below.
As you can see below, to take an extreme, if you add infinite number of stocks, there comes a point where adding 1 extra stock to your portfolio doesn’t do much to reducing your unsystematic risk, i.e. the impact of adding 1 stock to unsystematic risk decreases at a DECREASING rate. If it were to decrease at an INCREASING rate, you wouldn’t see the shape of the red curve below, but instead a mirror image where the curve hits zero eventually as stocks are added to portfolio – which doesn’t make sense.
Does this help?
We all have those days @DylanOwen – it was worse having to fail one level (L3 for me) and repeat the process again.
Definitely lots of moments questioning myself and what on earth I’m doing where I could be doing other more interesting things…
What do you currently do, and why are you studying for the CFA qualification then?
Hey @matthewtara, I’m Chris, a recent charterholder.
1) Third party study materials help cut through the sheer volume of CFA Curriculum to go through. It depends on your study style, I’ve not tried Mark Meldrum (he’s more video-focused), but used Kaplan myself, just the standard notes package with practice exams. Heard good things for both, so you probably won’t go wrong there, just choose what you prefer.
2) It’s hard to ‘measure’ really, but you can’t be worse off for sure. As I’m already in Portfolio Management (apparently the most common route for CFA charterholders), it helped in terms of solidifying my reputation and made my case for promotion more straightforward. It’s pretty valuable / well recognized in the Asset management world by clients and employers hence I did it. But it is a versatile qualification for broader finance, and I wanted to have that option just in case. You’re still young and starting out, so it can be useful to have a broad certification in finance like CFA to open up options as you’re still discovering/exploring what career paths to pursue.
@daved10 – is there any specific field in finance you want to go for? It is important to understand your motivation here for a career in finance (and which part). Getting a CFA charter is not a golden ticket to jobs, so I’m worried you’re spending extra time and money and not getting what you really want to achieve with this.
Honestly speaking – and I don’t mean to be a naysayer – the current employment market is not looking great for all, and finance is an extremely competitive field as is. The 4 year unemployment gap can be an easy target to discount your application, and age may be an issue too with graduates flooding the market.
Switching career and/or job function is never a one-step thing, and usually people achieve one change at a time (i.e. switch job function but different sector, or switch sector but holding the same job function). I wonder whether you would be able to leverage your math/programming background to get into the finance sector to start (but not your ideal job function)?
Lots of food for thought here, and not enough information.
Hey, charterholder here. I don’t think it matters much to employers in how long you took to do the CFA exams, it’s just bragging rights (rightly so probably) for those who managed to achieve it quickly.
That said, there are specific ways of stating your CFA status in your CV which should be factual rather than implying any superiority.
You’re still young, so I think focusing on getting a graduate job and obtaining job experience is more important, so it is totally fine to have a break in between CFA exam levels as it makes sense for you. Getting a job and building up work experience is key especially in the current market, and you can continue Level 2 & 3 later on in your career where it packs the most punch anyway. Even if you decided to go for the CFA exams now and passed all of them in around 2 years, you will still have to wait to satisfy the work experience requirements for the CFA charter.
just my 2 cents 🙂
Hi, I assumed you had a typo in your original question for S1, that it should be 5.5% as I don’t seem to get your exact answers with S1=5% (an answer of 1014 instead of 1009).
Assuming that S1=5.5%, the correct answer is B, i.e. 1009.
This is derived as:
1009 = 100/[(1.055)] + 100/[(1.055)*(1.0763)] + 100/[(1.055)*(1.0763)*(1.1218)] + 1100/[(1.055)*(1.0763)*(1.1218)*(1.155)]
In your calculation (which yielded 996), you have assumed that the S4 spot rate is the same each year i.e. S1=S2=S3=S4, which is not true.
S2 = (1.055*1.0763)^(0.5)-1 = 6.56%
S3 = (1.055*1.0763*1.1218)^(1/3)-1 = 8.4%
And you already have S1 and S4. So if you discount each cashflow with their respective period’s spot rate, you’ll get the same answer, i.e. 1009 = 100/(1.055) + 100/(1.0656^2) + 100/(1.084^3) + 1100/(1.1013^4)
artyeasel said:Retaking L2 is very, very common, I wouldn’t obsess too much about comparing with others.Second that excelmonkey. It’s a step up from L2 and frankly insane amount of material to absorb.
Hope you can prep better this time, feel free to ask questions/concept that you need help with here. I got lucky and just became a charterholder, but feel like I forgot half the things already, so very happy to help and refresh concepts 🙂
@Hardik_Parikh, I remember getting confused with this too, as it’s pretty counterintuitive.
When there is high correlation between an asset class with the rest of the portfolio, this means that the returns tend to move together. While that is riskier, there is less risk for the asset allocation as a percentage to deviate from what investors choose it to be. Therefore risk tolerance is higher and a wider corridor is acceptable.
In other words, highly correlated assets’ target weights/allocations stay roughly the same since everything is moving together. This implies there is less deviation from the target weights and thus you can have a wider corridor before rebalancing.
So using an extreme example, if you have 2 asset classes that are perfectly correlated, when one goes up, the other will follow. Thus, weighting of the 2 asset classes will remain similar since they both moved in the same direction.
Just to add some stuff from my notes:
3 factors positively-correlated with corridor:
- higher transaction costs
- higher risk tolerance
- high positive correlation with other asset classes (no need to rebalance if they move up/down together)
2 factors negatively-correlated with corridor:
- high volatility of the asset class;
- high volatilities of the other asset classes (highly volatile asset class means increasing risk, so you can set narrower ranges to control that risk)
Hope these makes sense?
Hey @jasdev, sorry to hear that man… I just managed to scrape through on my 2nd try, so there’s hope.
When this happened to me last year, I felt slightly angry actually as I was hoping to pass and “be done with this”. But i feel it’s so close to that 3 letters behind my name I actually was really motivated to have another go – it’s kinda like the double down mentality (terrible gambler :# ). Second time around felt less intimidating as I’ve experienced the written nature of the exam before, and I forced myself to make/type succinct notes as I study along to speed up last minute revision this time. Kinda just about work, so just sharing my thoughts –> have a think about it during your holiday, but I definitely get that the time cost with family/friends/social life sucks though.
