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Archive for July, 2013

Questions for Investment Planning, CFP

Posted by Prashant Shah on July 31, 2013

Following questions have been suggested by one of the reader. Hence I don’t own any of the question.

1. Mr. A is of 35 yrs with spouse and a kid of an age 5 yrs. His strategic asset allocation is 50:35:15 in equity, debt and liquid. He is able to invest rs 1.5lakh pa immediately to work various life goal. At age 40 the allocation would change to 40:50:10 in equity, debt and liquid asset with annual investment going up to 2.5 lakh for 5 more years. At age 45, for next 10 year he adapts the conservative wealth protection allocation 25:70:5 in eq, debt & liquid asset with 3 lakh pa investments. The per annum return expected in this stage are; from equity : 12%.11% & 10%, from debt : 9%,8% & 7%, from liquid asset : 6,5%,5.5% & 4.5%.What amount could he accumulate by his age 55 years?
a. 113.9 lakhs
b. 97.21 lakhs
c. 66.65 lakhs
d. 117.91 lakhs




























































2. Your client wants to buy a house in 3 years in an area where the current price are 60 lakhs appreciating at 8% pa. He can afford loan up to Rs 40 lakh. He has an FD of Rs 8 lakh which are maturing shortly. You find that reinvesting in FD would not fetch good return. You advice to shift the entire FD maturity to long run debt scheme, expected to return 12% pa for next 2 years. He can additionally invest rs 30000 pm for the goal which you advice to invest in equity which you expect to return 15% pa in the next 2 years. You shift the debt & equity accumulation to liquid fund returning 5% pa in the third year while additionally investing in that fund. You estimate achievement of own fund for house to be?
a. The difference between own fund required and available may swell over 16 lakh
b. Shortfall of 12.58 lakh in own fund after 3 yrs
c. Achieve the goal with surplus of 3 lakh
d. Shortfall of 6 lakh

SOLUTION: Solve this question using monthly nominal rate to get the exact answer.




















$12.48 L

3. Mr. A has gross annual salary of 9 lakh of which he saves 30% which include statutory EPF deduction, PPF and monthly systematic investment in long term MF scheme. Another 30% goes toward servicing of household & car loan & taxes. His financial planner advice him to accumulate 6 months household expense in liquid fund. HE change job and expect immediate rise of 20% in his gross income .You estimate that other heads would not change materially except his household expense which would rise by 5% due child education. How many months will it take to accumulate liquid reserve?
a. 25 months
b. 11 months
c. 14 months
d. 13 months





















=189000/162000=1.16667*12 = 14

4. An individual start investing immediately for 10 year annually Rs 80000 in the ratio 70:30 in equity and debt products. He expects the return from equity and debt to be 12.5% pa & 9.5% pa. during this period. To protect the wealth he rebalance the portfolio in 40:60 of equity and debt after 10 yrs and invest in same ratio annually rs 1.5 lakh for next 10 years. The return expected from equity and debt in this period subsides to 10.5% pa and 7.5% pa respectively. What could be his total investment at the end of the entire tenure of his investment?
a. 60.38 lakh
b. 60.31 lakh
c. 70.42 lakh
d. 61.58 lakh

5. A bond with par value of rs 1000 and coupon rate of 11% (payable semi-annually, next coupon due immediately) and maturing after 5 years is available at Rs.942.50 in the market. If the coupon received can be reinvested till maturity at average rate of 8.5% pa. What could be realized rate of return from such investment if the bond is held till maturity?
a. 13.33%
b. 13.15%
c. 13.90%
d. 13.60%


1 55 82.6984719
2 55 79.39332767
3 55 76.22027752
4 55 73.17404214
5 55 70.24955324
6 55 67.44194507
7 55 64.74654634
8 55 62.15887248
9 55 59.67461813
10 55 57.28965
11 55 55
  TOTAL 1748.047304
  RY 13.150%

PV = 942.5, FV = 1178.04, N = 5, I/Y =?

6. An investor purchased 5000 units of an equity oriented MF scheme under dividend reinvestment scheme on 1st June 2012 at NAV of rs 18.46 along with systematic investment plan of rs 5000, each for 6 months. The SIP dates are 1st of every month beginning 1st July 2012. The NAV at which additional unit were bought through SIP were rs 19.06, rs 18.51, rs 17.23, rs 18.97, rs 16.75 and rs 17.95 on 15 October 2012. The scheme declared a dividend of 25% on face value of rs 10 per unit which record date being 21st October 2012. The NAV on 22nd October 2012 was rs 16.50. The investor redeemed all units on 28 January 2013 at a price of rs 19.10 . What holding period return was obtained by investor?
a. 27.83%
b. 23.58%
c. 15.89%
d. 18.46%


