FinQuiz.com CFA Level III Mock Exam June, 2017 Revision Copyright © 2010-2017 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 2017 (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 Portfolio Management of Global Bonds 18 55-60 Global Investment Performance Standards 18 Total 180 FinQuiz.com © 2017 - 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 © 2017 - 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 © 2017 - 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 © 2017 - 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 © 2017 - 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 © 2017 - 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 © 2017 - 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 © 2017 - 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 $320 million On behalf of NAM, Moreno intends to acquire a 15% non-marketable minority stake in DL A minority interest and a marketability discount of 28% and 36%, respectively, are deemed appropriate for the manufacturer Larry Armstrong is a junior portfolio manager with some knowledge on alternative investments He is exploring an exchange traded fund (ETF) which utilizes a futures trading strategy to manage exposure to the petroleum industry Armstrong believes that NAM client portfolios should benefit from participation in the commodity ETF 13 Based on the justifications provided for the three asset classes, Moreno is most likely accurate with respect to: A commodities only B real estate and commodities only C neither of the three asset classes 14 When describing indirect venture capital funds, Moreno is correct with respect to their: A structure B process C drawbacks 15 With respect to Anderson’s query, the most appropriate response is that dividend recapitalizations: A enable buyout funds to recoup their acquisition costs in a few years time B allow for the restructuring of operations and improvement of management C are used as an exit route for private equity funds, buyout and venture capital FinQuiz.com © 2017 - All rights reserved 10 CFA Level III Mock Exam – Questions (PM) Questions 31 through 36 relate to Equity Investments Joyce Walker Case Scenario Joyce Walker is a portfolio manager at South-March Associates, an asset advisory firm Walker is managing the equity portion of Lakehouse Limited Endowment’s (LLE) policy portfolio The portfolio is currently invested in international ex-US equities and is being managed by four individuals – Gina Eco, Blake Morris, Carl Smith, and Mehmet Akhtar Exhibit displays details concerning the funds managed by the individuals Exhibit 1: Equity Portion of LLE’s Policy Portfolio Eco Smith Asset under management ($ millions) 5.0 2.5 Expected alpha 0.0 5.5% Expected tracking risk 0.0 3.6% Dividend yield 0.0 2.1 P/E 16 10 P/B 6.0 4.3 5-year consensus expected earnings growth 5.0% 3.1% Annualized manager’s return 15.1% 22.1% Annualized manager’s normal benchmark return* 15.1% 18.0% Annualized investor benchmark return* 15.1% 12.1% Equity investment style N/A Value *All returns are gross of management fees Morris 3.5 7.2% 6.5% 1.3 14 0.7 6.8% 12.7% Akhtar 2.0 10.1% 8.1% 1.6 25 15.8 10.5% 17.0% 13.7% 11.6% Value 16.1% 17.3% Growth Walker’s colleague, Levin Alexei, is reviewing the allocation presented in Exhibit He tells Walker that a true/misfit distinction between portfolio risk and returns is crucial He supports his statement by providing the following justifications: Justification 1: The true/misfit distinction will allow for an optimized allocation to managers such that misfit risk is eliminated and true active returns are maximized Justification 2: The distinction allows for the performance appraisal of active managers FinQuiz.com © 2017 - All rights reserved 18 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 © 2017 - 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 © 2017 - All rights reserved 20 CFA Level III Mock Exam – Questions (PM) Questions 37 through 42 relate to Fixed Income Hope Foundation Case Scenario Hope Foundation (HF) is a nongovernmental entity funding cancer treatment for the unprivileged in Africa Over the past few years, HF’s spending needs have increased Its policy portfolio is currently invested entirely in equities It would like exposure to fixed income securities and has hired Dennis Bardem, CFA, as fixed income manager During his first week at work, Bardem establishes the need to segregate HF’s fixed income portion into two segments; one segment will be used to finance the construction of a health care facility in four years time while the other will be managed using a variety of trading analysis techniques For the latter segment, Bardem uses mean reversion analysis to analyze three different issues For his analysis he assumes credit spreads on the three issues are mean reverting Current spreads, mean spreads over the past eight months, and standard deviation of these spreads is summarized in Exhibit Exhibit Current Spreads, Mean Spreads Over the Past Months, and Standard Deviation of the Spreads Issue A B C Current Spread 112 bps 108 98 Mean Spread Over Past months 98 bps 91 86 Standard Deviation of Spread 35 bps 24 19 Upon the conclusion of his analysis, Bardem proceeds to evaluate trading strategies utilized by two funds, G.X Fund and Mono G.X Fund primarily trades in Eastern European credit securities Its security evaluation process involves projecting exchange, inflation and interest rates as well as the outcomes of economic policies Results from the projections are followed by a survey from economists requesting their insight on economic sectors they perceive are worthy of investment Recent economic reports have focused on the strong economic growth in Eastern Europe According to the report, sectors such as financials and cyclicals will be most promising G.X.’s management decides to reallocate the fund to these sectors FinQuiz.com © 2017 - All rights reserved 21 CFA Level III Mock Exam – Questions (PM) Mono trades securities with embedded options based on expectations regarding yield curve movements and volatility Its trading activities are concentrated in Japan It has forecasted a rally in Japanese bond markets According to Bardem’s estimates, HF will need to commit $80 million for the health care project Although he has not finalized which method to use, he has narrowed his choices down to the contingent immunization strategy and the cash flow matching strategy HF has expressly stated that it requires a minimum 8% return on all its investments Bardem estimates that he can achieve a return of 9.25% using the contingent immunization strategy with a time horizon of years In describing the strategy to HF, he makes the