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 – 6th Mock Exam 2017 (PM Session) Questions Topic Minutes 1-6 Ethical and Professional Standards 18 7-12 Ethical and Professional Standards 18 13-18 Asset Allocation 18 19-24 Equity Investments 18 25-30 Fixed-Income Portfolio Management 18 31-36 Alternative Investments 18 37-42 Derivatives 18 43-48 Monitoring & Rebalancing 18 49-54 Portfolio Execution 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 David Seaman, CFA, Case Scenario David Seaman, CFA, is a portfolio manager at Himalayan Wealth Management, an asset advisory firm, where he is responsible for managing the accounts of high net-worth clients He has categorized the accounts being managed as high risk tolerance/low liquidity needs (Class A); high risk tolerance/high liquidity needs (Class B); low risk tolerance/low liquidity needs (Class C); and low risk tolerance/high liquidity needs (Class D) HWM portfolio managers are under strict orders to comply with the CFA Institute Code of Ethics and Standards of Professional Conduct Seaman has hired Martin Freeman as a junior portfolio manager Freeman has passed the CFA Level II exam this year but will not be sitting for the Level III exam because he has missed the fee payment deadline After joining HWM, Fraser distributes business cards to his colleagues at his previous employer as well as his current business contacts His business card reads as follows: Himalayan Wealth Management Martin Fraser Junior Portfolio Manager CFA Program Level III Candidate Seaman has also recently changed the broker used to execute client trades Eastern Associates (EA), a brokerage-dealer firm, will now be executing HWM client trades EA has appointed Sylvia Marshall to broker the trades On behalf of EA, Marshall will be charging a fee higher than the previous broker but promises to deliver exemplary performance results EA is relatively new to the market and does not have a performance history Unbeknownst to clients, Marshall is Seaman’s close friend and upon mutual consent has offered to reduce broker fees below the standard rate In exchange she would like Seaman to provide investment advice for her personal portfolio and her wealthiest brokerage clients Marshall discloses this arrangement to her supervisor while Seaman accepts the offer but does not make any disclosures FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Marshall notifies Seaman that Blue-Cap Enterprises, a robotic chip manufacturer and her brokerage client, will soon undertake an IPO of its stock The news has not yet been made public and, in a meeting, Marshall informally tells Seaman that she came to know of this impending event while overhearing a conversation between two senior brokers at EA Upon the conclusion of their meeting, Seaman returns to his desk and instructs Fraser to keep the news to himself and allocate the stock to client portfolios Fraser allocates the stock to Class A and B while he deems the event as highly risky for the other two classes and makes no further allocations At the end of first year of engaging EA, Seaman prepares a performance presentation which summarizes the results achieved and projections for the future The respective statements to be included in the presentation are as follows: Results achieved: ‘HWM has generated an annual return of 18.2% on Class A accounts; 15.2% on Class B accounts; 8.6% on Class C accounts; and 6.1% on Class D accounts.’ Projections: ‘We expect to maintain or enhance the results achieved in the current year for the foreseeable future subject to tax rates and fees remaining constant We not seek to guarantee performance results.’ By distributing his business card, Fraser is in violation of the CFA Institute Standards of Professional Conduct because he most likely: A shared them with his former colleagues B specified his candidacy in the CFA Program C has not identified himself as a Level II candidate By selecting EA as a brokerage firm, Seaman is in violation of the CFA Institute Standards of Professional Conduct relating to: A suitability B fair dealing C loyalty, prudence and care FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) In context of the details of the brokerage arrangement with Marshall, which of the following Standards of Professional Conduct is least likely being violated? A Referral fees B Conflict of interests C Additional compensation arrangements Are the three individuals in violation of the CFA Institute Standards of Professional Conduct with respect to the IPO trade? A B C Marshall? Yes Yes Yes Seaman? No Yes Yes Fraser? No No Yes Is the ‘Results Achieved’ statement consistent with the CFA Institute Standards of Professional Conduct? A Yes B No, returns