FinQuiz level3 mock2017 version3 JunePMSolutions

CFA Level III Mock Exam – Solutions (PM) 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 FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) FinQuiz.com – 3rd Mock Exam 2017 (PM Session) Questions Topic Minutes 1-12 Ethical and Professional Standards 36 13-18 Alternative Investments 18 19-30 Risk Management 36 31-36 Risk Management Application of Derivatives 18 37-42 Fixed Income 18 43-48 Portfolio Execution 18 49-54 Equity Investments 18 55-60 Global Investment Performance Standards 18 Total 180 FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Questions through relate to Ethical and Professional Standards GemStar Associates Case Scenario GemStar Associates, a U.S based firm, provides investment advisory services to domestic and international private wealth and institutional clients It houses two portfolio management teams, A and B, comprising of three managers each Team A manages traditional investment vehicles while Team B manages alternative investments This year, one of the firm’s objectives is to gain full compliance with the Global Investment Performance Standards (GIPS) Susan Marcus, CFA, is a member of Team A who is exploring small-cap high growth equities in the emerging market country of Lipa To aid her selection process, she is using a statistical model, which uses factor-based models and regression analysis In her monthly communication with clients she describes the model Description: To aid the selection of equity securities in Lipa, a statistical model is being used which employs complex methodologies Details on the model are available on request Damien Rupert is another portfolio manager and member of Team A He is following Mono Corporation, a manufacturer of skin care products, the owner of which is a close friend of Rupert’s During a casual lunch, Monroe’s friend shares his long-term business plans He intends to launch a line of organic skin care products; the launch will depend on Mono’s success following the IPO Following their meeting, Rupert purchases Mono stock for a majority of his clients’ portfolios To avoid any conflict of interest, he does not invest in the stock for his personal portfolio Rupert devotes some of his time to charities as a volunteer At some charities, he participates in the policy making progress while at others he serves as a junior volunteer He has not disclosed these involvements to GemStar Terry Peters is GemStar’s senior portfolio manager and member of Team B Due to his successful performance record and significant expertise with alternative investments, he has been invited by Abascus Associates, a newly incorporated investment advisory firm, to offer wealth management guidance to its portfolio managers His meeting with the firm’s CEO is scheduled at an offsite company lodge Upon arriving at the lodge, the CEO invites Peters to a famous skiing spot, which he accepts Although he had notified his employer about the visit to the lodge, he reports the remaining trip details upon his return FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) In order to bring GemStar into compliance with the GIPS standards, senior compliance officer Jerry Walsh plans to undertake verification for its equity composites, which have recently been brought into compliance, from Tray Inc, a firm providing verification services Walsh intends to take the following actions to further comply with the standards: Action 1: Present each account’s performance net of trading expenses The amount of trading expenses will be disclosed upon request Action 2: Include terminated accounts within the relevant composite’s historical performance record for a three year period with details of termination dates clearly disclosed By providing a description of the model she employs, has Marcus violated any CFA Institute Standards of Professional Conduct? A No B Yes, she has not described the model adequately C Yes, she has not used an adequate communication channel Correct Answer: B Reference: CFA Level III, Volume 1, Study Session 1, Reading Marcus has violated Standard V (B) Communication with Clients and Prospects by not describing the model adequately The standard requires members and candidates to use reasonable judgment in identifying which factors are important to their investment analysis and include those factors in the communications with their clients Merely stating that she uses a model, which employs complex methodologies, does not qualify as an adequate description Communication can be in written or oral firm By describing the model in the monthly newsletter, she has not violated any standards FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Has Rupert violated any standards by purchasing Mono’s stock for his clients’ portfolios? A No B Yes, he has acted on material nonpublic information C Yes, he has not determined the suitability of the investment Correct Answer: A Reference: CFA Level III, Volume 1, Study Session 1, Reading Rupert has not violated any standards by purchasing Mono’s stock