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 – 5th Mock Exam 2017 (PM Session) Questions Topic Minutes 1-6 Ethical and Professional Standards 18 7-12 Ethical and Professional Standards 18 13-18 Economic Analysis 18 19-24 Equity Investments 18 25-30 Fixed-Income Portfolio Management 18 31-36 Fixed-Income Portfolio Management 18 37-42 Alternative Investments 18 43-48 Performance & Evaluation 18 49-54 Derivatives 18 55-60 Global Investment Performance Standards 18 Total FinQuiz.com © 2017 - All rights reserved 180 CFA Level III Mock Exam – Questions (PM) Questions to relate to Ethical and Professional Standards Sun Davidson, CFA, Case Scenario Sun Davidson, CFA, is a sell side energy research analyst Davidson maintains an equity investment blog which is actively followed by over 5,000 investors spread across numerous countries The investors are from various financial backgrounds with differing risk appetites In the current year, Davidson decides to change the layout of the blog Instead of placing announcements concerning investment recommendations at the bottom of the screen, as has been the case since she started the blog, recommendations can now be accessed by clicking on a highlighted (in bold) ‘Recommendations’ tab located at the top left of the screen Davidson does not feel it is necessary to make any announcement with respect to the change For her next entry, Davidson will be preparing an investment recommendation on Energy Fund, a hedge fund which undertakes long and short positions in equity securities from the energy sector Due to her limited expertise with the alternative asset class, Davidson seeks the advice of Earl Ramos, a leading hedge fund manager at Carlton, a hedge fund management firm During their initial meeting, Ramos informs Davidson that, with the knowledge of his employer, he is invested in the Energy Fund (EF) and maintains a working relationship with the fund’s manager from whom he has learnt that the fund will be expanding to include highly risky energy stocks issued in less developed countries Upon Ramos’s advice, Davison issues a buy recommendation but does not disclose Ramos’s holding in EF or his relationship with the fund manager Pleased with their professional relationship, Davidson invites Ramos to become a regular contributor to the blog which he accepts Ramos’s compensation will be in the form of commission generated for the recommendations he issues However, he will not be paid by Davidson Ramos informs his supervisor of the offer after acceptance and has decided to contribute to the blog during the weekends so as not to disrupt his routine work activities FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) The same evening, both professionals attend an investment conference at which Ramos collides into Wilson Clark Clark maintains an investment in the Carlton hedge fund along with his brother, Ridley Wilson praises Ramos for his exemplary performance results achieved during the current year on both their holdings Wilson invites Ramos to vacation with him in Morocco Upon the conclusion of their conversation, Ramos shares the details of the offer with Davidson stating, “I manage the hedge fund investments of the Clark brothers and both are equally pleased with my performance This calls for a celebration.” By changing the layout of the blog Davidson is in violation of the CFA Institute Standards of Professional Conduct with respect to: A loyalty to clients B diligence and reasonable basis C communication with clients and prospects By issuing the purchase recommendation, Davidson is in violation of the CFA Institute Standards of Professional Conduct because she has failed to: A conduct a suitability analysis B disclose that she has employed the expertise of Ramos C disclose her reliance on material nonpublic information In order to avoid violation of the CFA Institute Standards of Professional Conduct, Davidson is required to disclose to investors: A Ramos’s investment in the EF only B Ramos’s relationship with the manager of the EF only C Both Ramos’s investment in and relationship with the manager of the EF By accepting Davidson’s offer to contribute to the blog, is Ramos in violation? A No, he will not be disrupting the activities of his employer B Yes, he should have sought permission prior to acceptance C Yes, he has not disclosed the commission income which he will earn FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Ramos’s best course of action with respect to Clark’s offer is to: A decline the offer B disclose the offer to his employer only C disclose the offer to his clients and employer With respect to the statement made to Davidson at the investment conference, is Ramos in violation of the CFA Institute Standards of Professional Conduct? A No B Yes, by mentioning that he manages Ridley’s portfolio only C Yes, by mentioning that he manages