Mock sample exam CFA level III mock exam itemset questions 2009

2009 Level III Mock Exam The 2009 Level III Chartered Financial Analyst® Mock Examination has 60 questions To best simulate the exam day experience, candidates are advised to allocate an average of 18 minutes per item set (vignette and multiple choice questions) for a total of 180 minutes (3 hours) for this session of the exam Questions Topic Minutes 1-6 Ethical and Professional Standards 18 7-12 Ethical and Professional Standards 18 13-18 Risk Management 18 19-24 Equity Portfolio Management 18 25-30 Performance Attribution 18 31-36 Fixed Income Portfolio Management 18 37-42 Risk Management Application of Derivatives 18 43-48 Risk Management Application of Derivatives 18 49-54 Portfolio Management of Global Bonds 18 55-60 GIPS 18 Total: 180 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Questions through relate to Ethical and Professional Standards Weiying Shao Scenario Weiying Shao, CFA, is an investment officer employed by Zhang Financial Services Zhang provides wealth management services solely to high net worth individuals and has adopted the CFA Institute Standards and Asset Manager Code of Conduct Shao receives a request from a client asking for an itemized accounting of the actual fees and other costs charged to them for the year Shao sends the client a document itemizing management fees paid by the client along with an explanation as to how the fees were derived Zhang has expanded its services recently to include proprietary mutual funds Two experienced and respected research analysts were promoted to manage the new mutual funds Shao meets with Guohua Xu, a client who holds a diversified portfolio of funds Traditionally, Shao has invested client assets in long-established funds with strong performance and management continuity Because he has great respect for Zhang’s new products and their portfolio managers, Shao suggests investing a portion of Xu’s portfolio in one of the new Zhang funds He recommends a fund with investment objectives similar to those of Xu Shao provides performance data based on a simulated application of the fund’s approach over the past 18 months He adds, “The new fund’s simulated performance is comparable to the performance of your current holdings over that period.” Several clients ask Shao about hedge funds After carefully screening for risk and return characteristics, Shao recommends selected hedge funds he finds appropriate for even conservative clients The funds have had excellent performance so Shao believes they are appropriate despite their three year lock out prevision He discusses his research and recommendations with a colleague who responds “I don’t believe hedge funds are appropriate for any of our conservative clients, especially those with short-term liquidity needs.” Periodically Shao reviews Zhang’s confidential proxy voting policy that is disclosed to clients only upon request The policy directs investment officers to be selective when reviewing proxies, and to avoid spending time reviewing and voting routine proxies In such cases, Zhang considers the cost involved for the client to be greater than the benefit that the client would receive Zhang has strict trade allocation procedures developed in accordance with the CFA Institute Standards and Asset Manager Code of Conduct The firm distributes copies of the procedures to clients annually Occasionally, Shao receives notice from the trading desk at the close of the day informing him that his block trades were only partially filled By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Recently, when the trading desk could not execute the full $750,000 in stock that he had requested for two accounts, he allocated $100,000 of the stock to the $5 million dollar private account and the remaining $500,000 of stock to a $25 million dollar institutional account During the next month, Zhang’s founder is accused by regulatory authorities of a number of violations including misappropriation of client funds The same day, a team of senior portfolio managers leave Zhang to start their own firm Zhang instructs its personnel not to discuss either of these developments with current or prospective clients Are the fee disclosures made by Shao to his client consistent with the CFA Institute Asset Manager Code of Professional Conduct? A No B Yes, because Shao disclosed how fees are derived C Yes, because Shao itemized the management fees paid on the client’s behalf By recommending that Xu switch a portion of his portfolio to a new Zhang fund, does Shao violate any CFA Institute Standards of Professional Conduct? A No B Yes, because he has a conflict of interest as the new funds are proprietary C Yes, because the fund data used in the performance comparison was simulated By recommending hedge funds, does Shao violate any CFA Institute Standards? A No B Yes, because hedge funds have risk characteristics that are not suitable for conservative investors C Yes, because the hedge funds recommended are not suitable for conservative investors with short-term liquidity requirements By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Is Zhang’s proxy voting policy consistent with the requirements and recommendations of CFA Institute Standards and the Asset Manager Code of Conduct? A Yes B No, because the proxy voting policy should be disclosed to all clients C No, because voting of all proxies is a part of the management of client investments When allocating the shares on the partially filled block order does Shao violate any CFA Institute Standards? A No B Yes, because he fails to disclose the firm’s trade allocation policies C Yes, because he should allocate shares to client accounts only after the order is completely filled According to the CFA Institute Asset Manager Code of Conduct, Zhang must disclose the information regarding its: A founder only B team of senior portfolio managers only C both the founder and the team of senior portfolio managers By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Questions through 12 relate to Ethical and Professional Standards Anne Zawadi Case Scenario A group of fund management professionals recently formed a self-regulating professional association, the