for his clients’ portfolios Although Rupert has acted upon the discovery of his friend’s business plans, the plan has yet been finalized and is contingent upon Mono’s success Based on Standard II (A) Material nonpublic information, information is material if it impacts the price of a security or if investors would want to have access to the information before making a decision; information which is uncertain/ambiguous in terms of its effects on a security’s price does not qualify as material information even if it is nonpublic There is no information to indicate that Rupert has failed to determine the suitability of the investment Has Rupert violated Standard IV (A) Loyalty by failing to disclose his charity involvements to GemStar? A Yes, with respect to his role as policy maker B Yes, with respect to his role as policy maker and junior volunteer C No Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Rupert has not violated the Loyalty standard by failing to disclose his involvement with charities to GemStar According to the Loyalty standard, ‘Practice’ means any service the employee makes available for remuneration while undertaking independent practice means engaging in competitive business Rupert’s involvement with charities as a policy maker and as a junior volunteer is entirely voluntary and does not compete with GemStar Therefore, his involvement does not qualify as independent practice, which requires disclosure Has Peters violated any Professional Conduct Standards during his trip? A Yes, by visiting the offsite company lodge B Yes, by visiting the skiing spot C No Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading Peters has not violated any standards by visiting the offsite company lodge or visiting the skiing spot He informed his employer about the trip to the offsite company lodge but did not have any knowledge about the visit to the skiing spot at the time of accepting the trip offer By informing his employer about the remaining trip details upon his return he has complied with Standard IV (B) Additional Compensation Arrangements Walsh’s decision to undertake verification is: A appropriate B inappropriate, verification must be firm wide C Inappropriate, with respect to the independence of the verifier Correct Answer: B Reference: CFA Level III, Volume 1, Study Session 1, Reading FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Walsh’s decision to undertake verification is inappropriate because verification must be undertaken on a firm-wide basis rather than for the equity composites only Additionally, verification must be undertaken by an independent third party Given that Tray Inc is an independent third party verifier, Walsh’s decision is not inappropriate in this regard Which of the following actions violate the CFA Institute Standards of Professional Conduct? A Action B Action C Both Actions and Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading Action violates the CFA Institute Standards of Professional Conduct Disclosures related to fees must not be made available on request but should be included with the performance presentation Action violates the CFA Institute Standards of Professional Conduct Terminated accounts should be included as part of performance history with a clear indication of when the accounts were terminated Although the firm will provide details on the terminated accounts, a policy of including terminated accounts for a three year period does not comply with the standards FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Questions through 12 relate to Ethical and Professional Standards Martinez Advisory Case Scenario Martinez Advisory is a U.S based multinational investment management firm founded by the Martinez brothers, Jose and Juan Its U.K division, Holton Advisory (HA), currently manages a £45 million investment fund and is being headed by Jeremy Walsh, CFA Portfolio investments include U.K Treasuries, corporates, gilts, municipals, hedge funds, private equity, and emerging and developed market equities A strong believer of maintaining good relationships with clients, Walsh instructs HA’s portfolio managers to report hedge fund performance on a semi-annual basis and the performance of the other asset classes on a quarterly basis To justify the difference in the reporting policies, HA’s performance report includes a disclosure to clients Disclosure: All our hedge fund investments are structured with lock-up periods; therefore their performance cannot be ascertained with 100% accuracy before the scheduled reporting date Therefore, it is HA’s utmost responsibility to ensure reported performance is fair, accurate and complete HA’s private wealth clients are of various financial backgrounds To ensure equitable dealings with clients, portfolio managers allocate trades based on needs assessment Trades are first allocated to those accounts which management believe require immediate allocation Any remaining portion of the trade is allocated to the accounts of those clients expressing an interest HA’s risk management