    DATE          AMT              NAV           UNITS
1-Jun-12 92300 18.46 5000
1-Jul-12 5000 19.06 262.3294858
1-Aug-12 5000 18.51 270.1242572
1-Sep-12 5000 17.23 290.1915264
1-Oct-12 5000 18.97 263.5740643
22-Oct-12 15215.55 16.5 922.1544445
1-Nov-12 5000 16.75 298.5074627
1-Dec-12 5000 17.95 278.551532
28-Jan-13 -144882 19.1 7585.432773
122300 Total investment

Final step: (144882-122300)/122300 = 18.46%

7. Mr. B bought the house by availing a housing loan of rs 25 lakh for 15 yrs at a variable rate of interest. The initial rate was 8.5% & the fixed EMI was in May 2008. The finance company raise the rate to 9.25% pa effective from EMI due on April 2009. The finance company retain the same EMI but increased the outstanding tenure. Mr. B received a bonus of rs 2.5 lakh from her employer in May 2010. What amount she should prepare to invest to bring back tenure to original contract period with effect from June 2010?
a. 75,814
b. 111,215
c. 78,681
d. 109,543


I/Y = 8.5/12

PMT = 24618

P1=1, P2=11

BAL = 2421238

PMT = 24618

I/Y = 9.25/12

N = ? 184.8

P1=1, P2=14

BAL = 2333570

PMT = 24618

N = 180-25 = 155

I/Y = 9.25/12

PV = 2222303

HENCE PREPAYMENT REQUIRED   = 2333570-2222303 = 111267 APPROX

8. You purchase 500 shares of a company at rs 205 per share on 1st July 2011. The dividend of rs 1100 and rs 1300 were received respectively in August 2011 and September 2012. On 1st January 2013 the share were sold for rs 1.15 lakh. Your holding period return comes to?

9. An investor allocated equal amount of rs 2 lakh each to bond, stock and gold ETF three years ago. His investment in bond has yielded coupon of rs 7500 every six months & is presently redeemable at rs 2.13 lakh. The stock portfolio is valued at rs 2.79 lakh. He has also received rs 2725 as dividend from stock in year one, rs 3125 in year two and rs 2965 lately. The gold ETF unit have a market value of rs 2.58 lakh. The coupon and dividend received remain in the bank saving account yielding an annual interest of 4.5%. If the inflation remained at 10.5%, 9.6% and 8.5% in those three year. What real rate of return he stands to generate on liquidation of entire portfolio?
a. 1.02% pa
b. 0.77% pa
c. 0.88% pa
d. 0.71% pa

10. A invested 1o lakh in beginning of year in equity, corporate bond, government sec and alternate investment in proportion 35:35:20:10. A year after making investment it generated  return which were 14%,10%,6%,16% respectively. If investor followed constant mix policy his plan of action would be?
a. Keep the portfolio under changed
b. Buy equity of rs 9800 and alternate investment of rs 4800 and sell corporate bond of rs 4200 and government sec of rs 10,400.
c. Increase the exposure of alternate investment and equity
d. Sell equity of rs 9800 and alternate investment of rs 4800 and buy corporate bond of rs 4200 and government sec of rs 10,400.

11. XYZ company paid dividend 2, recently of common stock; dividend expected to grow by 20% for next 3 years, after which expect to stabilize at 10% growth. If required rate of return is 15%. How much maximum price would you pay today to buy stock?
a. 82.5
b. 43.5
c. 52
d. 50

Posted in Practice Questions | 105 Comments »

Asset Allocation for CFP

Posted by Prashant Shah on July 29, 2013

Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

Asset allocation is the process of deciding how to distribute an investor’s wealth among different countries and asset classes for investment purposes. An asset class is comprised of securities that have similar characteristics, attributes, and risk/return relationships.

The asset allocation decision is not an isolated choice; rather, it is a component of a portfolio management process.

Types of Asset Allocation

Strategic Asset Allocation

  • ™A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal for asset allocation
  • At the inception of the portfolio, a “base policy mix” is established based on expected returns
  • Because the value of assets can change given market conditions, the portfolio constantly needs to be re-adjusted to meet the policy

Tactical Asset Allocation:

  • An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors
  • This strategy allows portfolio managers to create extra value by taking advantage of certain situations in the marketplace
  • It is moderately active strategy

Insured Asset Allocation:

  • Insured asset allocation assumes that expected market returns and risks are constant over time, while the investor’s objectives and constraints change as his or her wealth position changes.
  • For example, rising portfolio values increase the investor’s wealth and consequently his or her ability to handle risk, which means the investor can increase his or her exposure to risky assets.
  • Declines in the portfolio’s value lower the investor’s wealth, consequently decreasing his or her ability to handle risk, which means the portfolio’s exposure to risky assets must decline.
  • Often, insured asset allocation involves only two assets, such as common stocks and T-bills.
  • As stock prices rise, the asset allocation increases the stock component.
  • As stock prices fall, the stock component of the mix falls while the T-bill component increases.
  • This is opposite of what would happen under tactical asset allocation.
  • Insured asset allocation is like the integrated approach without the feedback loop on the capital market side
  • It is sometimes called a constant proportion strategy because of the shifts that occur as wealth changes.