Fund Managers’ Association (FMA), whose main objective is to increase the level of integrity of fund management in the country Membership in the FMA is restricted to fund management firms The FMA wants to create a Code of Conduct to be used by all the firm members of the FMA To help in the creation of the Code, the FMA has hired Anne Zawadi, a CFA charterholder In the first meeting between the Board of the FMA and Zawadi, the Chairman of the FMA Board states, “Our initial thoughts are to require all of our members to adopt the CFA Code of Ethics and Standards of Professional Conduct rather than create our own code If they fail to abide by the CFA Code, their membership will be revoked.” Zawadi responds, “Perhaps it would be better to adopt the CFA Institute Asset Manager Code of Professional Conduct, as it is specific to asset management firms, not individuals The Code lays out principles of conduct, including acting in a professional and ethical manner, acting for the benefit of clients at all times and with independence and objectivity, in addition to acting with skill, competence and diligence It also covers communication with clients It is so comprehensive there is no need to allow any flexibility amongst your members However, it only covers some aspects of our capital markets regulations but it should be adopted without any further provisions.” After Zawadi’s comments, the FMA Board agreed to adopt the CFA Asset Manager Code without any changes or additions, requiring all its members to strictly abide by it It also required its members to state in their marketing material that their clients could submit complaints regarding any member to the FMA’s Compliance Committee One year later, the Compliance Committee of the FMA asks to meet with Zawadi to discuss a complaint against one of its members, Amani Asset Management The complaint comes from a client who gave Amani full discretion and believes Amani violated the Asset Managers Code His opinion is based on the fact that he lost one third of his portfolio value over the last year The client claims he was told by one of Amani’s managers that recently all of their clients’ asset allocations were heavily weighted to more speculative equity investments in order to enhance returns The manager is also alleged to have told the client his performance is really quite good as the market lost 50 percent Along with his complaint, the client submitted his investment policy statement, prepared by Amani Zawadi noted that the client’s risk tolerance in the statement was described as “moderate” due to his conservative nature and poor investment experiences in the past By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Amani’s client also indicates he heard that Amani had been fined a substantial amount of money by regulators for not complying with regulations regarding the handling of client funds The client also indicates that as a result of the disciplinary action, several top management personnel left the company The client enclosed Amani’s last bi-weekly newsletter in which Amani disclosed recent staff additions, new management fee structures, and changes in handling client account procedures As part of the FMA’s objective of improving standards in their industry, the FMA Board asks Zawadi to review the procedures they require of their members in regards to Compliance and Support, Trading and Disclosure Zawadi finds the following existing procedures in place: Compliance Members are required to ensure all their employees sign a statement and Support: acknowledging the firm’s mandatory compliance with the CFA Asset Managers Code; appoint a Compliance Officer reporting to the CEO and Board of Directors; maintain records regarding investment decisions for a minimum of six years; and portfolio information must be checked by another department within the Member firm Trading: Members are required to enforce procedures to ensure: clients’ interests are first and foremost; trade allocations are distributed equally amongst all clients and best trade execution Disclosure: Members are required to ensure all Members disclose: basis for valuation methodology; potential conflicts of interest; and use of derivatives After the review of the procedures she makes two recommendations as to how the FMA can further enhance integrity amongst its members: Recommendation: Recommendation: Each member firm should require all of its employees to declare on a quarterly basis, any investment actions taken by themselves or anyone else living in their household to ensure the firms’ clients’ interests are being put before the employees of the firm Member firms should restrict the use of performance fees but solely charge clients on the basis of a percentage of assets under management so to ensure managers not take excessive risk By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Are Zawadi’s comments regarding the implementation and the ethical responsibilities of the CFA Asset Manager Code of Professional Conduct most likely accurate? A No B Yes, because she covers all aspects of the ethical responsibilities C Yes, because she covers all aspects of the ethical responsibilities and mentions that the Code must be adopted without any changes Did Amani’s client have a basis for making a complaint with regard to the Asset Manager Code against Amani? A Yes B No, Amani treated all the clients equally and did not favor one client over another C No, the client gave Amani full discretion and his portfolio outperformed the market Which of the FMA’s existing procedures regarding Compliance and Support least likely meets the minimum Standards of the Asset Managers Code? A Maintaining records B Department confirmation C Independent Compliance Officer 10 Which of the following disclosures would the FMA least likely require of their members to meet the minimum Standards of the Asset Managers Code? A Use of leverage B Fund audit results C Remuneration of Professional Staff 11 Could Zawadi’s first recommendation be improved further to better meet the Standards of the Asset Manager Code and the CFA Standards of Professional Conduct? A No, it already meets the requirements of both Codes B Yes, disallow all employees to trade in investment