head, Harold White, has retired after serving a 30 year period Upon his retirement he recommends Jack Lee, senior risk manager, for his position After lengthy discussions and decision making by the board, Lee is appointed as the risk management head Upon his appointment, Lee formulates a plan to automate HA’s centralized risk management system The system will have the added function of generating automated performance reviews of the firm’s portfolio managers To ensure performance being reported to clients complies with HA’s policies, the most experienced portfolio managers undertake a review of individual client account information Due to the complexity of institutional accounts, a joint audit is undertaken by HA’s internal audit department head and a renowned external audit firm Valuing private equity holdings has been a challenge for HA’s portfolio managers To aid its portfolio managers, Walsh has introduced a self-developed valuation model whereby FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) fund investments are valued using statistical methodologies With the exception of hedge funds investments and emerging market equities, which are valued using a ad hoc error approach, all other asset classes are valued using the most recent asset prices Are HA’s performance reporting policies consistent with both the required and recommended standards of the CFA Institute Asset Manager Code of Professional Conduct? A Yes B No, the procedures regarding hedge funds are not C No, the procedures regarding all asset classes are not Correct Answer: B Reference: CFA Level III, Volume 1, Study Session 2, Reading HA’s performance reporting policies regarding hedge funds are not consistent with the Asset Manager Code while those regarding other asset classes are consistent The Code encourages Managers to report to clients at least quarterly and such reporting should be provided within 30 days after the end of the quarter Even if hedge funds have lock-up periods, a semi-annual reporting schedule is not consistent with the Code’s recommendations Is HA’s trade allocation policy consistent with both the required and recommended standards of the Asset Manager Code? A Yes B No, trades should be allocated based on suitability C No, trades should not be allocated to the accounts of clients expressing an interest FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Correct Answer: B Reference: CFA Level III, Volume 1, Study Session 2, Reading HA’s current trade allocation policy violates the requirements of the Asset Manager Code Managers are required to fairly place trades for client accounts When placing trades, Managers must ensure that some client accounts are not routinely traded first or receive preferential treatment In HA’s case, this implies that Managers need to allocate trades to the accounts of those clients who have not expressed an interest, but for which the trades are suitable, as well as the accounts of those clients expressing an interest for which the trades are suitable In order to adhere to the requirements and recommendations of the Asset Manager Code with respect to the changes at the risk management department, HA’s best course of action is to: A nothing B disclose to clients details regarding the risk management head replacement only C disclose to clients details regarding the risk management head replacement and the automation of the risk management system Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 2, Reading HA must disclose details regarding the risk management head replacement as well as the automation of the risk management system The Code requires Managers to disclose material changes to the risk management process A change in the risk management head as well as a system automation both qualify as material changes FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) 43 With respect to the use of VWAP as a price benchmark and the two statements made by Banner, which of the following is most likely correct? A Banner is correct in agreeing with Miller; Banner is incorrect with respect to both Statements and B Banner is correct in agreeing with Miller; Banner is correct with respect to both Statements and C Banner is correct in agreeing with Miller; Banner is correct with respect to Statement only Correct Answer: C Reference: CFA Level III, Volume 6, Study Session 16, Reading 29 Banner is correct in agreeing with Miller because VWAP is a more satisfactory benchmark compared to quotation mid-point Statement is correct; VWAP can easily be gamed Statement is incorrect because measuring VWAP over multiple days does not provide a reliable measure because the cost of measuring VWAP over a longer time frame is that there is less accuracy in estimating trading costs 44 With regard to Banner’s conclusion regarding market quality and use of implementation shortfall as a price benchmark, which of the following is most likely correct? A Banner is correct with respect to market quality and correct with respect to the use of implementation shortfall B Banner is