FinQuiz level3 mock2017 version6 JunePMSolutions

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 – Solutions (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 – Solutions (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 – Solutions (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 Correct Answer: B Reference: CFA Level III, Volume 1, Study Session 1, Reading 2, LOS a FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) B is correct Fraser is violation of Standard VII (B) Reference to CFA Institute, the CFA designation, and the CFA Program because he specified his candidacy in the CFA program on his business card There is no such thing as a partial designation and by stating ‘CFA Level III Candidate’ on his business card he is implying exactly that A is incorrect Simply distributing business cards to former colleagues does not itself constitute a violation C is incorrect Although Fraser cannot identify himself as a Level III candidate because he is not registered for the exam, identifying himself as a Level II candidate would still constitute a violation of Standard VII (B) (see above) 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 Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading 2, LOS a C is correct By selecting EA as a brokerage firm, Seaman is in violation of Standard III (A) Loyalty, Prudence and Care which requires members and candidates to act in the best interests of their clients; this is because Seaman has not verified whether the performance fees are justified based on firm performance Furthermore, the statement made by Marshall is not sufficient to justify EA’s high fee schedule Seaman may fall into the trap of using soft dollars to pay for below average brokerage services A is incorrect There is no evidence to indicate that the standard concerning suitability has been violated B is incorrect There is no evidence to indicate that Seaman has dealt unfairly and in a manner which is not objective when dealing with his clients FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (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 Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading 2, LOS a C is correct There is no evidence to indicate that the standard concerning additional compensation arrangements is being violated; this is because neither Seaman nor Marshall are accepting gifts, benefits, considerations, or compensation which could compete with their employer’s interests A is incorrect Both Marshall and Seaman are clearly in violation of Standard VI (C) Referral Fees because they have failed to disclose the existence of the investment advisory agreement (in the case of Marshall, to her clients and in the case of Seaman, to both clients and employer) The standard requires members and candidates to disclose to their employers, clients and prospects, as appropriate, any compensation, consideration or benefit received from or paid to others for the recommendation of products and services B is incorrect Seaman is in violation of Standard VI (A) Disclosure of Conflicts He has not disclosed the fact that he is receiving a reduced fee schedule from EA which is due to his past acquaintance with Marshall His friendship with Marshall may have influenced his judgment when selecting and, in the future, retaining her as broker The standard requires members and candidates to make full and fair disclosures of all matters that could reasonably be expected to impair their independence and objectivity or interfere with their respective duties to their clients, prospective clients and employer FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) 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 Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading 2, LOS a Marshall is in violation of Standard II (A) Material nonpublic information by sharing and acting on material nonpublic information concerning the Blue Cap Enterprises stock The standard prohibits members and candidates from acting or causing others to act on material nonpublic information which could affect the value of an investment Seaman is in violation of Standard II (A) Material nonpublic information by instructing Fraser to act on such information Furthermore, the manager is in violation of Standard V (C) Responsibility of Supervisors by failing to prevent violations of the Code and Standards at HWM Fraser is in violation of the standard concerning material nonpublic information because he has used such information to make the allocation to client accounts 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 Correct Answer: B Reference: CFA Level III, Volume 1, Study Session 1, Reading 2, LOS a FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (PM) B is correct Standard III (D) Performance Presentation requires members and candidates to make reasonable efforts when communicating performance information to ensure it is fair, accurate and complete To ensure a complete and accurate performance presentation, Seaman should have disclosed whether the returns were gross- or net-of-fees By failing to so, his presentation is inconsistent with the CFA Institute Standards of Professional Conduct C is incorrect Seaman manages the portfolios of different client classes Therefore, it is quiet natural for him to achieve different returns for each class Securities selected for each class will be such that they are consistent with client’s risk and return objectives and constraints 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 Correct Answer: C Reference: CFA Level III, Volume 1, Study Session 1, Reading 2, LOS a C is correct