have not been identified as being either gross- or net-of fees C No, the statement highlights discrimination of client classes in terms of differing portfolio results Is the ‘Projection’ statement consistent with the CFA Institute Standards of Professional Conduct? A Yes B No, past results are being simulated C No, there is an implicit performance guarantee FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions to 12 relate to Ethical and Professional Standards Gatekeepers Associates, Case Scenario Gatekeepers Associates is a large-scale investment firm providing investment advisory and brokerage services Gatekeeper’s chief compliance officer, Emeral Irmak, is in the process of modifying the firm’s policies and procedures so that they are in compliance with the CFA Institute Asset Manager Code of Professional Conduct Wayne Fisher is a broker at Gatekeepers who specializes in domestic UK equities His performance is judged against a value-weighted average price (VWAP) benchmark In current trading quarter, Fisher received an order to buy 250,000 shares of a pharmaceutical at a limit price of £52.00 (or better) from one of its institutional clients which emphasizes on execution speed The average daily trading volume and market price was million shares and £53.00, respectively, at the time the order was received Fisher purposely delays his trade till the end of the trading day in the hope of the seller hitting his bid One hour prior to the time of market close, the price of the security declines to £52.00 and Fisher executes the order when the VWAP is £51.80 Upon evaluating his performance, Wayne’s supervisor notes that the ask price did decline to £52.00 two hours prior to the market close but, based on his performance relative to the VWAP benchmark, Wayne’s trade timing strategy allowed him to successfully minimize implicit costs which he otherwise could not have achieved The defined benefit pension fund of Thunder Limited is also Fisher’s client The fund’s plan sponsor has requested the broker to purchase 2.5 million shares of large-cap equity securities for the investment portfolio In addition, the sponsor has expressed the desire to maintain trading anonymity Fisher decides to display 10% of the order at any one time to fulfill his client’s request In response to a systems virus which wiped out client information on the firm’s operating system, Irmak has decided to design a business continuity plan which aims to address systems failure and disaster recovery The three policies devised are as follows: Policy 1: Educate and train employees so that they can effectively execute the plan and are specifically trained in their areas of responsibility Policy 2: Backup all client account information in hardcopy format in an offsite storage facility FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Policy 3: Establish plans for notifying clients if primary systems become unavailable and trading activities cannot be resumed A portion of Gatekeeper’s client holdings are in emerging market securities The firm has appointed brokers specializing in these securities to execute client orders Securities are valued using an internally developed valuation model to arrive at estimates of fair market prices as actual prices are not directly observable in these volatile markets On the other hand, domestic equities are valued using current market prices Portfolio managers disclose the valuation methods used for domestic equities in monthly and emerging market equities in semi-annual performance reports, which are dispatched to clients on their respective dates The firm’s compliance officer is in the process of implementing a policy with respect to the acceptance of gifts and entertainment Under the proposed policy managers cannot accept gifts, either cash or non-cash, which exceed a value of £2,500 in nominal terms In addition, employees are required to disclose to their manager, either orally or in writing, the acceptance of any gift or entertainment item within 30 days of receipt By employing his trade timing strategy for the pharmaceutical stock, Fisher is in violation of the Asset Manager Code with respect to: A client loyalty B misrepresentation C market manipulation With respect to Thunder Limited’s buy order, are Fisher’s actions consistent with the requirements and recommendation of the Asset Manager Code? A Yes B No, he is not seeking to maximize value C No, he is attempting to manipulate the market Which of the following proposed business continuity plan policies is least likely consistent with the Asset Manager Code? A Policy B Policy C Policy FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) 10 Is the firm’s valuation method and associated