incorrect with respect to market quality and incorrect with respect to the use of implementation shortfall C Banner is correct with respect to market quality but incorrect with respect to the use of implementation shortfall Correct Answer: C Reference: CFA Level III, Volume 6, Study Session 16, Reading 29 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Market quality is low when quoted and effective spreads are high; investors not have easy access to accurate and reliable information about quotes and trades and parties to trades not stand behind their quotes Banner is incorrect with respect to the use of implementation shortfall (IS) because using IS as a price benchmark is not preferred when a market lacks transparency 45 With regard to the two advantages of implementation shortfall: A Advantage is correct; Advantage is incorrect B Advantage is correct; Advantage is correct C Advantage is incorrect; Advantage is correct Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 16, Reading 29 Advantage is correct because it correctly states an advantage of IS Advantage is incorrect because IS is not useful for assets that trade infrequently (e.g alternative investments) 46 Using the data provided in Exhibit 1, the implementation shortfall and delay costs are, respectively, closest to: implementation shortfall: A 0.373% B 0.375% C 0.316% delay costs: 0.446% 0.148% 0.069% Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 16, Reading 29 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Implementation shortfall (IS) = (paper portfolio gain – real portfolio gain) / Paper portfolio investment Paper portfolio gain = 1,100 (23.15) – 1,100 (23.05) = 110 Real portfolio gain = 750 (23.15) – [(750 × 23.11) + 15] = 15 Paper portfolio investment = 1,100 × 23.05 = 25,355 IS = (110 – 15) / 25,355 = 0.375% Delay costs = = ௉௥௘௩௜௢௨௦ ௗ௔௬ ௖௟௢௦௜௡௚ ௣௥௜௖௘ – ௕௘௡௖௛௠௔௥௞ ௣௥௜௖௘ ௕௘௡௖௛௠௔௥௞ ௣௥௜௖௘ $ଶଷ.ଵ଴ି$ଶଷ.଴ହ ଻ହ଴ $ଶଷ.଴ହ × × ௌ௛௔௥௘௦ ௣௨௥௖௛௔௦௘ௗ ௦௛௔௥௘௦ ௢௥ௗ௘௥௘ௗ ଵଵ଴଴ = 0.148% 47 With respect to Miller's conclusion regarding implementation shortfall and Banner's analysis of the adjusted implementation shortfall (IS) measure for ACC, respectively, which of the following is most likely correct? A B C Miller is: Incorrect Correct Correct The adjusted IS is: – 2% + 2% – 2% Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 16, Reading 29 Miller is incorrect because IS may not always be positive if the effect of the market is removed Adjusted IS = 23% – 25% = –2% 48 With regard to the comments made by Ryan on trading costs, which of the following is most likely correct? A Comment is correct; Comment is incorrect B Comment is correct; Comment is correct C Comment is incorrect; Comment is incorrect Correct Answer: C FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Reference: CFA Level III, Volume 6, Study Session 16, Reading 29 • • Comment is incorrect Implicit not explicit costs constitute a major part of total trading cost Comment is incorrect The trade that is never completed is often the most expensive trade; not the trade that is competed aggressively FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Questions 49 through 54 relate to Equity Investments Amanda Gary and Harrod Dickson Case Scenario Amanda Gary, CFA and Harrod Dickson, CFA are senior analysts at Wealth Management Associates (WM) WM provides portfolio management services and investment advice to wealthy individuals and institutional clients Gary and Dickson discuss the fundamental law of active management and its application in evaluating managers’ performances During their discussion, Gary makes two statements Statement 1: “In the fundamental law of active management, investor’s breadth represents the number of independent active decisions made each year This implies that the greater the size of the investor’s research universe, the greater the breadth and consequently the greater the information ratio.” Statement 2: “A manager’s style of investing can be identified using two approaches with one based on analyzing the characteristics of overall individual security holdings while the other based on analyzing the characteristics of the overall portfolio.” Dickson has gathered some data on three portfolio managers at WM Macklin holds a long position in S&P 500 Futures contracts and a cash position He focuses on generating alpha by altering the duration of his cash position Correlation between Macklin’s forecasted returns and actual returns is 0.04 Carter holds a long-short portfolio which involves 500 stocks in the S&P 500 index and uses a stock-based semi-active strategy to generate active returns Correlation between Carter’s forecasted returns and actual returns is 0.07 Bernard holds a long-only portfolio consisting of 500 stocks of the S&P 500 index and focuses on generating active returns through over- or under weighting individual stocks based on his expectations for those stocks Correlation between Bernard’s forecasted returns and actual returns is 0.04 Walter Tobler, Dickson’s subordinate, is concerned about the effects of a