Rebalancing is bringing your portfolio back to your original asset allocation mix. This is necessary because over time some of your investments may become out of alignment with your investment goals. You’ll find that some of your investments will grow faster than others. By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to a comfortable level of risk.

There are basically three different ways you can rebalance your portfolio:

  • You can sell off investments from over-weighted asset categories and use the proceeds to purchase      investments for under-weighted asset categories.
  • You can purchase new investments for under-weighted asset categories.
  • If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance.

Investment with a Portfolio and Rebalancing

Assume a requirement of 1500000 after 10 years. Investment is made in equity and debt in a ratio of 75:25. Investment is made at the beginning of the period. Find amount to be invested in equity and debt each. Rate of return on equity 11% and debt 8%.


Assume investment amount   of 1000. Hence 750 will be invested in equity and 250 will be invested in   debt.


As both equity and debt   grow at their own rate, find FV of both in isolation

Equity  : PMT(bgn)=750          N=10                i/y=11              FV:13921

Debt    : PMT(bgn)=250          N=10                i/y=8                FV:3911

Total value of the   portfolio: 17832

If investment of 1000   accumulates 17832, how much to invest for 1500000?

Cross multiplication:   1500000*1000/17832 = 84120 (approx)

Equity investment=63090

Debt investment=21030

Portfolio Rebalancing

Assume in the above case if proportion changes after 5 years to 50:50, the amount of investment in each component will be


Assume investment amount   of 1000. Hence 750 will be invested in equity and 250 will be invested in   debt.


As both equity and debt   grow at their own rate, find FV of both in isolation

Equity  : PMT(bgn)=750          N=5                  i/y=11              FV:5185

Debt    : PMT(bgn)=250          N=5                  i/y=8                FV:1584

Total value of the   portfolio after 5 years: 6769

Now the portfolio will be   divided in 50:50


Equity  : PV=3385        PMT(bgn)=500            N=5                  i/y=11              FV:9160

Debt    : PV=3385        PMT(bgn)=500            N=5                  i/y=8                FV:8141

Hence the total value of   portfolio = 17301

Cross multiplication:   1500000*1000/17301 =86700 (annual   investment)


FPSB Questions

Illustration   -1
A   buisnessman wants to achieve the goal of marriage of his daughter after 10   years. The funds required would be Rs. 25 lakh at then costs. He wants to   invest monthly for the goal. You suggest an asset allocation strategy where   he should invest monthly in equity and debt in ratio 65:35 for 9 years, and   shift the entire accumulated amount in these funds to liquid fund in the last   year. If the returns expected from equity, debt and liquid funds in this   period are 12% p.a., 9% p.a. and 5% p.a., respectively, what approximate   amount per month is required to be allocated to equity and debt schemes?
Illustration   -2
Your   client Mr A. has his Rs. 50 lakh portfolio in three asset classes as on 1st   April 2009 comprised of Equity and Debt each in 35 % allocation with the rest   of the portfolio invested in Gold ETF. Over the period upto 1st January 2013,   Gold has given a total return of 90 % in the portfolio whereas equity and   debt have returned 11% and 15%, respectively. You rebalance the portfolio   today and change its allocation to 60% in equity with the other two classes   equally sharing the balance. What should be the transfer of money amongst   asset classes?
Illustration   -3
Your client starts   investing immediately for 10 years annually Rs. 60,000 in the ratio of 80:20   in equity and debt products. You expect return from equity and debt to be   11.75% p.a. and 8.25% p.a. during this period. To protect the wealth, he   rebalances the portfolio in 40:60 ratio of equity and debt after 10 years and   invests in the same ratio annually Rs. 60,000 for the next 5 years. The   return expected from equity and debt in this period subsides to 9% p.a. and   7% p.a., respectively. What rate of return is expected on his total   investments? How would this return fare when seen from average inflation of   6% during the entire period?
Illustration   -4
Your client started   investing Rs. 12,000 per month a year ago in an asset allocation of 30:70 in   equity and debt to achieve a goal in 6 years from now by accumulating Rs. 10   lakh. You realize that he would be requiring Rs. 15 lakh for the same goal.   You expect equity and debt to give returns of 11.75% p.a. and 8.25% p.a.,   respectively in the entire period of investment. You assess changing asset   allocation to 65:35 in equity and debt by investing Rs. 2,000 additional per   month to see how closer he can reach to his goal. You find that ______.

Posted in Asset Allocation, CFP, Investment Planning | 9 Comments »