disclosure for emerging market securities consistent with the requirements and recommendations of the Asset Manager Code? A Yes B No, disclosure must not made by asset class C No, internal valuation models cannot generate fair values 11 Is Gatekeeper’s performance reporting frequency consistent with the requirements and recommendations of the Asset Manager Code? A No B Only with respect to domestic equities C Only with respect to emerging market equities 12 The firm’s proposed gifts and entertainment policy is inconsistent with the requirements and recommendations of the Asset Manager Code as: A oral disclosure is not permitted B the nominal value limit is excessive C acceptance of cash gifts is prohibited FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Questions 13 to 18 relate to Asset Allocation Patrick Smith Case Scenario Patrick Smith is a currency overlay manager at East End Advisors (EEA), a U.K based wealth management firm EEA runs a global equity fund which is invested in domestic as well as US, French, South African, Russian, and Brazilian equities The exposures to the emerging market foreign currencies are currently unhedged and Smith has been tasked with devising a suitable hedging strategy Two months earlier, Smith hedged EEA’s exposure to the USD and EUR using fourmonth forward currency contracts Smith has always preferred forward over futures contracts for hedging currency exposures and justifies his choice as follows: Justification 1: “Forward contracts are especially useful for hedging currency exposures of emerging market currencies for which there is a general lack of liquid futures.” Justification 2: “Forwards contracts have higher liquidity and lower credit risk when traded in larger quantities.” Justification 3: “There are no initial and maintenance margins associated with forward contracts and so the volatility of the organization’s cash flows will be relatively low when opting for this hedging instrument.” Smith begins his assignment by hedging EEA’s Russian ruble (RUB) 3.0 million investment using a three-month currency forward contract at an agreed upon rate of RUB/GBP 85.45 Two months later, the value of the position and spot rate declines to RUB 2.2 million and RUB/GBP 81.05 respectively Smith has decided to rebalance the position using an FX swap Next, Smith turns his attention towards EEA’s BRL 10 million and ZAR million foreign currency exposures He enters into a discussion with a senior equity manager at the firm in which he shares his intention to employ the same hedging strategy for the two currencies He shares details concerning potential hedging strategies with the equity manager while making the following statement: FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) “I am deciding between i) fully (and dynamically) hedging the currency exposures and ii) employing a strategy to reduce hedging costs by accepting some downside risks and upside potential The second strategy would enable me to express market views concerning the GBP/BRL and GBP/ZAR My investment horizon will be three months.” Smith proceeds to evaluate whether the first strategy will be worthwhile based on spot and forward rate data collected (Exhibit) Exhibit: Data for Evaluating a Fully Hedged Currency Position Three-Month MidMid-Market Three-month Market Forecast Current Spot Rate Forward Points Spot Rate GBP/BRL 4.6500 -120/-110 4.2511 GBP/ZAR 17.6385 135/145 17.0580 Smith concludes his assignment by evaluating 3-month BRL- and ZAR-denominated currency options Based on his spot rate expectations, he is aiming to design a strategy which will generate limited upside potential on EEA’s exposures while providing downside risk protection 13 With respect to his preference for forward contracts over futures, Smith is most accurate regarding Justification: A B C 14 To rebalance the hedge, Smith is required to: A buy RUB 0.8 million today B sell 0.01 million GBP today C buy RUB 0.8 million two months from today FinQuiz.com © 2017 - All rights reserved 10 CFA Level III Mock Exam – Questions (PM) 34 Using the data in Exhibit 1, the value of Singh’s investment at the end of her investment horizon using the eight month average rolling return is closest to: A $3.1709 million B $3.1867 million C $3.2063 million 35 Using Exhibit 2, should Doyle allocate $3 million to the FOF? A No B Yes, her portfolio’s risk-adjusted performance will improve C Yes, her portfolio’s risk-adjusted performance will deteriorate 36 A limitation of Doyle using the data in Exhibits and to analyze and forecast risk-adjusted performance is: A future performance is difficult to predict B consistency analysis is less relevant given fund composition C hedge funds allow entry/exit