long-only constraint on investing activities In response to those concerns, Dickson states: Statement 3: “A long-only constraint only limits an investor’s ability to take advantage of negative information This indicates that in case of a long-only constraint, the investor has an asymmetric opportunity set.” FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) On hearing that, Tobler asks Dickson about the types of risks long-only investors are exposed to James Chan, WM’s client, indicates that he might invest a total of USD 100 million While having a discussion with Robert Andrew, CFA, a portfolio manager at WM, Chan says: Statement 4: “Although I am highly risk averse, I am interested in taking a systematic risk exposure along with the opportunity to earn skill-based active returns.” In response to Chan, Andrew says the strategy that best serves Chan’s interest is an equitized market neutral long-short strategy Andrew is also analyzing different funds to pursue a core-satellite approach for Chan Relevant data on these funds is given in Exhibit Exhibit Potential Funds for the a Core-Satellite Approach Expected α Expected Tracking Risk Total Investment Fund A 0% Fund B 5% Fund C 0% Fund D 3% Fund E 2% 0% 9% 0% 6% 5% $50 million $10 million $15 million $40 million $45 million Andrew is also working with another client, Rainbow Foundation (RF) RF seeks to achieve two specific objectives Objective 1: To earn skill-based active returns along with beta exposure but without altering the strategic asset allocation of our portfolio Objective 2: To capture value added from active management along with matching overall portfolio’s risk to its benchmark FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) 49 Is Gary correct with regard to Statement and with regard to Statement 2: which style analysis would result in greater need for buffering? A Yes; holdings-based analysis B No; composition-based analysis C No; return-based analysis Correct Answer: B Reference: CFA Level III, Volume 4, Study Session 11, Reading 23 • • Gary is incorrect because number of independent active decisions does not necessarily increase with size of research universe Holdings-based analysis is also known as composition-based analysis It detects style changes more quickly than return-based analysis Thus, it makes buffering more necessary in order to avoid unnecessary high turnover with the index 50 With regard to the data provided on the three portfolio managers, which of the following statements is most likely incorrect? A Macklin will have a higher information ratio than Bernard B Carter will have a higher information ratio than Bernard C Macklin will have a lower information ratio than Carter Correct Answer: A Reference: CFA Level III, Volume 4, Study Session 11, Reading 23 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) • • • Both Macklin and Bernard have same information coefficient However, Macklin follows a derivative based semi-active strategy which has lower breadth than the stock-based semi-active strategy which is followed by Bernard Thus, Macklin will have a lower information ratio than Bernard Macklin follows a derivative based semi-active strategy which has lower breadth than the stock-based semi-active strategy which is followed by Carter In addition, Carter has higher information coefficient Thus, Macklin will have a lower information ratio than Carter Although both Carter and Bernard have the same breadth (500 stocks), Carter’s information coefficient is greater than Bernard’s Carter will have a higher information ratio than Bernard 51 With regard to Statement and Dickson’s response to Tobler, respectively, which of the following is most likely correct? A Statement is correct; long-only investors are exposed to both systematic and unsystematic risk B Statement is incorrect; long-only investors are exposed to both systematic and unsystematic risk C Statement is incorrect; long-only investors are exposed to systematic risk only Correct Answer: B Reference: CFA Level III, Volume 4, Study Session 11, Reading 23 Statement is incorrect because a long-only constraint limits an investor’s ability to exploit both negative and positive information A long-only investor is exposed to both systematic and unsystematic risk 52 Is Andrew’s proposed strategy appropriate for Chan? A Yes B No; the most appropriate strategy is an alpha-beta separation strategy C No; the most appropriate strategy is a short extension strategy Correct Answer: C Reference: CFA Level III, Volume 4, Study Session 11, Reading 23 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Chan is highly risk averse; thus, the most appropriate strategy to satisfy Chan’s needs would be a short-extension strategy because it involves only a partial relaxation of long-only constraint in order to control risk associated with complete relaxation of long-only constraint (e.g in market-neutral long-short strategies) 53 Based on Exhibit and Statement 4, in order to pursue the core-satellite approach, which of the following funds would be most