securities C Yes, require all employees to obtain permission prior to making a trade By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose 12 Does Zawadi’s recommendation conform to the Asset Manager Code of Standards? A Yes B No, Code does not forbid performance fees as long as the fee calculation is clearly disclosed C No, Code does not forbid performance fees as long as each client’s performance fee is calculated identically By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Questions 13 through 18 relate to Risk Management Lara Fraser Case Scenario Lara Fraser is the risk manager for Galaxy & Co., a large investment firm located in Scotland She recently hired a new employee, Stuart Wallace, to assist her with enhancing the firm’s risk management process Fraser asks Wallace to document the exposures to risk that have been identified through Galaxy & Co.’s current risk management process As Wallace begins the project, Fraser responds to client questions and requests Client A states: “I am a new client and received my first investment portfolio statement The statement specifies, “With 95 percent confidence, the VAR of the portfolio is $1 million for one month.” My portfolio holds long stock positions along with some option positions on those stocks and I am concerned about the impact that low probability events may have on my portfolio performance Can the VAR measure be adjusted to address this concern? In addition, please explain the primary limitation of VAR.” Fraser responds with the following statements: Statement 1: VAR quantifies potential losses in simple terms Statement 2: VAR often underestimates the magnitude and frequency of the worst returns Statement 3: VAR is a forward-looking measure that cannot be backtested against historical data Client B asks: “I am preparing to make a VAR presentation to my Board of Directors I am familiar with the analytical method of measuring VAR that Galaxy & Co uses Please describe other methods for estimating VAR and indicate a disadvantage of each.” Galaxy & Co.’s senior management wants to be confident that the firm is managing and measuring credit risk in an appropriate manner They ask Fraser to provide a specific example of an investment instrument within the portfolio that may create credit risk Fraser chooses to illustrate the concept of credit risk with a swap example A portion of the firm’s portfolio is invested in floating rate notes Galaxy uses interest rate swaps to manage the interest rate risk exposure of this investment Specifically, the firm has entered into a one year pay variable receive fixed interest rate swap The swap has a notional value of £1,000,000 The current market value of the swap to Galaxy is -£47,000 Fraser is confident that the techniques she employs to mitigate credit risk are comprehensive and follow industry best practice standards She drafts a description of the techniques used at Galaxy and includes the following statement: By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose “In keeping with industry standards, our primary means of managing credit risk is requiring that our counterparties post collateral.” Meanwhile, Wallace drafts a memo to Fraser with some of his initial thoughts: “As an investment firm that manages international and domestic fixed income and equity portfolios, Galaxy & Co is exposed to both financial and non-financial risks Each of these broad topics will be addressed in turn.” Wallace decides to initially add depth to the financial risks that the firm faces 13 Fraser’s most appropriate response to Client A’s question regarding the possibility of adjusting the VAR measure is: A an increase in the confidence interval will increase the magnitude of the VAR measure B the VAR measure will decrease if the time frame of measurement is increased C for your portfolio, any confidence interval will provide essentially identical VAR information 14 Fraser correctly identifies a limitation of VAR in: A Statement B Statement C Statement 15 Fraser drafts a number of possible responses to Client B An appropriate response would include: A The Monte Carlo simulation method requires an assumption of normally distributed returns B The historical method is nonparametric and does not allow the user to make assumptions about the probability distribution of returns C The historical method relies completely on events of the past, and the probability distribution of the past may not hold in the future By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose Exhibit Allied Representative Portfolio vs Benchmark Portfolio Benchmark * Year Return Return 2004 9.70% 9.40% 2005 -3.50% -3.75% 2006 5.40% 6.00% 2007 0.75% 1.00% 2008 6.95% 6.25% *Returns are net of management fees of 0.15% annually Moir also is interested in the risks that Allied takes in spread sectors He asks for additional information on the amount of spread risk in Allied’s portfolio relative to the benchmark Thorne responds with the information shown in Exhibit Sector Treasury Corporate Mortgage Asset backed Total Exhibit Contribution to Spread Duration Portfolio Benchmark % of Contribution to % of Contribution to Portfolio Spread Duration Portfolio Spread Duration 44.0 0.0 45.0 0.0 22.5 1.96 23.0 1.38 14.0 0.42 17.0 0.53 19.5 0.49 15.0 0.40 100.0 2.87 100.0 2.31 Moir then asks Thorne for his interest rate forecast for the coming year Thorne responds, “At Allied we expect long rates to underperform short rates causing a twist in the yield curve.” Finally, Moir asks Thorne to illustrate how he evaluates the total return of a new trade Thorne presents an analysis for a model trade of a percent coupon bond with five years to maturity currently trading at par, with the next coupon payment due in six months In his analysis, Thorne assumes he can sell the bond at $101.50 at the end of a six-month holding period By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation only The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose ... accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation... accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation... accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates Candidates may view and print the exam for personal exam preparation