the investment portfolios of the Clark brothers FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions to 12 relate to Ethical and Professional Standards Riverside Asset Management Case Scenario Riverside Asset Management (RAM) is a privately owned, small-scaled investment advisory firm The firm’s client base exclusively includes institutional clients Roger Marquez, the firm’s compliance officer, has made necessary modifications to RAM’s policies and procedures to ensure they are consistent with the Asset Manager Code Once he is reasonably satisfied with RAM’s level of compliance, Marquez sends an investment letter to clients and prospective clients which includes the compliance statement, “RAM claims compliance with the CFA Institute Asset Manager Code of Professional Conduct This claim has not been verified by the CFA Institute.” Thomas Nash manages RAM’s global equity fund which in benchmarked to the MSCI global equity index Nash employs a passive mandate for the global equity allocation of Aero Inc’s defined benefit pension plan’s portfolio, which is consistent with the client’s funding objectives In the current year, the sponsor reports a surplus following a profitable financial year Nash decides to modify his investment strategy and employ a semi-active approach which will allow him to increase the portfolio’s opportunity to earn higher returns He intends to inform the sponsor of the change in their next quarterly meeting Victoria Reed is a junior portfolio manager reporting to Nash Reed is managing the investment portfolio of the Legend Foundation As instructed by the foundation’s chief executive, Reed allocates 1,000 of Hower Inc’s shares to the portfolio which has undertaken an IPO Reed simultaneously purchases 2,000 shares for her personal investment portfolio She discloses the amount and quantity of her purchase in a quarterly trade confirmation and an annual statement of personal holdings which she will email to Marquez on the respective dates Marquez is soon to retire and has been asked by RAM’s chief investment officer to nominate a successor Marquez evaluates two candidates one of whom is his brother who is well-informed on the Code’s compliance policies and procedures The second candidate is an investment manager who overlooks RAM’s emerging market equity fund FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Several of the fund’s clients have requested an allocation to commodities However, RAM lacks expertise and has selected Fairhole Associates, a commodity trading specialist to manage the allocation Upon making the allocation, a letter is sent to clients which states, “RAM has appointed Fairhole Associates to manage commodity investments Fairhole Associates retains liability for the performance of these investments.” At the end of the performance year, Nash prepares a performance presentation for the global equity fund Although the fund has been in operation for the past eight years, he decides to present the annual performance for the recent most five years as they represent its most successful years He presents gross- and net-of-fees returns and provides a breakdown of fees charged as management fees, incentive fees and commission His disclosure purposely omits a contingent fee component which he deems as too complex for the understanding of clients Is RAM’s claim of compliance statement consistent with the Asset Manager Code? A No B Yes, the CFA Institute cannot verify actual compliance with the Code C Yes, the CFA Institute can only verify the Manager’s claim of compliance By modifying his strategy, is Nash in violation of the Asset Manager Code? A No B Yes, he has not undertaken a suitability analysis C Yes, he has not made disclose to clients prior to the change With respect to the purchase of Hower Inc.’s shares, is Reed in violation of the Asset Manager Code? A No B Yes, she did not seek prior approval C Yes, she did not delay the purchase of shares FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) 10 Which candidate best fits the role of compliance officer in accordance with the Asset Manager Code? A Marquez’s brother B The emerging market fund manager C Neither of the two individuals 11 Is the allocation of client trades to Fairhole Associates consistent with the requirements and recommendations of the Asset Manager Code? A Yes B No, RAM cannot outsource work C No, RAM must retain liability for the outsourced work 12 Which of the following statements least likely indicates why Nash’s performance presentation is inconsistent with the requirements and recommendations of the Asset Manager Code? Nash: A has distorted the performance presented B has not explained the commission component C need only present gross- or net-of-fees returns but not both FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions 13 to 18 relate to Economics Dianne Fernandez Case