appropriate for Chan as a core investment? A Fund A B Fund C C Fund E Correct Answer: A Reference: CFA Level III, Volume 4, Study Session 11, Reading 23 Both Fund A and C represent core investments since both have expected alpha and tracking risk of zero However, Chan mentioned that he is highly risk averse The lower the risk tolerance, the greater the core allocation will be Therefore, Chan might prefer Fund A as core investment to Fund C 54 In order to meet RF’s objectives, the most appropriate investment approach is: A short-extension strategy for objective 1; completeness fund for objective B equitized market neutral long-short strategy for objective 1; bias control fund for objective C short-extension strategy for objective 1; portfolio indexed to broad market for objective Correct Answer: B Reference: CFA Level III, Volume 4, Study Session 11, Reading 23 For objective 1, the most appropriate strategy is equitized market neutral longshort strategy as it facilitates to earn market return from one source and alpha from another source without the need to adjust the strategic asset allocation For objective 2, the most appropriate strategy is completeness fund which is also known as bias control fund FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Questions 55 through 60 relate to Global Investment Performance Standards Eleanor Moser Case Scenario Eleanor Moser, portfolio manager at Boise Securities, an asset management firm, has been hired by Adrian Gustov Gustov represents Maritime Corp’s pension plan’s investment portfolio and has approached Moser based on Boise’s advertised claim of compliance to the Global Investment Performance Standards (GIPS) During her first meeting with Gustov, Moser states, “Compliance with the GIPS standards is entirely voluntary Once a firm claims compliance, it must apply the standards with the goal of full disclosure and fair representation.” Gustov is particularly interested in Boise’s international equity composite and asks Moser to demonstrate how the composite’s performance complies with the standards Moser responds by stating, “All composite returns are calculated by multiplying individual portfolio returns by the beginning composite assets held in each portfolio and summing the results.” Next, Moser collects data concerning the international equity composite’s assets and related external cash flow activity (Exhibit 1) Exhibit International Equity Composite Assets and External Cash Flows Portfolio ($ 000) Cash flow weighting factor Beginning assets (March 31) A B C 91.5 124.8 140.0 External Cash flows April 0.933 –4.0 + 5.0 + 2.0 10 April 0.667 + 3.8 + 6.0 + 4.0 27 April 0.100 + 5.0 –1.2 + 3.6 96.9 135.0 150.8 Ending assets (April 30) *The composite has a beginning total assets and weighted cash flows of $400,000 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Boise’s international equity composite was constructed on January 1, 2006 Composite policies did not meet the requirements of the GIPS standards at that time Boise’s chief compliance officer, Ramon Martin, drafted three policies on December 31, 2006 These policies were intended to ensure that composites fairly and accurately reflected the performance of the underlying portfolios Policy 1: All foreign emerging and developed market equities are included in the composite To capture active returns, the former category is managed using a core-satellite approach while the latter is managed using a short-extension strategy Policy 2: If a portfolio’s total asset value falls by at least $2 million for two consecutive periods, it will be removed from the composite along with its performance record Portfolio B belongs to a risk-averse client who exhibits home bias with respect to his investments His entire portfolio is invested in foreign equities The client has requested Moser to dispose his foreign stock allocation and avoid further foreign trades 55 With respect to the statement made during her meeting with Gustov, Moser is most likely: A correct B incorrect, compliance with the GIPS standard is compulsory C incorrect, full disclosure cannot be made in performance situations where a standard does not exist Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 18, Reading 32 Compliance with the GIPS is voluntary Firms that choose to comply with the standards must apply them with the goal of full disclosure and fair representation When performance situations arise on which the Standards are silent or open to interpretation, disclosures other than those required may be necessary FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) 56 Is Boise’s composite return calculation policy in compliance with the requirements of the GIPS standards? A Yes B No, composite returns must be time-weighted C No, composite returns must be weighted according to beginning asset values and external cash flows Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 18, Reading 32 Boise’s composite return calculation policy is in compliance with the GIPS standards The Standards require composite returns to