Any Last Minute Questions? Your Problems are My Problems!

I’ll shoot.

From schweser volume 2, problem 118 of mock 2 if you have them. If not, it says, “Based on the information in exhibit 3 (attached below), an investor that wishes to construct a portfolio with an active risk of 4% would most appropriately choose to combine the benchmark w/ fund A, B or C” 

So the answer assumes the portfolio is unconstrained, which I wish that information was stated in the case/question, but anyways, that’s not my real issue. So they solve the problem by finding the fund w/ the highest Information Ratio which is fine, but I guess I don’t understand how to calculate breadth. Given this information, I’d think breadth would equal 12, 4, and 2, respectively, but they are calculating breadth as 12*2, 4*3, and 2*2, respectively. Any insights here? I think it could be just a poorly worded question, but maybe I’m missing something. If the text specified that there were x bets per year each on y number of independent stocks, then I’d follow that breadth =x*y, but it seems like there is information to be desired here. Any thoughts? 

Thanks.

Quick question about Net Income/Earnings under Equity Method vs Acquisition

We are told that Net Income is equal under both methods, but how does the amortization of goodwill affect this?

Dagmar topic test from CFAI topic tests:

Dagmar would use the equity method to account for its investment in Elbe because of its classification as an associated company. Therefore, Dagmar will include its proportionate share of Elbe’s net earnings, minus the amortization of the excess purchase price from the initial acquisition. Dagmar owns 30%: (1.8/6.0, in millions of shares) of Elbe

30% proportional ownership, 12,375 Net Income from Investee company, and excess purchase price of $5250, 15 year depreciation

So, under equity method: (.30)*12,375  – [(5250*.30)/15) = 3607.5

Assuming that there was control for whatever reason, wouldn’t acquisition method Net Income be (.30)*12,375 and be different since there is no amortization of excess of the purchase price over fair value?

EDIT: acquisition method would have to depreciate it’s proportion of the assets too wouldn’t it, so net income because of all of the assets on the balance sheet would be equal?

The goodwill is never amortized.  The excess of fair value over book value is. Under equity method you won’t even see goodwill. It’s included in the one line item for investment in associates.  Goes for equity and acquisition method. Goodwill is tested for impairment annually and I suggest knowing how to test for it and apply it for IFRS and US GAAP. 

Last thing,  goodwill in equity method isn’t tested for impairment.  The investment in associatea as a whole is though.  I suggest you know how to do that too under both accounting standards. 

I suggest you keep cramming out mocks! Lol

I think what ctown is implying is that the Frequency already implicitly includes the multiplicative effect on the number of choices. For example, if the number of stocks followed is 2 and frequency is 12 then the number of times your placing bets is 6. So I think your just twisting the terminology. Frequency is not the number of bets. Its just how often you walk to the casino counter and place a bet with the clerk. You can darn well place more than one bet every time you go to the clerk though. I would view frequency as the number of times you go to the casino clerk. Then the number of stocks followed is how bets you make anytime to go to the clerk so you for each unit of frequency there are 2, 3 4, 5 etc bets.

googs1484 said:

I think what ctown is implying is that the Frequency already implicitly includes the multiplicative effect on the number of choices. For example, if the number of stocks followed is 2 and frequency is 12 then the number of times your placing bets is 6. So I think your just twisting the terminology. Frequency is not the number of bets. Its just how often you walk to the casino counter and place a bet with the clerk. You can darn well place more than one bet every time you go to the clerk though. I would view frequency as the number of times you go to the casino clerk. Then the number of stocks followed is how bets you make anytime to go to the clerk so you for each unit of frequency there are 2, 3 4, 5 etc bets.

Exactly how it makes sense to me. However, it’s wrong according to schweser lol. I’m over it @ this point. Good luck boyos, may we all survive Saturday.