Scenario Dianne Fernandez is a junior economic analyst serving Thompson Ace (TA), a research firm providing advisory services to institutions Fernandez covers emerging markets TA has been engaged by Blake Asset Management (BAM), a U.S based asset advisory firm, to analyze the firm’s asset allocation and recommend changes based on capital market projections Fernandez will be responsible for developing capital market projections for the country of Rica with currency RIC Rica is currently enjoying a period of strong economic growth Fernandez, however, projects that this economic strength will accelerate inflation in the months to come Based on preliminary economic analysis, Fernandez learns that bond investors expect the central bank to maintain its inflation target by raising short-term rates BAM has allocated a total of 30% of client funds to securities (fixed income and equity) issued in Rica (Exhibit 1) Exhibit: BAM’s Current Asset Allocation Allocation Asset Class (%) Domestic equities 35 Emerging market equities 10 Long-term government bonds - Rica 15 U.S Treasuries 10 AA-rated Domestic Corporate Bonds 25 Real estate Total 100 Next, Fernandez meets with BAM’s senior investment officer who informs her that 40% of the holdings to long-term government bonds belong to those investors with a shortterm time horizon while the remaining 60% has a long-term holding period Gillian Moore, a senior emerging market analyst serving TA, evaluates Fernandez’s findings and suspects that the analyst’s projections as well as market expectations with respect to inflation may be conservative FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) After discussing her forecasts with the analyst, Moore urges Fernandez to analyze Rica’s economy in more detail paying specific attention to long-term growth forecasts Paying heed to Moore’s advice, Fernandez decomposes long-term GDP growth into four factors and develops projections for each She compares her findings with another analyst who has decomposed GDP growth into three factors and summarizes both sets of projections in an Exhibit for her research report (Exhibit 2) Exhibit 2: Decomposition of Rica’s Long-term GDP Growth Forecast Fernandez’s Analyst’s Projections Projections Growth in potential labor force size Growth from capital inputs Growth in actual labor force participation rate Growth from labor inputs TFP growth Growth from labor productivity (%) (%) 3.4 2.1 3.0 0.5 4.8 5.2 8.4 Fernandez then reads an article on the current state of Rica’s economy which is titled as, ‘Rica’s Economy – Today and Tomorrow’ She is analyzing the implications of the following excerpt on BAM’s holding of the country’s equities: Excerpt: “Rica’s rapid rate of economic growth has been due to a surge in capital investments.” Fernandez concludes her analysis by evaluating the current value of the RIC/USD exchange rate She would like to determine whether the RIC is correctly valued based on the purchasing power parity She has collected data relevant for her analysis in an exhibit (Exhibit 3) Exhibit 3: Data Relevant for Analysis of RIC’s Value Current RIC/USD exchange rate 1-year Rica risk-free rate 1-year U.S risk-free rate Expected inflation rate – Rica Expected inflation rate – U.S FinQuiz.com © 2017 - All rights reserved 70.52 13.00% 2.50% 5.00% - 0.02% 10 CFA Level III Mock Exam – Questions (PM) Years to maturity A Baa Exhibit: Two U.S Investment Grade Credit Curves Spread Over On-the-Run US Treasuries (bps) 10 30 70 80 125 200 110 135 185 265 Based on the data collected, Stewart advises Butler to implement a credit barbell strategy for both her clients in an effort to moderate portfolio risk Stewart decides to expand her analysis by reading a report on the short-term economic outlook in the US The report projects a recession following a decline in GDP over two consecutive fiscal quarters The report also forecasts the central bank to take preemptive stimulatory policy measures TEE’s pension plan has a stream of early retirement benefit obligations which need to be satisfied at regular intervals However, the bulk of the obligations are due thirty years from today Butler has asked Stewart to devise a liability funding solution The analyst recommends a combination matched strategy for immunizing the liability stream 31 What is the generally observed implication of Conclusion on corporate: A B C credit spreads? relative returns? decrease increase decrease increase increase decrease 32 Conclusion is most likely: A correct B incorrect, with respect to the structure of the global credit market C incorrect with respect to the change in duration of long-term bonds FinQuiz.com © 2017 - All rights reserved 20 CFA Level III Mock Exam – Questions (PM) 33 Does the analysts’ evaluation of the impact of liquidity concerns on portfolio management decisions correspond to actual market observations? A