FinQuiz.com CFA Level III Mock Exam June, 2018 Revision Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com CFA Level III Mock Exam – Questions (PM) FinQuiz.com –2nd Mock Exam 2018 (PM Session) Questions Topic Minutes 1-12 Ethical and Professional Standards 36 13-18 Alternative Investments 18 19-24 Risk Management 18 25-30 Risk Management Application of Derivatives 18 31-36 Equity Investments 18 37-42 Fixed Income 18 43-48 Monitoring and Rebalancing 18 49-54 Risk Application of Swap Strategies 18 55-60 Global Investment Performance Standards 18 Total 180 FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions through relate to Ethical and Professional Standards Wilshire Investment Case Scenario Wilshire Investment (WI) is a U.S based investment management firm providing wealth management services to institutional clients The firm primarily invests in traditional asset classes such as equity and fixed income Holme’s Trust Foundation (HTF) is WI’s institutional client Its portfolio is being managed by Tony Monroe Monroe is evaluating commodity futures in Rigea, an Eastern European country, for HTF’s investment portfolio WI does not have expertise with commodity futures Therefore, Monroe has made arrangements with an external portfolio manager, Raul Davis Under the arrangement Davis and WI will share any commissions generated In addition to their agreement, Davis has invited Monroe to Rigea As a signal of good gesture, Davis’s firm has offered Monroe to pay for commercial transport and hotel accommodation Monroe has declined the hotel accommodation offered but has not responded to the transport offer Jean Lowe is a research analyst serving WI’s research wing Lowe is currently analyzing hedge funds in Rigea Monroe has asked Lowe to avoid hedge funds in Rigea because he believes they will not generate attractive returns Lowe remains convinced that the hedge funds are attractive investment opportunities After thorough research and analysis, Lowe recommends the assets class and compels Monroe to invest his clients’ funds Six months later, the investment generates a strong alpha Prior to serving WI, Monroe served another portfolio management firm at which he was extremely popular In order to generate the same level of popularity at WI, Monroe decides to contact a fellow portfolio manager at his previous workplace to provide contact details of clients who are no longer invested with the firm The firm continues to store client details on its database After his successful yet uncertain venture into hedge funds, Monroe contemplates increasing client portfolio allocations to modern alternative investment classes, particularly buyout funds and venture capital funds In describing the new investment opportunity to his clients, he states: FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) Statement: “Buyout fund investments are virtually risk-free as the associated funds are established companies; the latter category is highly risky but will generate substantial returns if the associated venture survives.” Octavia Richards, CFA, is a broker serving East End Brokers (EEB) On behalf of EEB, she is forming an arrangement whereby any requested research will be directed to EEB in exchange for providing new clients to Monroe The commission charged by Richards is higher than average; however, he believes doing business through Richards will allow WI to gain access to investment funds with very high investment requirements and improve client accounts’ results as well as meet their investment needs He intends to disclose the arrangement to clients if successful Curious about the success of the hedge fund, Monroe decides to investigate the source of the outperformance During his analysis and discussions with local analysts, Monroe comes to the conclusion that the fund may be victim to survivorship bias He presses fund management who refuse to provide any information on the matter In response to the commercial transport offer made by Davis’s firm, Monroe’s best course of action would be to: A accept the offer without any disclosure to his supervisor B accept the offer with disclosure to his supervisor C decline the offer By issuing the research report, has Lowe violated any Standards of Professional Conduct? A No B Yes, she has violated IV (A) Loyalty by not respecting Monroe’s instructions C Yes, she has violated VI (A) Disclosure of conflicts by failing to disclose the difference in opinion By requesting access to client records, has Monroe violated any Standards of Professional Conduct? A No B Yes, he has violated IV (A) Loyalty C Yes, he has violated III (E) Preservation of Confidentiality FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) In describing the proposed investment classes to his clients, Monroe has most likely violated: A I (C) Misrepresentation B III (D) Performance Presentation C V (B) Communication with Clients and Prospective Clients By undertaking the brokerage arrangement with EEB and Richards, Monroe