be calculated by assetweighting the individual portfolio returns using beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows Either of the two methods can be used When the former method is used, the composite return can be calculated by multiplying the individual portfolio returns by the percentage of composite beginning assets held in each portfolio and summing the products 57 Using the data in Exhibit 1, the proportion of portfolio B relative to the composite’s beginning assets and weighted cash flows is closest to: A 31.20% B 33.34% C 35.89% Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 18, Reading 32 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Portfolio B’s total beginning assets and weighted cash flows is calculated using the following formula: ௡ ܸ௉ = ܸ଴ + ෍ሺ‫ܨܥ‬௜ × ‫ݓ‬௜ ሻ ௜ୀ௜ Where CFi represents the portfolio cash flows and wi represents the weights assigned to these cash flows V Portfolio B = 124.8 + (5 × 0.933) + (6.0 × 0.667) + (─ 1.2 × 0.10) = 133.347 When expressed as a percentage of composite beginning total assets and weighted cash flows of $400,000, the proportion of portfolio B is 33.34% (133.347/400) 58 With respect to Policy 1, has Boise complied with the GIPS standards by including developed and emerging equities in one composite? A Yes B No, they each represent distinct geographical segments C No, they are each managed using a distinct investment strategy Correct Answer: C Reference: CFA Level III, Volume 6, Study Session 18, Reading 32 Boise has not complied with the GIPS standards by including developed and emerging equities in one composite This violation does not arise because the two equity segments belong to different geographical segments However, since the two segments are each managed using a distinct investment strategy, Boise cannot include them in one composite Under the GIPS standards, composites must be defined according to similar investment objectives and/or strategies Firms are not permitted to include portfolios with different investment mandates, objectives or strategies in the same composite FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) 59 Is Policy consistent with the GIPS standards? A Yes B No, the historical performance record must not be removed C No, portfolios falling below the minimum threshold should be withdrawn at the end of the first period Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 18, Reading 32 Policy is inconsistent with the GIPS standards For firms which define a minimum asset level for a composite, the Guidance Statement recommends that they consider establishing a valuation threshold and a minimum time period for applying the policy A policy which mandates removing a portfolio which falls below the minimum asset level for two consecutive periods complies with this Standard However, the historical performance of the portfolio must remain in the composite Policy violates the Standards in this regard 60 In order to comply with the GIPS standards, Boise’s best course of action with respect to client B’s portfolio is to: A remove the portfolio from the composite B transfer the portfolio to a more suitable composite C retain the portfolio but provide adequate disclosure Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 18, Reading 32 FinQuiz.com © 2015 - All rights reserved CFA Level III Mock Exam – Solutions (PM) With respect to portfolio B, Boise’s best course of action is to transfer the portfolio to a more suitable composite The GIPS standards prohibit the inclusion of non-discretionary portfolios in a firm’s composite (I.3.A.1) The Standards go on to state that if a portfolio is not discretionary, in must not be included in any composite However if an investor merely restricts the portfolio manager to domestic equities, the portfolio can still be managed; it does not lose its discretionary status By prohibiting Moser from purchasing international equities, the client is not completely imposing restrictions on her freedom to make investment decisions Moser can continue to purchase domestic equities for B’s portfolio Because the portfolio is not non-discretionary, simply removing the portfolio from the international equity composite is not an appropriate course of action; it must be transferred to another composite Additionally, the portfolio no longer meets the international equity definition Therefore, retaining the portfolio in the international composite by providing adequate disclosure is not an appropriate course of action FinQuiz.com © 2015 - All rights reserved ...CFA Level III Mock Exam – Solutions (PM) FinQuiz. com – 3rd Mock Exam 2017 (PM Session) Questions Topic Minutes 1-12 Ethical and Professional... Execution 18 49-54 Equity Investments 18 55-60 Global Investment Performance Standards 18 Total 180 FinQuiz. com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) Questions through... his employer about the visit to the lodge, he reports the remaining trip details upon his return FinQuiz. com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) In order to bring