into funds on a quarterly or less frequent basis and so monthly returns are inappropriate FinQuiz.com © 2017 - All rights reserved 21 CFA Level III Mock Exam – Questions (PM) Questions 37 to 42 relate to Derivatives Stephen Muller, CFA, Case Scenario Stephen Muller, CFA, is a derivatives specialist at Winstar Associates, a derivatives dealer firm He is analyzing two transactions – i) establishment of an interest rate collar on a floating rate loan undertaken by Top-Tech, a client of WA, and ii) sale of equity call options to a client Interest Rate Collar Top-Tech arranged a floating rate loan on June 15, 2013 to finance the construction of one of its factories Top-Tech’s CEO made a request to Muller to reduce the firm’s exposure to the risk of rising interest rates Muller responded by purchasing caplets and selling floorlets to establish a zero-cost position Details concerning the loan transaction and hedging transaction are summarized in Exhibit Exhibit summarizes LIBOR rates and the number of days falling within each settlement period Exhibit 1: Details Concerning Loan and Hedging Transaction Loan amount Frequency of interest payments Term of loan Cap rate Floor rate Interest rate on loan $50 million Semi-annually (June 15 and December 15) years 10.20% 9.40% Libor + 100 basis points Exhibit 2: Loan Settlement Dates and LIBOR Rates Number of LIBOR Settlement Date Days in Period (%) June 15, 2013 8.50 December 15, 2013 183 9.00 June 15, 2014 182 9.20 December 15, 2014 183 9.95 June 15, 2015 182 11.30 FinQuiz.com © 2017 - All rights reserved 22 CFA Level III Mock Exam – Questions (PM) Muller shares the results of the transaction to his recently hired junior analyst, Tyron Bolt After a preliminary review, Bolt poses the following questions to his supervisor: Question 1: “At which rates will Top-Tech’s exposure to interest rate risk be highest?” Question 2: “Effective interest payments can differ even if the LIBOR rate is the same for each settlement date Is this because some options are expiring when they are in-the-money?” Delta Hedged Position Next, Muller analyzes the short call position taken by WA The firm sold 1,000 call options, priced at $85.60, to its client so that the latter could hedge his stock holding To delta hedge the firm’s short call position, a senior derivatives trader at WA purchased shares of the underlying stock when the market price was $3,000 The exercise price of each call option was $2,250 while the shares were purchased using available funds and carry a zero dividend yield Muller notes that a frequent issue with delta hedging is the need to dynamically rebalance the hedge with the passage of time and change in price Muller would like to analyze the impact of an instantaneous price change on the delta hedged position He uses the BlackScholes-Merton (BSM) model to calculate new deltas for each change in the underlying price as well as estimates the new call price He summarizes the results in Exhibit assuming time to be a constant factor in his analysis Exhibit 3: Results of the BSM Model and Delta-Estimated Call Prices Delta-Estimated New Price of Underlying Call Price ($) New Delta ($) 2,980 ? 0.5980 2,990 79.48 0.6123 3,000 85.60 0.6545 3,010 92.61 0.7010 FinQuiz.com © 2017 - All rights reserved 23 CFA Level III Mock Exam – Questions (PM) 37 Using the data in Exhibit 1, the effective interest due on June 15, 2014 is closest to: A $2.427 million B $2.440 million C $2.629 million 38 The most appropriate response to Question and 2, respectively, is: A B C Question 1: Question 2: any rate exceeding 10.20% any rate below 9.40% any rate between 9.40% and 10.20% a no a yes a yes 39 Using the data in Exhibits and 2, the caplet payoff on June 15, 2015 is closest to: A $0 B $63,200 C $278,100 40 Using the data in Exhibit as well as on the delta hedged position, the transaction required to reestablish the hedge when the underlying declines to $2,990 will involve: A selling 42 shares B selling 57 shares C purchasing 57 more shares 41 Using the data in Exhibit and the information provided on the delta hedged position, compared to the delta-estimated price of $92.17, an increase in the underlying price to $3,010 will result in the actual call price calculated from the BSM model being: A equal B lower C higher FinQuiz.com © 2017 - All rights reserved 24 CFA Level III Mock Exam – Questions (PM) 42 Using the data in Exhibit and the information provided on the delta hedged position, when the underlying declines to $2,980 the delta-estimated call price is closest to: A $72.51 B $73.64 C $85.03 FinQuiz.com © 2017 - All rights reserved 25 CFA Level III Mock Exam – Questions (PM) Questions 43 to 48 relate to Monitoring and Rebalancing Adele