has: A violated standard III (A) Loyalty, Prudence and Care B violated standard III (C) Suitability C not violated any Standards of Professional Conduct Based on Monroe’s suspicions regarding the hedge fund, his best course of action would be to: A consult his supervisor B consult WI’s whistleblowing policy C discontinue his investment arrangement with the hedge fund FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions through 12 relate to Ethical and Professional Standards Alliance Limited Case Scenario Alliance Limited (AL) is an asset advisory firm situated in Chicago, providing investment advisory services to private wealth clients To improve its standing in the national market, senior officer Ali Reza has recommended AL adopt the CFA Institute Asset Manager Code He has drafted compliance policies in three different areas which will assist the firm in gaining compliance Personal Trading: Any employee intending to trade a security on AL’s watch list must seek prior approval from the compliance officer if the trade exceeds the $1,000 limit Backup records: To ensure the safety of account information, all pertinent information will be stored on a backup computer system in electronic form only The system will be located in AL’s headquarters; an offsite system is currently not within the firm’s budget Fee Disclosures: All managers are encouraged to disclose all actual gross- and net-offees performance results as well as an itemization of charges The procedure used to determine contingent fees must be disclosed upon request After drafting the policies, Reza engages in a discussion with AL’s senior portfolio manager, Rob Martin Martin manages the account of Martha Flower, a wealthy real estate developer who is operating in Florida Martin has long suspected Flower of embezzling her clients’ funds After thorough investigation, Martin is now certain and fears a substantial portion of her portfolio may be funded with these funds He is uncertain of what action to take Sylvia Bath, CFA, a portfolio manager serving AL, manages the investment account of Peter Blake Blake is one year away from retirement and will depend entirely on his retirement income to provide for his modest lifestyle His investment portfolio has a current equity allocation of 10%, comprising entirely of domestic large-cap value stocks, with the remainder in fixed income securities Due to the current cyclicality of the U.S economy and to protect her client’s portfolio, Bath has decided to sell the value stocks and purchase large-cap growth stocks in the same proportion Since this action was taken to protect Blake’s portfolio, she does not believe informing Blake was necessary FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) Later that evening, Bath receives an invitation to attend a charitable event from Blake Among the invitees include professionals from the investment industry Believing that the event will provide the opportunity to bring more business to AL, she accepts the invitation after informing her supervisor in writing At the event, the attendees engage in various activities for cash prizes Blake wins two cash prizes worth $50 each, which she intends to disclose to her supervisor The following day Bath has been asked to review the performance record and resume of Ramos Davis, a candidate applying for the position of computer systems technician Davis was fired from Cappa Inc., a large investment bank, after being wrongly accused of negligent supervision of the bank’s backup computer system, which subsequently led to its destruction in a site fire Which of the following policies is most likely consistent with both the required and recommended standards of the CFA Institute Asset Manager Code? The policy concerning: A Personal trading only B Backup records only C neither personal trading nor backup records Which of the following statements is most likely correct with respect to the Fee Disclosures policy? A The procedure used to determine contingent fees must be disclosed regardless of client request B Managers should be encouraged to disclose either gross- or net-of-fees results but not both C The policy is in compliance with the required and recommended standards of the Asset Manager Code In order to adhere with the requirements and recommendations of the Asset Manager Code, Martin’s best course of action with respect to his knowledge on Flower’s activities is to: A inform his supervisor B inform local authorities C keep any information gained during the investigation confidential FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) 10 By diverting Blake’s funds to large-cap growth stocks, has Bath violated the Asset Manager Code? A No B Yes, she should have informed Blake after implementing the change C Yes, she should have informed Blake of the proposed change before taking investment action 11 With respect to informing her supervisor of the invitation and accepting the cash prizes, are Bath’s actions consistent with the Asset