Yes B No, investors with higher liquidity needs demand premiums for MTNs C No, credit bid/ask spreads have decreased due to lower credit risk 34 Considering the data in the Exhibit, is Stewart’s recommendation to Butler appropriate? A Yes B Only with respect to TEE C Only with respect to First Capital 35 Based on the forecasts of the economic report, Stewart should recommend an investment in investment-grade credit products with maturities which are: A long-term only B short-term only C short- and intermediate-term 36 An advantage of the immunization approach recommended to Butler over multiple liability immunization is: A lower liability funding costs B liquidity needs are better met C lower reinvestment risk in earlier years FinQuiz.com © 2017 - All rights reserved 21 CFA Level III Mock Exam – Questions (PM) Questions 37 to 42 relate to Alternative Investments Howard Corp Case Scenario The board of trustees of Howard Corp’s defined benefit pension plan is seeking to expand the $200 million investment portfolio which is currently allocated to Russell 3000 equity index stocks and the Lehman Corporate Bond Index The board is particularly interested in an allocation to commodities due to their inflation hedging potential and low correlation with existing portfolio holdings The board is seeking the advice of Diego Miller, an investment manager, serving a wealth management firm Miller deems that a direct exposure to futures based on the GSCI is suitable for HC’s portfolio To justify his choice of asset class, Miller collects historical performance on the commodity index performance He breaks down the performance of the index into four components (Exhibit) Year Exhibit: Components of the GSCI Return Index (2000-2014) GSCI Total GSCI Collateral GSCI Roll GSCI Spot Annual Return Yield Return/Yield Annual Return (%) (%) (%) (%) 25.1 4.5 ? 14.8 ? 18.8 12.7 6.1 Jill Travis is a board trustee representative at Howard Corp She is concerned about the limitations associated with an investment in GSCI futures She asks Miller whether her concerns are valid Miller proceeds to forecast the future performance of commodity index futures if Howard Corp decides to undertake the investment He reads an analyst’s report which presents forecasts concerning the future economic outlook Miller focuses on two forecasts: Forecast 1: Economic and business conditions are likely to worsen Forecast 2: Due to a decline in the profitability of businesses, in general, inventory levels will be reduced to cut down costs thereby increasing the supply of commodities in the market FinQuiz.com © 2017 - All rights reserved 22 CFA Level III Mock Exam – Questions (PM) Miller discusses these forecasts with Travis emphasizing on what they imply for spot returns Travis asks Miller whether Forecast signals that Howard Corp will be exposed to positive event risk While the GSCI futures investment will provide a passive long-only exposure to the portfolio, Miller determines that the pension plan’s characteristics provide room for risk taking The manager proceeds to explore an active program using managed futures He prepares a report for Howard Corp’s board proposing the investment strategy In his report, Miller presents the investment characteristics of managed futures: Characteristic 1: Seek active returns from inefficiencies in the pricing of individual stocks and bonds Characteristic 2: Investment requires a stringent due diligence process Characteristic 3: Are absolute return strategies as returns depend on the skill and/or strategy of the individual trader 37 Using the data in the Exhibit, which of the following reasons least likely explains the roll return observed in Year 2? A Market volatility has decreased B Convenience yields have increased C There is an excess supply of commodities 38 Based on the data in the Exhibit, the roll return in Year is closest to: A 5.8% B 10.3% C 12.7% 39 The most appropriate response to Travis is that an investment in the GSCI futures will: A increase liquidity risk B increase rebalancing costs C decrease the degree of investability FinQuiz.com © 2017 - All rights reserved 23 CFA Level III Mock Exam – Questions (PM) 40 The implication of Forecast and on projected spot returns respectively is: A B C Forecast 1: Forecast 2: positive negative no effect negative no effect positive Correct Answer: A Reference: CFA Level III, Volume 5, Study Session 13, Reading 24, LOS n In periods of financial and economic distress, commodity prices tend to increase in value An expected increase in the supply of commodities will lead to a decrease in commodity prices and spot returns and business will reduce their inventory levels (commodities) Therefore, Forecast has a negative impact on spot returns 41 The most appropriate response to Travis’ query concerning Forecast implying high positive event risk for the pension plan is a: A no B yes, there is an excess supply of commodities C yes, the volatility of commodity prices will increase 42 In context of his research report covering managed futures, Miller is least accurate with respect to Characteristic: A B C FinQuiz.com © 2017 - All rights reserved 24 CFA Level III Mock Exam – Questions (PM) Question 43 to 48 relate to Performance and Evaluation Vault Corp Case Scenario The equity portion of Vault Corp’s investment portfolio is being managed by Reliable Financials (RF), a brokerage firm with a trust department Vault’s CEO, Carla Smith, has recently fired their investment advisor because he failed to outperform his performance benchmark for two consecutive years Judith Spencer, CFA, is an investment advisor at RF who will be managing the ex-North American developed equity market segment of VC’s portfolio These securities are issued in Europe, Australasia and the Far East (EAFE) Under the previous advisor the portfolio was managed with a long-only active, market-oriented, large-cap equity mandate The current performance benchmark is a returns-based index with an equal allocation to largecap growth and large-cap value EAFE equities Spencer is of the opinion that the existing benchmark is inappropriate and is seeking to replace it with one which is valid The portfolio will continue to be managed under its original mandate One year after assigning a suitable performance benchmark, Spencer’s supervisor, Eric Daniels, tests the benchmark’s quality by collecting relevant information concerning VC’s investment portfolio (P), benchmark (B), and the broad MSCI EAFE market index (M) in an exhibit (Exhibit) After carefully examining the performance results of the portfolio, Daniels notes that Spencer has maintained strong negative and positive views concerning the EAFE securities FinQuiz.com © 2017 - All rights reserved 25 CFA Level III Mock Exam – Questions (PM) Exhibit: Testing Spencer’s Benchmark Quality Volatility of E* σE 18.7% Volatility of Active Return σA 9.5% Correlation Coefficient between - 0.5 S and E (pS,E) 0.0 Correlation Coefficient between A and B (pA, B) B* – M* Positive Benchmark turnover 10.5x Benchmark coverage 0.7 Average annual active position - 0.8% *E = Account performance (P) – Market index performance (M) S = Return attributable to manager’s style B = Benchmark performance A small portion of VA’s investment portfolio is invested in a hedge fund employing a long-short equity strategy with respect to stocks included in the Russell 2,000 index Smith would like to evaluate the performance of the fund over the most recent performance year She is evaluating three different options: Option 1: Compute the fund’s rate of return ( ெభ ିெబ ெబ ) over the performance period Option 2: Compare the hedge fund’s Sharpe ratio to a universe of hedge funds with a long/short investment mandate Option 3: Evaluate the fund’s performance relative to a custom-based benchmark by combining separate long and short equity benchmarks Based on limited knowledge on hedge funds, Smith concludes that option can lead to nonsensically extreme returns; the Sharpe ratio relevant to the hedge fund universe identified in option is not measurable as the investment strategy includes a high degree of skewness; and option will produce a benchmark which lacks transparency FinQuiz.com © 2017 - All rights reserved 26 CFA Level III Mock Exam – Questions (PM) 43 The most likely implication of Smith’s decision to fire the previous investment advisor is that: A Type I error will decrease B Type I error will increase C Type II error will decrease 44 One limitation of the benchmark based on the returns-based index is that: A it is ambiguous B it is not investable C tracking error is increased 45 The most appropriate benchmark for VA’s EAFE segment is a: A style index B broad market index C custom security-based index 46 Based on the data in the Exhibit and considering each factor in isolation, Daniels will conclude that the benchmark is of low quality based on the fact that the: A the proportion of active positions is low B benchmark is not reflective of Spencer’s investment style C benchmark bears little resemblance to the opportunity set of Spencer’s investment process 47 Using the correlation data in the Exhibit, Spencer will conclude that systematic bias in the benchmark relative to the account is: A minimal based on correlation coefficient of E and M (pE,M) B minimal based on correlation coefficient of A and B (pA,B) C significant based on correlation coefficient of E and M (pE,M) 48 Regarding hedge fund performance evaluation, Smith is most accurate regarding her conclusions with respect to: A only B and only C all three options FinQuiz.com © 2017 - All rights reserved 27 CFA Level III Mock Exam – Questions (PM) Question 49 to 54 relate to Derivatives Gus Weaver Case Scenario Gus Weaver holds a $30 million