CFA Practice Question

There are 434 practice questions for this study session.

CFA Practice Question

An analyst has a client with a $1,000,000 portfolio. The client may need to liquidate $100,000 of the portfolio at the end of a particular year. The client does not want to invade the initial capital of $1,000,000. The table below summarizes different investment allocations.

What is the probability that the return on the safety-first optimal portfolio will be less than the shortfall level RL? Assume normality.
A. 27%
B. 30%
C. 33%
Explanation: The probability is 33% that the return on the safety-first optimal portfolio will be less than the shortfall level, RL. The optimal z-value on X was 0.435.

Thus, P(RA < 10) = N (-0.435)). The reading on the table at 0.44 is 0.6700.

The solution is thus 1 - 0.6700 = 33%.

User Contributed Comments 7

User Comment
danlan 0.435=(20-10)/23 for X, which is higher than
(10-10)/23 for Y and (13-10)/18 for Z
dimanyc my problem is "reading on table at 0.44". There won't be a table at exam and 27,30,33 are too close to guess (although i guessed that part right! :)
achu No reasonable tester would require memorization of the normal table. Use an online version of the table when doing these problems; assume you'd get a table excerpt on a real test for such a problem!
homersimpson Looks like Y is the only one that falls short out of the three. So 1/3=33%. No z table required.
Anevasee Can someone expand on the solution please? What is RL?
megageorge RL is 10% minimum that client wants to earn (100k/1mln)
megageorge how we can get our test statistics without amount of n?
You need to log in first to add your comment.