Manager Code? A No B Yes C Only with respect to the cash prizes 12 When hiring Davis as systems technician, which of the following actions will be required by AL to comply with the Asset Manager Code? A Ensure Davis is qualified B Consider another candidate for the position C Provide disclosure of the details of his employment termination to clients FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions 13 through 18 relate to Alternative Investments Victor Moreno Case Scenario Victor Moreno, CFA, is an alternative investment analyst recently hired by Northbay Asset Management (NAM), a U.S based firm NAM primarily deals with equity and fixed income Its equity securities are benchmarked to the S&P 500 index while fixed income securities use the Lehman Aggregate Bond Index as benchmark Moreno is exploring commodities, private equity and real estate as potential asset classes for client portfolios Dmitri Anderson, portfolio manager at NAM, asks Moreno to justify each of the three proposed asset classes Moreno shares the following knowledge with Anderson: Real estate: Although both types of real estate investments, direct and indirect, offer diversification benefits, direct real estate is a suitable asset class for both the informational advantaged and disadvantaged investor Commodities: When the inflation outlook is poor, cyclical commodities provide an effective inflation hedge Private equity: They are similar to seasoned public equity as they exhibit similar return dispersion and help enhance long-term return Anderson has heard that private equity investments can be direct or indirect He asks Moreno to describe the indirect venture capital form to him Moreno responds by describing the structure, process and drawbacks of the asset class to Anderson Structure: Indirect venture capital investments can be structured as limited liability companies or limited partnerships with life extension options Process: Investors deposit their funds in a centralized pool which are subsequently deployed by a managing director for investments Drawbacks: Partners suffer from limited liability and double taxation Anderson has also heard of dividend recapitalization often being associated with buyout funds He asks Moreno what is meant by the term After concluding his discussion with Anderson, Moreno analyzes an investment in Decorum Limited (DL), a furniture manufacturer DL is a recently established private FinQuiz.com © 2018 - All rights reserved CFA Level III Mock Exam – Questions (PM) venture which has managed to receive financing from two external parties It intends to use the funds to develop its products DL will commence commercial manufacturing in two days time It has sold product samples to a selected number of customers, who are extremely pleased with their design and quality Moreno estimates that if DL were publically traded, its value would have been $320 million On behalf of NAM, Moreno intends to acquire a 15% non-marketable minority stake in DL A minority interest and a marketability discount of 28% and 36%, respectively, are deemed appropriate for the manufacturer Larry Armstrong is a junior portfolio manager with some knowledge on alternative investments He is exploring an exchange traded fund (ETF) which utilizes a futures trading strategy to manage exposure to the petroleum industry Armstrong believes that NAM client portfolios should benefit from participation in the commodity ETF 13 Based on the justifications provided for the three asset classes, Moreno is most likely accurate with respect to: A commodities only B real estate and commodities only C neither of the three asset classes 14 When describing indirect venture capital funds, Moreno is correct with respect to their: A structure B process C drawbacks 15 With respect to Anderson’s query, the most appropriate response is that dividend recapitalizations: A enable buyout funds to recoup their acquisition costs in a few years time B allow for the restructuring of operations and improvement of management C are used as an exit route for private equity funds, buyout and venture capital FinQuiz.com © 2018 - All rights reserved 10 CFA Level III Mock Exam – Questions (PM) Following Alexei’s advice, Walker compiles details concerning the benchmarks used for each of the four managers (Exhibit 2) Manager’s normal benchmark Investor’s benchmark Exhibit 2: Portfolio and Investor Benchmarks Eco Smith Morris MSCI US MSCI World MSCI World Broad Market ex-US Value ex-US Value Index Index index MSCI US Broad Market MSCI World MSCI World Index ex-US index ex-US index Akhtar MSCI World ex-US index MSCI World ex-US Growth index Following his analysis of the equity allocation, Walker holds a meeting with LLE’s chief executive During the meeting the executive entrusts Walker with the management of $10 million which the fund has received from a wealthy donor The executive shares his desire for an active equity exposure to emerging market equities However Walker has little expertise