Investing Guide

I started studying for the CFA Level 3 exam back in November 2007. I started studying seriously for the exam in January 2008. Over the past 6 months, I’ve spent numerous hours on the exam.
Estimated Time spent studying:

CFAI Curriculum books - 125 hours
Schweser Notes - 50 hours
Schweser Video Lecture - 40 hours
Schweser Audio MP3s - 20 hours
Schweser Qbank - 10 hours
Schweser Seminar Workbook - 10 hours
Schweser 3 Day Seminar - 20 hours
Schweser 2 day Online Problem workshop and Solution Seminar - 16 hours:
CFAI old exam questions 2000-2007 - 15 hours
Schweser Online 3 Online Exams: 15 hours
Schweser Volume 1 (3 full exams): 15 hours
Schweser Volume 2 (1 exam): 5 hours

Total - 341 hours +/- 50 hours.

Good Times!!!

By Loi Tran

I am attending the Schweser online seminar problem workshop for CFA level 3 this weekend. It is 8 hours on Saturday and 8 hours on Sunday. The speaker is Dr. Bruce Kuhlman. This seminar has been very very helpful compared to the 3 day seminar. His exam strategies tips and review for the morning sessions has been great. I now know how to approach the individual IPS and institutional IPS questions, which were my biggest concerns going into this seminar.

The “mind map” slides that came with this work shop is very intuitive.  The graphical representation helps give me a big picture of the overall curriculum material.
I still have 2 full exams in the Schweser Volume 2 book as well as the 3 CFAI sample exams and the 1 mock exams.  And I still have about 500+ Qbank questions to do. Things are looking brighter and I can see the light at the end of the tunnel.

With 5 weeks left, I need to ramp up my studying. I’ve read through the CFA curriculum, Schweser Study notes, watched the Schweser Video Lectures (40 hours), went to the 3 day seminar, and gone through the flash cards. I’ve reviewed CFAI 2000-2003 exams. My plan is to go over the rest of the CFAI exams. Then I am going to review most of the 2,000+ questions on SchweserPro Qbank. I also need to work on Schweser practice book 1 (3 6 hour practice exams). After that, I am going to do CFAI practice exams and do the Schweser problem practice workshop and 3 more Schweser online practice exams. I hope I’ll be ready by then. Wish me luck.

I’m attending the Schweser 3 day seminar this weekend. It’s Saturday now and I’ve gone to 2 out of the 3 days. This year’s level 3 seminar was not as helpful as the last year’s seminar for level 2. The instructor is Erik Benrud. Although he knows his material, he went over the seminar workbook slides 80% of the time. I was hoping to learn more exam strategies. I did get 1 helpful tip so far and it is to only write down what is required. If a question asks for 1 answer explanation, do not give 3 or 4 answers. The $430 is a sunk cost, so I’m going to make the most out of the last day. At least the seminar forces me to put in some more hours, but it is killing my weekend.

Individuals may sometime need to change the systematic (beta) exposure of their portfolio.  One can use futures to adjust the Beta of a portfolio.  The formula to determine the number of futures contracts needed is:

Number of futures position = (Beta target - Beta of Portfolio) * Market value of Portfolio / Price of futures contract

If an investor had a 1 million dollar portfolio with 60% stocks index and 40% bond and wanted to convert their allocation to 50/50 stocks and bond, they would need to convert 100,000 of their stock position to cash by shorting the appropriate amount of stock index futures.

Let’s say the stock index futures contract price is 2,500 with a beta of 1.  The stock portfolio has a beta of 0.85.  Using the formula:

(0 - .85)/1 * 100,000/2,500 = -34 contracts.  In order to convert the 100,000 portion of the stock index to cash, we would need to short 34 stock index futures.  With the synthetic cash, we will now convert the cash into the bond position by going long on a bond index futures.

The formula for calculating the number of bond futures to essentially the same as the stock index formula except we replace beta with modified duration.

(Modified duration Target - Modified Duration Portfolio) * Mv of Bond/ future price

If the modified duration of the portfolio = 6, bond index duration = 7, bond index price is 1,250, we can now figure out how many bond futures position to go long.

(6 - 0)/7 *100,000/1,250 = 68.57.  The 100,000 has a duration of zero because it is the synthetic cash that we converted from the stock portfolio.

Using futures may be a cheaper alternative than buying and selling positions, especially if an investor does not want to delay capital gains taxes.  Investors can choose to hold cash and create a synthetic stock position by going long futures if liquidity is a concern.  Using futures may be a good use for someone employing tactical asset allocation.

Companies usually immunize their liabilities by matching duration or cash flow. 

If duration of the portfolio < liability duration, there will be reinvestment risk-the risk of losing money when interest rates fall because the price increase will be less than the reinvested coupons.

If duration of the portfolio > liability duration, there will be price risk-the risk that the loss of principal when interest rates rise because the loss in price is more than the gain on the reinvested coupons.

Duration changes when interest rates fluctuate and as time passes.  One must weigh the transaction costs with the benefits of rebalancing a portfolio.

To avoid immunization risk (assets and liabilities changes do not match) portfolio managers can try to minimize cash flow dispersion around the maturity date by using bullets and barbell strategies. 

Investors have multiple accounts to minimize, delay and avoid taxation. Assets are taxed when a capital gain is realized or when income is received through coupon payments or dividends. Taxes can be delayed with a Traditional IRA, 401k or 403B plan. Taxes can be avoided by using a ROTH IRA or ROTH 401k. Some life insurance and municipal bonds can shelter asset returns. Trusts can be used to minimize or avoid the taxation related to transfer of wealth to heirs. Public and private foundations are also used to transfer wealth to charities.

Asset locations strategy is to place the most tax inefficient assets in the tax deferred/free accounts and the most tax efficient assets in the taxable accounts. The general rule of thumb is to place tax inefficient assets such as bonds, value stocks, and mutual funds with high distributions into tax deferred accounts.  Stocks, index funds, and municipal bonds should be placed in taxable accounts because of the tax efficiency.

Investors who view familiar stocks as better investments (higher return, lower risk) than unfamiliar ones.  Investors tend to invest in investments that they are familiar with such as their own company stocks.  They are also more comfortable investing in companies closer to home such as domestic stocks instead of foreign companies. 

Investors affected by familiarity tend to feel comfortable investing in stocks they are familiar with even though they have not done any thorough research on the company.  The feel the company will perform well even though they have a false sense of familiarity because they have not done their due diligence.  Since they do not take in to account the risk associated with the investment, it will lead them to concentrated undiversified positions.