Ramos, CFA, Case Scenario Adele Ramos, CFA, is a senior investment advisor at Stoke Advisory, an investment advisory firm which manages the portfolios of individual client accounts Ramos is seeking to implement a disciplined rebalancing approach for two of her clients’ accounts, Jerry Hayes and Carlos Alvarez She holds a meeting with each client in an effort to determine their desire for a particular rebalancing strategy She also collects information on the two clients’ investment portfolios to aid her decision Jerry Hayes Hayes’ $25 million investment portfolio is invested in US equities and Treasury bills in the proportion 65%/35%, respectively The client expresses his preference for a calendar rebalancing approach by stating, “I would like the timing of portfolio rebalancing to correspond to my monthly portfolio review schedule; this will enable me to track rebalancing trades.” Ramos is concerned that Hayes’ preferred rebalancing approach may incur significant transaction costs and increase his portfolio’s present value of expected losses particularly if constituent weights have diverged substantially from their target by the rebalancing date.” Carlos Alvarez The majority of Alvarez’s $50 million investment portfolio comprises of financial wealth inherited from his deceased father’s estate Alvarez has an above average willingness and ability to tolerate risk Upon further discussion with the client, Ramos elects to employ the percentage-of-portfolio rebalancing approach and implements a daily schedule for monitoring portfolio weights FinQuiz.com © 2017 - All rights reserved 26 CFA Level III Mock Exam – Questions (PM) Ramos established corridors for the asset classes comprising Alvarez’s portfolio which she presents in an exhibit alongside their respective current weights (Exhibit) Exhibit: Corridors for Alvarez’s Portfolio Asset Class Current Weight (%) Domestic US equities 43.0 International equities 18.1 Corporate bonds 22.0 Real estate 6.0 Private equity 10.9 Corridor 40% ± 5.0% 20% ± 3.5% 15% ± 3.0% 7% ± 1.2% 18% ± 2.8% After concluding her meeting with Alvarez, Ramos makes three observations which she feels could influence the chosen rebalancing discipline, which include: Observation 1: A portion of the private equity funds in which Alvarez is invested have been taken public via an IPO Alvarez continues to maintain his holdings in these funds Observation 2: A recent decline in mortgage rates has increased the frequency of the refinancing of mortgage loans and decreased the returns on Alvarez’s real estate investments Observation 3: Tax on long-term capital gains has increased from 13% to 15% Ramos is unsatisfied with the rebalancing discipline specified for Hayes’ portfolio as it does not account for market movements She decides to implement a constant-mix rebalancing strategy by setting the multiplier equal to a value of 0.5 She also determines that US equities are expected to generate a return of 12% in the coming month Ramos shares the results of the new rebalancing strategy with Hayes and justifies her choice by stating, “You can expect to achieve superior performance results by maintaining stable systemic risk characteristics and a contrarian stance in trending markets.” FinQuiz.com © 2017 - All rights reserved 27 CFA Level III Mock Exam – Questions (PM) 43 In light of their respective portfolio holdings, liquidity represents a greater concern for: A Hayes B Alvarez C both of the clients 44 With respect to the impact of Hayes’ rebalancing strategy on present value of expected losses, are Ramos’ concerns valid, and which transaction costs is she referring to? A B C Impact on Present Value of Expected Losses? No No Yes Transaction Costs? Taxes Liquidity Market impact 45 Using the data in the Exhibit, which of the following asset classes least likely needs to be rebalanced? A Private equity B Corporate bonds C Domestic equities 46 Considering each of Ramos’ observations in isolation, which of the following most accurately highlights the necessary change in the corridor width of the relevant asset class? A B C Observation 1: Observation 2: Observation 3: Widen Narrow No effect Widen No effect No effect Narrow Widen Widen FinQuiz.com © 2017 - All rights reserved 28 CFA Level III Mock Exam – Questions (PM) 47 Assuming Ramos’ forecasts concerning US equities materialize, the action required to rebalance the portfolio will be to sell equities worth: A $2.25 million B $3.75 million C $5.70 million 48 Ramos’ justification of the constant mix strategy is most likely incorrect because these strategy: A supplies liquidity to markets B underperforms in the identified market conditions C does not maintain stable systemic risk characteristics FinQuiz.com © 2017 - All rights reserved 29 CFA Level III Mock Exam – Questions (PM) Questions 49 to 54 relate to Portfolio Execution Wiscon Alliance Case Scenario Wiscon Alliance (WA) is a broker/dealer firm operating in the US In an effort to maximize the value of clients’ portfolios, WA would like to ensure its traders comply with the CFA Institute’s Trade Management Guidelines Paul Mathews, CFA, is WA’s chief compliance officer who has been tasked with drafting a suitable policy which will be consistent with The Guidelines Mathews begins his assignment by drafting a policy which will address the areas – employee compliance, disclosures, and best execution The officer then proceeds to define three characteristics underlying best execution which he intends to include in a report introducing the new policy Characteristic 1: “Best execution must be judged on a trade-by-trade basis due to the variable nature of trades.” Characteristic 2: “Best execution is trade-specific and consequently must be jointly determined by buyer and seller on an ex-post basis.” Characteristic 3: “Best execution is an outcome of a repetitive process.” Simon Bale is a senior trader at WA Bale is evaluating the trades undertaken by WA’s traders during the current week The first trade being examined is a sell order for 500,000 shares of the Gratex Corp stock The order was executed in an order driven market with a specified limit price of $55.00 (or better) The trader’s primary concern was to minimize the price impact of the trade and he thus elected to display 30% of the order size at any one time The trade was executed at a time when the best offer was $53.80 Next, Bale examines an order to buy 800,000 shares of Lestley Inc’s shares of a stock The order was submitted to an electronic crossing network The crossing of the trade took place at 11 am on the same day when market bid and ask prices were $28.10 and $28.30, respectively The trader received a partial fill of 200,000 shares and is seeking a market which will ensure the remaining order is completed The average trading size of the Lestly Inc stock is 200,000 shares FinQuiz.com © 2017 - All rights reserved 30 CFA Level III Mock Exam – Questions (PM) Bale concludes his analysis by examining an order to buy 125,000 shares of ABC Manufacturing’s common stock a price of $52.00 (or better) The order was placed on Monday and 30,000 shares were purchased at a price of $51.80 each when the market ask was $51.00 The VWAP for the day was $51.50 The commissions paid on the trade were $12,000 Lark Holmes is a senior trader at WA Upon Bales’ request, Holmes reviews Bale’s analysis of the ABC Manufacturing trade After reviewing his analysis, Holmes concludes that there are certain limitations in using VWAP as a price benchmark Limitation 1: “The magnitude of a trade’s volume tends to bias the VWAP measure.” Limitation 2: “Brokers with discretion in the timing of their trades can delay buy orders received if the stock’s price exceeds VWAP at the close of a particular trading day.” 49 With respect to the areas addressed by Mathews’ policy, which of the following is most consistent with the Trade Management Guidelines? A Disclosures B Compliance C Best execution 50 With respect to the characteristics of best execution identified by Mathews, which is most consistent with the Trade Management Guidelines? Characteristic: A B C 51 The trade order for the Gratex Corp stock is most likely classified as: A reserve order B participate order C best efforts order FinQuiz.com © 2017 - All rights reserved 31 CFA Level III Mock Exam – Questions (PM) 52 Which of the following features of electronic crossing networks most likely serves as a motivating force behind the desire to change the trading venue for the Lestley Inc stock? A Cost of trade B Price discovery C Market impact of trades 53 The implicit cost of the ABC Manufacturing trade using VWAP as the price benchmark is: A $9,000 B $15,000 C $21,000 54 Considering the limitations identified by Holmes, which of the following addresses the fact that the VWAP measure can be gamed? A Limitation only B Limitation only C Both of the limitations FinQuiz.com © 2017 - All rights reserved 32 CFA Level III Mock Exam – Questions (PM) Questions 55 to 60 relate to Global Investment Performance Standards Sandra Miller Case Scenario Sandra Miller is a real estate valuator serving Ricard, a professional real estate appraisal firm She is analyzing two real estate funds, Fund AX and Fund BY, to determine whether they are subject to the general or real estate provisions of the Global Investment Performance Standards (GIPS) Fund AX is a privately-traded, closed-end, leveraged fund managed by a professional real estate fund