with respect to this equity category Walker is of the opinion that exposure to the U.S equity market can be highly profitable and devises a strategy to manage the $10 million by undertaking a long futures position in the S&P500 equity index For the emerging market equity allocation, he narrows down his selection to Octavia Wilde, an active manager benchmarked to the MSCI Emerging Markets Index (EMI) Wilde undertakes a short futures position in the MSCI EMI 31 Based on the information presented in Exhibit 1, Morris’s value investment style can most likely be classified as: A low P/E B contrarian C high dividend yield 32 The information ratio earned on LIE’s equity allocation is closest to: A 0.9 B 1.2 C 2.0 FinQuiz.com © 2018 - All rights reserved 19 CFA Level III Mock Exam – Questions (PM) 33 Using the information presented in Exhibit 1, which manager has outperformed his or her asset class benchmark by the highest margin? A Smith B Morris C Akhtar 34 With respect to the benefits of a true/misfit distinction, Alexei is least accurate with respect to: A Justification only B Justification only C both of his justifications 35 Based on the information provided in Exhibits and and the vignette, Alexei has correctly defined the normal benchmark for: A Eco B Smith C Akhtar 36 The strategy employed by Walker to manage the $10 million entrusted by LLE’s chief executive is most likely classified as: A completeness fund B equitized market neutral C alpha and beta separation FinQuiz.com © 2018 - All rights reserved 20 CFA Level III Mock Exam – Questions (PM) Questions 37 through 42 relate to Fixed Income Chat and Dine (C&D) Case Scenario Brenda Cross is part of the portfolio management team that manages the investment portfolio of Chat and Dine (C&D), a food chain with fourteen branches within New York, USA C&D started off as a bakery around five years ago but has now diversified its business by incorporating coffee houses and restaurants as a part of their chain Owing to an enhanced variety of products, C&D has incorporated the latest technologies to augment the effectiveness of their supply chain and reduce the transit time of perishable items It has, thus, taken on a series of debt obligations to cover its technological investments Cross has been advised to manage the firm’s investment portfolio in accordance with the firm’s debt portfolio which consists of cash outflows at regular intervals for a period of 15 years While talking to Brown Smith, C&D’s CEO, about the appropriate investment strategy, Cross suggests two approaches: Fund A: “A portfolio that has a duration that equals the duration of the debt portfolio The matching would be achieved by using Treasury zeros, each maturing at the dates of respective cash outflows At the current interest rate of 7.5%, the present value of the investment portfolio will slightly exceed that of the debt portfolio “ Fund B: “A portfolio consisting of interest rate futures and bonds that mature at dates that precisely match the dates of the future liability payouts Cash inflows precisely equal cash outflows.” The firm’s CEO seems more comfortable with Fund B’s investment mandate and instructs Cross to structure the investment portfolio accordingly In doing so, Cross shortlists three bonds to include in the fund The characteristics of the bonds are given in Exhibit FinQuiz.com © 2018 - All rights reserved 21 CFA Level III Mock Exam – Questions (PM) Exhibit 1: Bond Characteristics Bond A Bond B Bond C Issue Size $35 million $40 million $50 million Time to Maturity years years 11 years Credit Rating AA AAA BBB Time since issuance New issue months months Moderate Moderate Frequent 33% 25% 30% 21% 17% 19% $1.20 billion $1.75 billion $0.89 billion Issuer’s issuing frequency Short-term capital gains tax(< years) Long-term capital gains tax (>2 years) Total Issuance Outstanding The bond selected would be used to cover liabilities that would be due in five quarters from now Smith states that liquidity is of a prime concern C&D owns commercial real estate that it does not use in the normal course of its business While talking to Cross about it, Smith expresses the desire to invest the locked up real estate value in a fixed-income fund Since the focus is to enhance returns, Cross recommends using leverage to invest part of the value in fixed-income securities She suggests investing $15 million for five years in a bond portfolio worth $22 million Cross believes that this investment would earn them a return premium of 9.5% A loan, taken for five years, costs 11.5% before taxes, and the risk-free rate equals 5.5% Smith is not sure if this investment would add to the returns especially because of the additional risk added by the loan He is also unsure whether taking a loan would be the most suitable approach This is because he anticipates interest rates to decrease by 2-4% in the coming years and by 90 bps in the coming month Cross states that, to take advantage of the rate decrease, the firm