following statements: Statement 1: The portfolio can be managed actively as long as the prevailing immunized rate of return exceeds 8% Statement 2: The proposed strategy will help immunize the portfolio against parallel and nonparallel rate shifts 37 Based on the information presented in Exhibit 1, Bardem will most likely purchase issue: A A B B C C 38 Based on the information provided on G.X Fund, the technique used to analyze securities and the trading rationale being utilized, respectively, is most likely: Analysis Technique A Bottom-up B Top-down C Top-down Trading Rationale New issue swap Cash flow reinvestment Sector rotation 39 Given the expectation for the Japanese bond markets, which of the following structures will perform well? A Callables B Puttables C Neither callables nor puttables FinQuiz.com © 2017 - All rights reserved 22 CFA Level III Mock Exam – Questions (PM) 40 Assuming all returns are compounded semiannually, the initial safety margin on HF’s portfolio is closest to (in $ millions): A 3.74 B 29.49 C 33.23 41 Is Bardem correct with respect to Statements and 2? A No B Only with respect to Statement C Only with respect to Statement 42 Which of the following risks is least likely a drawback of the cash flow matching technique? The technique is: A difficult to understand B expensive to implement C subject to reinvestment risk FinQuiz.com © 2017 - All rights reserved 23 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 © 2017 - All rights reserved 24 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 © 2017 - All rights reserved 25 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 © 2017 - All rights reserved 26 CFA Level III Mock Exam – Questions (PM) Questions 49 through 54 relate to Portfolio Management of Global Bonds Trinity Foundation Case Scenario Trinity Foundation (TF), a U.S based entity, has requested its portfolio manager, Raul Castillo, to increase its exposure to international corporate bonds TF is aware of the foreign currency risks associated with international investing and has asked Castillo to present a solution Castillo recommends two different hedging strategies, both of which utilize currency forwards Strategy 1: Engage in a forward contract which requires the sale of a foreign currency, which is highly correlated with the currency of the bond, for the US$ Strategy 2: Engage in a forward contract requiring the exchange of the currency of the bond for a third (non-US$) currency After extensive research, Castillo decides to invest in Russian corporate bonds for TF’s portfolio However, he has not reached a formal decision on whether to hedge the associated foreign currency exposure He has collected relevant data for the analysis (Exhibit 1) He expects RUB to appreciate by 0.5% against the US$ Exhibit U.S and Russian Exchange Rate and Interest Rates Data Current spot rate 1-year U.S risk-free rate 1-year Russian risk-free rate Yield on 10-year Russian government bonds Actual spot rate (in year) US$ 30 per RUB 3.5% 2.2% 7.8% US$ 31.4 per RUB During lunch with one of his colleagues, Castillo is introduced to breakeven spread analysis His colleague describes the technique to Castillo Description 1: Breakeven spread analysis is extremely useful for active international bond portfolio selection Along with accounting for foreign exchange risk, the technique assists in assessing the risk of seeking bonds with higher yields FinQuiz.com © 2017 - All rights reserved 27 CFA Level III Mock Exam – Questions (PM) Description 2: The application of the technique to emerging market security selection is restricted Eager to test the newly discovered technique, Castillo collects data on two 20-year corporate bonds, Australian and French (Exhibit 2) He also obtains data from economic reports which forecast Australian interest rates to remain constant and French rates to rise by 50 basis points over the next year Exhibit Data Concerning Australian and French Bond Investments 20-year French corporate bond yield 20-year Australian corporate bond yield Duration of French bonds Duration of Australian bonds 12.90 12.40 9.0 7.5 While reading the economic reports, Castillo learns that a 100 basis points increase in U.S interest rates is highly anticipated In response, Castillo decides to eliminate TF’s $40 million exposure to corporate bonds using futures Information on TF’s U.S corporate bond holdings has been summarized by Castillo (Exhibit 3) Exhibit TF’s Corporate Bond Holdings Bond GX Corp Damien Autos FS-T Ltd Face Value $15 m $13 m $12 m Price 101.85 97.40 108.00 Current Duration 11.8 12.0 10.5 The futures contract is priced at $1,000,000 and has a duration and conversion factor of 9.7 and 1.5, respectively 49 Strategy and most likely depict: Strategy 1: A Proxy hedges B Proxy hedges C Cross hedges Strategy 2: Forward hedges Cross hedges Proxy hedges FinQuiz.com © 2017 - All rights reserved 28 CFA Level III Mock Exam – Questions (PM) 50 Using the information in Exhibit 1, the unhedged return on Russian corporate bonds is closest to: A 8.3% B 9.1% C 12.5% 51 Based on Castillo’s expectations, should he hedge the currency risk associated with Russian corporate bonds? A Yes, because the return from hedging is 0.8% greater B Yes, because the return from hedging is 1.3% greater C No, because the return from remaining unhedged is 0.8% greater 52 With respect to the colleague’s descriptions on the breakeven spread analysis technique, he is most likely: A correct regarding both descriptions B correct regarding Description 1; incorrect regarding Description C incorrect regarding Description 1; correct regarding Description 53 Given the forecast for Australian and French rates, Castillo will most likely: A invest in French corporates B invest in Australian corporates C be indifferent between the two 54 The number of futures contracts which need to be sold is closest to: A 72 B 106 C 212 FinQuiz.com © 2017 - All rights reserved 29 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 © 2017 - All rights reserved 30 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 © 2017 - All rights reserved 31 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 © 2017 - All rights reserved 32 ...CFA Level III Mock Exam – Questions (PM) FinQuiz. com –2nd Mock Exam 2017 (PM Session) Questions Topic Minutes 1-12 Ethical and Professional... Portfolio Management of Global Bonds 18 55-60 Global Investment Performance Standards 18 Total 180 FinQuiz. com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions through... and venture capital funds In describing the new investment opportunity to his clients, he states: FinQuiz. com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Statement: “Buyout