manager offering investors expertise in identifying, developing, and realizing the value of their investments Fund BY is a publically traded fund which purchases real estate properties and issues commercial and residential mortgage-backed securities to investors Next, Miller evaluates a commingled real-estate fund offered by High Properties Inc (HPI), a professional real estate firm The firm is in the process of converting its financial reporting and presentation procedures so that they are in compliance with the GIPS standards The firm’s compliance officer has drafted three policies addressing returns calculation, internal valuation, and disclosures Returns Calculation: I II III Component returns are defined as the sum of income and capital returns which must be calculated using the modified Dietz method for all performance results presented for periods falling after January 1, 2011 Gross-of-fees and net-of-fees total returns must be calculated and presented for each quarter Gross-of-fees component returns only need to be presented Internal Valuation Policy: I II Beginning January 1, 2010 all underlying properties will be valued based on the sale prices of comparable properties with appropriate adjustments This represents a shift from the previous valuation policy which was based on an income cap rate derived from similar properties Material policy changes need not be disclosed if undertaken prior to January 1, 2011 FinQuiz.com © 2017 - All rights reserved 33 CFA Level III Mock Exam – Questions (PM) Disclosures: I II III The composite presentation for each annual period should disclose HPI’s compliance with US GAAP The percentage of the total asset value which is not considered real estate should be disclosed once every thirty-six months Details of the existing valuation policy should be disclosed for the recent most period Next, Miller analyzes the investment of T&T Foundation in HPI’s fund T&T joined the fund two years ago, on January 1, 2013 Miller collects details on the client’s external cash flow activity with respect to the fund for the first two years of investment (2013 to 2014) and summarizes details concerning quarterly cash flows in an exhibit (Exhibit) She intends to use the data to estimate the since inception internal rate of return (SI-IRR) of the investment Exhibit: T&T Foundation’s Quarterly Cash Flow Activity in the HPI Commingled Fund (2013-2014) Date Quarter Initial investment 31 December 2012 Additional Investment 30 September 2013 Distribution 31 March 2014 Distribution 30 June 2014 Ending value 31 December 2014 Amount $300,000 $50,000 $10,540 $12,420 $378,900 Miller concludes his analysis by observing the growth in the number of portfolios in HPI’s fund between 2013 and 2015 She observes that the number of portfolios have grown from to to 14, respectively, in the three years 55 Which of the following funds are subject to GIPS real estate provisions? A Fund AX only B Fund BY only C Both AX and BY FinQuiz.com © 2017 - All rights reserved 34 CFA Level III Mock Exam – Questions (PM) 56 Which of the following statements least accurately highlights why HPI’s returns calculation policy is inconsistent with GIPS real estate provisions? A Total returns must be calculated more frequently B Both gross- and net-of-fees component returns must be presented C The Modified Dietz method does not represent a true time-weighted return 57 Which of the following components of HPI’s internal valuation policy is most consistent with the requirements of the GIPS real estate provisions? A I only B II only C Both I and II 58 In context of HPI’s disclosure policy, which of the following components most likely represents a recommendation of the GIPS real estate provisions? A I B II C III 59 Using the data in the Exhibit, the measure for SI-IRR on T&T Foundation’s investment which is consistent with GIPS real estate provisions is closest to: A 1.88% B 7.71% C 15.78% 60 In which of the following years is HPI required to present a specific measure of internal dispersion for its commingled fund’s compliant performance presentation? A 2015 only B 2014 and 2015 only C All three years FinQuiz.com © 2017 - All rights reserved 35 ...CFA Level III Mock Exam – Questions (PM) FinQuiz. com – 6th Mock Exam 2017 (PM Session) Questions Topic Minutes 1-6 Ethical and Professional... Rebalancing 18 49-54 Portfolio Execution 18 55-60 Global Investment Performance Standards 18 Total FinQuiz. com © 2017 - All rights reserved 180 CFA Level III Mock Exam – Questions (PM) Questions... arrangement to her supervisor while Seaman accepts the offer but does not make any disclosures FinQuiz. com © 2017 - All rights reserved CFA Level III Mock Exam – Questions (PM) Marshall notifies