could invest $2 million in a corporate bond using a repurchase agreement C&D would have to buy back the position in day at a price of $2.0836 million and keep collateral worth $2.0257 million with the lender Smith is still contemplating whether the profit on the short sale warrants the costs incurred FinQuiz.com © 2018 - All rights reserved 22 CFA Level III Mock Exam – Questions (PM) 37 With regards to the immunization of the single liability, which of the following is most accurate about the risks involved in the two strategies? A Fund A has no reinvestment risk but price risk is present B Fund B has no price but reinvestment risk is present C Neither fund has either price risk or reinvestment risk 38 Which of the following about the effectiveness of the immunization strategy of the funds is most accurate? A Unlike Fund B, Fund A would only work in case of parallel yield curve shifts B Unlike Fund A, Fund B would only work in case of parallel yield curve shifts C Both funds would work regardless of the type of yield curve change 39 Using only the information given in Exhibit 1, which of the following bonds should Cross add to the fund? A Bond A B Bond B C Bond C 40 How much value is Cross’s suggestion to use leverage to invest in the bond portfolio likely to add in percentage terms? A 1.63% B -0.93% C 1.03% 41 Based on Smith’s expectations of interest rate movements, the least appropriate way of adding leverage to the fixed-income portfolio would be to: A be the fixed-rate receiver in a swap agreement B Go long an inverse floater C Go long interest rate futures FinQuiz.com © 2018 - All rights reserved 23 CFA Level III Mock Exam – Questions (PM) 42 The size of the credit protection in the repurchase agreement is closest to: A 1.284% B 2.209% C 4.178% FinQuiz.com © 2018 - All rights reserved 24 CFA Level III Mock Exam – Questions (PM) Questions 43 through 48 relate to Monitor and Rebalancing George Pena Case Scenario George Pena, CFA, is a portfolio manager at Aqua Wealth Management (AWM), LLC Pena has extensive experience with managing private wealth accounts Karen Lawrence and Joseph Smith are Pena’s newest clients With respect to each client’s portfolio, Pena has a task on hand Task A: Determine the optimal rebalancing strategy for Lawrence’s portfolio Task B: Determine the optimal corridor width for each asset class in Smith’s portfolio Task A: Optimal Rebalancing Strategy Lawrence has recently inherited $300,000 from her deceased father’s estate She is 35 years old and practices dentistry privately Last year, Lawrence’s house was destroyed in a domestic fire 15% of the inheritance amount as well as insurance claims have enabled her to seek new accommodation Despite the incident, her living expenses are being comfortably met During a meeting with Lawrence, she shares with Pena her desire to maintain a minimum cash balance during economic downturns However, she would like to maximize portfolio returns when the opportunity arises and is willing to utilize her cash balance to increase equity exposure Upon the conclusion of their meeting, Pena collects data from several economic reports each of which forecast a sustained upward trend in equity markets Pena estimates that Lawrence’s stocks will generate a return of 5% Her portfolio value and stock/cash allocation, prior to any changes, is $2 million and 55/45, respectively Lewis Wise is an intern at AWM He is being trained by Pena and is assisting him in the management of Lawrence’s portfolio During his training session, he asks the following questions: Question 1: The graphical representations of the constant proportion portfolio insurance (CPPI) and constant-mix strategies are mirror images of each other Is this true? FinQuiz.com © 2018 - All rights reserved 25 CFA Level III Mock Exam – Questions (PM) Question 2: Is it correct to state that the buy-and-hold strategy is consistent with a risk tolerance which has a positive relation to wealth at all levels of stock return? Task B: Optimal Corridor Width For this task, Pena compiles volatility, return, transaction cost, and correlation data on the three asset classes held in Smith’s (Exhibit 1) portfolio Exhibit Expected Return, Volatility, Transaction Cost, and Correlation Data Asset Class Domestic Equity Domestic Bonds Commodities Volatility Expected (Annualized Transaction Correlation with the Return Standard Costs rest of the portfolio (Annualized) Deviation) 12.5% 14.2% 0.20% 0.25 7.8 11.8 0.45 0.18 11.3 11.9 0.19 0.09 Mildred Jones, CFA, is AWM’s Human Resource Manager She has recently implemented a policy which mandates firing any underperforming managers Some managers have complained that the policy is too stringent and has resulted in the company losing promising managers which have underperformed due to uncontrollable external factors 43 Considering economic forecasts and Lawrence’s requirements, which of the following rebalancing strategies is most appropriate for Lawrence’s portfolio? A CPPI B Buy-and-hold