portfolio invested in Arc Limited’s shares of a stock which is indexed to the DJIA 30 Weaver would like to reduce his exposure to the shares in anticipation of a profit squeeze which is forecasted to decrease Arc’s share price over the course of the coming months Weaver asks his portfolio manager, Eric Cox, to devise a suitable strategy which does not involve liquidating his holding Cox designs two alternative strategies using DJIA 30 equity index futures contracts and options, respectively The strategies he has devised include: Strategy 1: Synthetically reducing the exposure using 1-month DJIA 30 equity index futures Strategy 2: Employing equity call and/or put options written on the Arc Limited stock Cox explains to Weaver that should Strategy be implemented, the position will need to be rolled over each month until protection is no longer desired He collects details with respect to the instruments used for the strategy (Exhibit 1) Exhibit 1: Details Concerning Strategy Current market price per share $51.50 Futures price 1,860.50 Multiplier 25.00 Index dividend yield 0.50% One- month risk-free rate 2.30% After studying the strategy, Weaver asks Cox how an alternative strategy involving the liquidation of portfolio holdings and subsequent investment of the proceeds in a risk-free asset would compare to Strategy in terms of relative liquidity, transaction costs, and success in reducing portfolio beta to zero FinQuiz.com © 2017 - All rights reserved 28 CFA Level III Mock Exam – Questions (PM) Next, Cox proceeds to explore Strategy He collects details relevant to three one-month put options (Exhibit 2) written on the Arc Limited stock He expects the stock to be worth $51.80 at option expiration The designed strategy will greatly depend on whether Weaver would like to: i ii maximize loss protection or retain upside potential but hedge losses Option Exercise price ($) Option price ($) Exhibit 2: One-Month Put-Option Prices 49.70 51.00 1.10 1.70 54.30 2.40 Cox believes that a protective put strategy will be most suitable if Weaver decides to maximize loss protection and selects the 54.30 put to achieve this purpose Cox concludes his analysis by exploring the most suitable option structure should Weaver choose to retain upside potential Cox strongly believes that market volatility will remain low over the next three months and intends to incorporate this projection in his selection decision 49 The number of futures contracts required to be sold and the effective amount of money needed to be invested in risk-free bonds to implement Strategy is, respectively, closest to: A B C number of futures contracts to be sold: 645 646 646 effective investment in risk-free bonds: $29,998,096.00 $29,990,190.99 $29,999,940.12 FinQuiz.com © 2017 - All rights reserved 29 CFA Level III Mock Exam – Questions (PM) 50 In order to establish an effective hedge using Strategy 1, Cox must ensure that relative to the index beta, portfolio beta is: A lower B higher C identical 51 Cox’s most appropriate response to Weaver’s query concerning the comparison of Strategy to a liquidation of and reinvestment of portfolio proceeds in the context of liquidity and success of eliminating beta exposure is that: A neither of the two strategies will guarantee a zero beta exposure B strategy will be more effective in guaranteeing a zero beta exposure C investing the liquidation proceeds in risk-free securities is the more liquid alternative 52 Using the data in Exhibit and assuming the share price expectation is realized, the value of the protective put strategy, on a per share basis, is closest to: A $0.00 B $51.90 C $54.30 53 Using the data in Exhibits and 2, the breakeven price per share on the proposed protective put strategy is closest to: A $49.10 B $51.90 C $53.90 54 Which of the following strategies is most suitable for maximizing upside potential on the Arc stock position? A Straddle B Long position in a butterfly spread C Bear spread using put options and FinQuiz.com © 2017 - All rights reserved 30 CFA Level III Mock Exam – Questions (PM) Questions 55 to 60 relate to Global Investment Performance Standards Walk Associates Case Scenario Walk Associates (WA) is a firm providing brokerage and asset management services The firm is seeking to present its financial statements in compliance with the requirements and recommendations of the Global Investment Performance Standards (GIPS) Clarence Long is WA’s senior compliance officer who will be overseeing the conversion process Long evaluates the performance presentation of WA’s large-cap equity composite whose equity holdings are benchmarked to the Russell 3000 index (Exhibit 1) The composite commenced on January 1, 2010 The presentation has been prepared by a senior equity fund manager and includes note disclosures During his evaluation of the presentation, Long identifies numerous