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CP2 Paper 1 Sept 2022

Darragh Kelly

Ton up Member
Hi,

Just 2 additional questions on the CP2 paper titled above.

1) So lookin at Strategy A (or any of the other stragies, on the modelling tab of the IFoA model solution), we see the student invests on the 02/01/2021. But they recieve the 1000 to invest on the 01/01/2021. Are they allowed to enter the market on the 01/01/2021, and if so would they not base their return on the 02/01/2021, as the change in the stock prices between the 31/12/2020 (as this would be most current stock price available to them on the 01/01/2021) and the 02/01/2021? So then the first row for stragies A to D would be dated 01/01/2021 (with the 200 allocated in each of the 5 stocks) and their return on the 02/01/2021 would be based on the change in stock price from 31/12/2020 and 02/01/2021? Or do we assume the market is closed on the 01/01/2021 so they can really only invest when it opens on 02/01/2021 ie when the next stock price is published?

2) Looking at the Data Checks tab, I see that there is a check carried out in cells V20 to Z20 ie checking the average return vs final index. I'm guessing is a reasonable check (rather then rigerous mathematical check), saying well if our average return is positive, we expect the index to be greater then 100 at the end of the investment peroid, or if our average return is negative, we expect at the end of the investment peroid that the index will be negative? It makes intutitive sense to me... I mean I agree this holds true over the long run but it would not hold true in short run (as if it starts at 100 the chances it will exceed 100 is much higher then vs a 2 year peroid)? Also if the St dev was extremly high (volatile stock), is there a chance it could jump over 100 at the end of the peroid even with a avg neg return? Is this check based on any maths rules from previous IFoA subjects?

Thanks for your time,

Kind regards,

Darragh
 
Hi Darragh

1. Either approach would have been fine, just state your assumption clearly in your audit trail.

2. This has been used in the audit trail as a reasonableness check (have a look in that document for the comments on it). It would be possible for the check to fail as you describe (with a sudden movement) but that doesn't mean it isn't useful - if it fails we could then look in to the reason why.

As mentioned before, the examiners solution is just one way to check the reasonableness of the data - any other reasonableness check on the movements of the data (such as commenting that the average daily return is very low, which we would expect, or that the sector with the lowest min/max values also has the lowest standard deviation (or vice versa for the highest values)) would have been fine too. Have a look at the Examiners' Report.

Sarah
 
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