C Constant-mix 44 Assuming expectations are realized, Lawrence’s revised stock/cash allocation under a buy-and-hold strategy is closest to: A 53.5/46.5 B 55.0/45.0 C 56.2/43.8 FinQuiz.com © 2018 - All rights reserved 26 CFA Level III Mock Exam – Questions (PM) 45 The most appropriate responses to Wise’s questions are: Question A No B No C Yes Question No Yes No 46 Based only on the transaction cost and volatility information presented in Exhibit 1, which asset classes will have the narrowest corridor width? A Commodities B Domestic bonds C Domestic equity 47 Considering the correlation data in isolation, Pena will conclude that the asset class with the narrowest corridor width is: A Commodities B Domestic bonds C Domestic equity 48 Jones’ policy characterizes a (n): A Type I error B Type II error C adequate manager continuation policy FinQuiz.com © 2018 - All rights reserved 27 CFA Level III Mock Exam – Questions (PM) Questions 49 through 54 relate to Risk Application of Swap Strategies TSM Derivatives Trading (TSMDT) Case Scenario TSM Derivatives Trading (TSMDT) is a derivatives trading group situated in London, U.K Amongst the derivative contracts it executes, the group locates interest rate, equity, and commodity swap counterparties by acting as a dealer to parties seeking to hedge their positions In addition to solely offering dealership services, the group routinely undertakes the dual role of derivatives dealer for and acts as swap counterparty to its customers for an additional fee Kyote Inc is one of TSMDT’s customers Kyote Inc is a wholesale manufacturer producing cornmeal and other corn-based edible products For the purposes of producing these products, the manufacturer regularly purchases raw corn Kyote Inc.’s finished products are distributed to retailers to be further sold to individual retail customers To secure the purchase price of raw corn, Kyote Inc plans to enter into a derivative contract TSMDT’s senior derivatives trader, Josef Silos, recommends the manufacturer enter into a three year commodity swap contract on corn The 1-year, 2-year, and 3-year corn forward prices are £125, £150, and £165, respectively The 1-year, 2-year, and 3year interest rates are 7.5%, 8.0%, and 9.5%, respectively During an initial meeting with Kyote Inc.’s head of risk management, Silos makes the following statements: Statement 1: “Entering into the commodity swap contract on corn will give your firm (Kyote Inc.) a position equivalent to three forward contracts Statement 2: “Another way to look at it is, by entering into the commodity swap contract, your firm will effectively be making a 2-year loan to TSMDT.” Statement 3: “The benefit of entering into a commodity swap contract is that your firm’s counterparty credit risk becomes virtually non-existent.” The head of risk management responds to Silos’ statements by asking the following two questions Question 1: “If forward prices and interest rates change following contract initiation, will it have an impact on the value of our firm’s swap contract?” FinQuiz.com © 2018 - All rights reserved 28 CFA Level III Mock Exam – Questions (PM) Question 2: “If, in the future, our demand for corn needs to be increased (decreased) to accommodate an unexpected demand rise (fall) for cornmeal and we are met with seasonally high corn prices, is there a way to accommodate corn price and demand changes when pricing commodity corn swap contracts?” 49 If Kyote Inc decides to enter into the three-year commodity swap contract on corn, it will most likely: A make a fixed payment and receive a floating payment on the swap B make a floating payment and receive a fixed payment on the swap C make a fixed payment on the swap only 50 The effective unit price on the 3-year swap is closest to: A £119.51/bushel B £145.56/bushel C £165.55/bushel 51 TSMDT has entered into a three-year swap contract with Kyote Inc as a dealer and swap counterparty Assuming TSMDT hedges corn price risk on the swap contract by entering into three forward contracts, the derivative group’s net cash flow position on the swap and forward contract in the second year is closest to: A – £4.44 B + £4.44 C + £15.55 52 In context of the statements made by Silos to Kyote Inc.’s head of risk management, which of the following statements is most likely incorrect? A All three statements B and only C only 53 The most appropriate response to the risk management head’s first question is: A there will be no impact on the value of the swap contract B the value of the swap contract will change, increase or decrease, only in response to a change in corn forward prices C the value of the swap contract will change, increase or decrease, in response to a change in the value of either of the two variables, corn forward prices and forward interest rates FinQuiz.com © 2018 - All rights reserved 29 CFA Level III Mock Exam – Questions (PM) 54 The most appropriate response to the question is: A Yes B No, commodity swap contracts may only accommodate