inconsistencies which require rectification Exhibit 1: Large-Cap Equity Composite Performance Presentation and Note Disclosures Composite Benchmark Value of Value of Gross-ofGross-ofTotal Cash NonComposite Holdings Discretionary Downside Fees Fees Firm ($ Returns Returns Assets Assets Deviation Millions) ($ millions) Year (%) (%) ($ (%) Millions) 2010 8.9 7.8 2.5 0.1 0.1 - 4.5% 2011 9.1 9.0 2.8 0.2 0.1 - 8.8% 2012 9.5 9.5 3.4 0.1 0.3 - 2.2% 2013 9.0 9.8 3.0 0.3 0.2 - 7.1% 2014 8.9 9.8 3.1 0.3 0.4 - 12.0 Note 1: Gross-of-fees returns represent a return net of an all-in-fee comprising advisory, custody and administrative fees The portion of advisory fees including actual trading expenses has been omitted from return calculations as these expenses are highly variable and an estimate for trading expenses cannot otherwise be derived with a reasonable degree of accuracy Note 2: Total firm assets include discretionary fee- and non-fee paying portfolios FinQuiz.com © 2017 - All rights reserved 31 CFA Level III Mock Exam – Questions (PM) Note 3: Cash holdings represent investments in Treasury bills which are being managed by a client-designated external fixed-income specialist firm Returns from cash holdings have been included in portfolio return calculations Note 4: The firm routinely employs option strategies such as protective put and bear spreads to provide downside protection on its equity holdings Note 5: Due to the existence of embedded options for hedging purposes, the firm has elected to present downside deviation as an additional risk measure to standard deviation, which assumes normal distribution and is thus inappropriate for evaluating the performance of a skewed return distribution Note 6: Non-discretionary portfolios include those managed with an active mandate but are prohibited by portfolio holders from participating in small-cap equities Long would like to evaluate how composite portfolio returns are calculated and thus breaks down the performance of one portfolio in terms of cash flow activity and market values for a five month period (Exhibit 2) Exhibit 2: Five-Month Portfolio Valuation and External Cash Flow Activity (2014-2015) Portfolio Date 31 December 2014 25 February 2015 29 March 2015 16 April 2015 30 April 2015 Market value ($) 250,000 275,000 282,000 275,000 285,000 External Cash Flows ($) + 15,000 - 2,000 + 3,500 + 4,000 - 1,000 FinQuiz.com © 2017 - All rights reserved Market Value Including Cash Flows ($) 270,000 280,000 286,000 285,000 283,000 32 CFA Level III Mock Exam – Questions (PM) 55 WA’s fee presentation policy presented in Note is inconsistent with the requirements of the GIPS standards and requires modification Which of the following statements represents an appropriate adjustment? A Trading expenses should be included even if they cannot be estimated with accuracy B Administrative fees must be excluded as they are generally not within the control of a firm C The portion of advisory fees including actual trading expenses must represent the sole deduction from gross-of-fees returns 56 Are Note and Note consistent with the requirements and recommendations of the GIPS standards? A B C Note 2? Consistent Inconsistent Inconsistent Note 3? Inconsistent Consistent Inconsistent 57 Note is inconsistent with the requirements and recommendations of the GIPS standards with respect to WA’s use of derivatives instruments Which of the following has been omitted by the disclosure and represents a violation? A presence B characteristics C frequency of use 58 Is the firm’s decision to include downside deviation as a measure of internal dispersion appropriate (Note 5)? A Yes B No, the firm may only present standard deviation as a measure of risk C No, the GIPS glossary does not define downside deviation as a measure of risk FinQuiz.com © 2017 - All rights reserved 33 CFA Level III Mock Exam – Questions (PM) 59 Has the firm appropriately classified its non-discretionary portfolios (Note 6)? A Yes B No, the restriction does not impede the investment process C No, client restrictions on the portfolio manager not render a portfolio as non-discretionary 60 Using the data in Exhibit 2, calculate the rate of return for the portfolio for the 1st quarter of 2015 using revaluing the large cash flow methodology A 6.21% B 16.32% C 17.42% FinQuiz.com © 2017 - All rights reserved 34 ...CFA Level III Mock Exam – Questions (PM) FinQuiz. com – 5th Mock Exam 2017 (PM Session) Questions Topic Minutes 1-6 Ethical and Professional... Performance & Evaluation 18 49-54 Derivatives 18 55-60 Global Investment Performance Standards 18 Total FinQuiz. com © 2017 - All rights reserved 180 CFA Level III Mock Exam – Questions (PM) Questions... to contribute to the blog during the weekends so as not to disrupt his routine work activities FinQuiz. com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) The same evening,