forward price changes C No, commodity swap contracts may not be able to accommodate either variable commodity demand or forward prices FinQuiz.com © 2018 - All rights reserved 30 CFA Level III Mock Exam – Questions (PM) Questions 55 through 60 relate to Global Investment Performance Standards Brooks Wealth Management Case Scenario Brooks Wealth Management (BWM) is an asset advisory firm situated in Brooklyn, New York BWM manages the accounts of individual clients Its subsidiary, Thuraiya Associates, handles institutional client accounts Each firm has its own team of portfolio managers, trading desks, and marketing staff Managers from both departments base their investment decisions on research reports issued by a centralized in-house research department Access to this department is shared BWM is currently in the process of seeking compliance with the Global Investment Performance Standards (GIPS) Three of its policies are believed to comply with the requirements of these standards Large External Cash Flows: Portfolios belonging to the developed market equity composite are revalued when capital equal to 10% of the fair value is contributed or withdrawn Portfolios belonging to the emerging market equity composite are revalued when capital equal to 30% of the fair value is contributed or withdrawn This policy is documented Portfolio Valuation: The beginning value of investments is measured at cost Subsequent to initial recognition, investments are valued at fair value Valuation Frequency: Due to the illiquid nature of emerging market investments, portfolios belonging to the emerging market equity composite are revalued semiannually Liquid investments are revalued on the last day of the calendar month James Marco, BWM’s client, has requested BWM to demonstrate how his account’s performance is calculated in accordance with the GIPS standards Dmitri Solvang, CFA, Marco’s portfolio manager, compiles relevant portfolio information (Exhibit 1) FinQuiz.com © 2018 - All rights reserved 31 CFA Level III Mock Exam – Questions (PM) Exhibit Marco’s Portfolio Activity for the Month of January, 2011 (in $) January (Beginning value) 180,000 External cash flows: 12 January + 4,500 27 January ─ 3,450 Value on 12 January* 197,500 Value on 27 January* 220,000 January 31, 2010 (Ending value) 222,000 *Portfolio values include the relevant cash flows When presenting performance to clients, Solvang believes it is necessary to report internal dispersion of returns earned by individual portfolios in the composite Such information will enable users to evaluate how consistently the firm was able to achieve its strategy across individual portfolios To measure internal dispersion, BWM reports an annual VAR for all measured portfolios on an annual basis Gene Davis is another client of BWM Her contract with the firm expires on August 31, 2011 Unsatisfied with her account’s performance, she instructs her portfolio manager to cease trading and liquidate her holdings with immediate effect on August 12 Her account’s performance is calculated on a monthly basis 55 Which of the following entities meets the definition of a firm as outlined by the GIPS standards? A both entities B BWM only C Thuraiya Associates only 56 BWM’s Large External Cash Flows policy most likely satisfies the requirements of the GIPS standards with respect to: A both composites B the developed market equity composite only C the emerging market equity composite only FinQuiz.com © 2018 - All rights reserved 32 CFA Level III Mock Exam – Questions (PM) 57 Do BWM’s policies concerning portfolio valuation and valuation frequency, respectively, satisfy the requirements of the GIPS standards? Portfolio Valuation A No B No C Yes Valuation Frequency No Yes No 58 The true time-weighted rate of return on Marco’s portfolio is closest to: A 13.1% B 18.6% C 22.4% 59 Does BWM’s internal dispersion policy satisfy the GIPS standards? A Yes B No, firms are required to report VAR on a monthly basis C No, VAR is not an acceptable measure of internal dispersion 60 In order to comply with the requirements of the standards, BWM’s best course of action with respect to Davis’s account at a minimum, is to: A retain her performance record up to July 31, 2011 B retain her performance record up to August 12, 2011 C transfer her performance record to her new asset advisor FinQuiz.com © 2018 - All rights reserved 33 ... Clients and Prospective Clients By undertaking the brokerage arrangement with EEB and Richards, Monroe has: A violated standard III (A) Loyalty, Prudence and Care B violated standard III (C) Suitability... Monitoring and Rebalancing 18 49-54 Risk Application of Swap Strategies 18 55-60 Global Investment Performance Standards 18 Total 180 FinQuiz. com © 2018 - All rights reserved CFA Level III Mock... Standards of Professional Conduct? A No B Yes, he has violated IV (A) Loyalty C Yes, he has violated III (E) Preservation of Confidentiality FinQuiz. com © 2018 - All rights reserved CFA Level III