The ‘Projection’ statement contains an implicit performance guarantee and is thus inconsistent with Standard III (D) Performance Presentation which requires members and candidates to make reasonable efforts that a performance presentation is fair, accurate and complete By implying that HWM will achieve returns similar to that in the past for client accounts, he is implicitly guaranteeing investment performance B is incorrect There is no evidence that projections represent simulations of past results FinQuiz.com © 2017 - All rights reserved CFA Level III Mock Exam – Solutions (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 – Solutions (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 Correct Answer: A Reference: CFA Level III, Volume 1, Study Session 2, Reading 4, LOS b FinQuiz.com © 2017 - All rights reserved 10 CFA Level III Mock Exam – Solutions (PM) Ramos’s concerns with respect to the impact of a calendar rebalancing discipline on the present value of expected losses are valid The present value of expected loss results when a portfolio fails to track the optimal allocation A portfolio which is far away from optimal proportions on a given rebalancing date will expect to generate higher present value of expected losses for the client The transaction costs being referred to by Ramos are market impact costs An investor attempting to rebalance a portfolio which has strayed far away from its optimal proportions may incur unnecessarily high transaction costs in terms of market impact by rebalancing This is because a large trade may be required to rebalance the portfolio which, in turn, will significantly influence the prices of the concerned asset classes 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 Correct Answer: C Reference: CFA Level III, Volume 6, Study Session 16, Reading 30, LOS f C is correct Domestic equities not need to be rebalanced as the current weight (43.0%) falls within its tolerance band, 40% – 5% = 35% to 40% + 5% = 45%, respectively A is incorrect Private equity will need to be rebalanced as the current weight of the asset class (10.9%) has declined below the lower limit of its tolerance band of 18% - 2.8% = 15.2% B is incorrect Corporate bonds need to be rebalanced as the current weight of the asset class (22%) exceeds the upper and lower limits of its tolerance band, 15% 3% = 12% to 15% + 3% = 18%, respectively FinQuiz.com © 2017 - All rights reserved 51 CFA Level III Mock Exam – Solutions (PM) 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 Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 16, Reading 30, LOS f Observation will require narrowing the corridor width for private equity The IPO of a private equity fund will result in an improvement in the liquidity of the underlying investments as investors can now trade their holdings in public markets Observation will not demand a change in the real estate corridor width Observation will require increasing the corridor width for international equities as an increase in taxes will serve to increase transaction costs The more expensive it is to trade an asset, the wider the corridor should be because the marginal costs of rebalancing should equal to the marginal benefits 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 Correct Answer: C Reference: CFA Level III, Volume 6, Study Session 16, Reading 30, LOS h FinQuiz.com © 2017 - All rights reserved 52 CFA Level III Mock Exam – Solutions (PM) The target investment in stocks is $12.5 million = 0.5 × $25 million The actual investment in stocks is $16.25 million = 0.65 × $25 million A 12% return will increase the current value of equity holding to $18.20 million = $16.25 × 1.12 To rebalance the portfolio to the target equity investment, $5.70 million = $18.20 million – $12.50 million worth of equities will need to be sold 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 Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 16, Reading 30, LOS h & i B is correct The reason why Ramos’ justification of the constant mix strategy is incorrect is because this strategy underperforms in trending markets In a bull market an investor pursuing a constant-mix strategy is cutting back on his holding of shares to maintain a constant mix thereby losing out on potential gains resulting from an increase in share price In a bear market, the same investor will be increasing his holding of shares to maintain a constant mix thereby increasing the losses on his position A is incorrect Ramos is correct in stating that the constant-mix strategy is contrarian in nature; this implies that investors following this strategy supply liquidity by buying and selling securities when there are a lack of buyers and sellers, respectively C is incorrect Constant-mix strategies maintain stable portfolio systemic risk characteristics over time as investors react to market movements by adjusting the portfolio allocation to the target asset allocation FinQuiz.com © 2017 - All rights reserved 53 CFA Level III Mock Exam – Solutions (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 54 CFA Level III Mock Exam – Solutions (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 Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 16, Reading 29, LOS o The three areas which are addressed by the CFA Institute’s Trade Management Guidelines include processes, disclosures and record keeping 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 FinQuiz.com © 2017 - All rights reserved 55 CFA Level III Mock Exam – Solutions (PM) Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 16, Reading 29, LOS n B is correct Characteristic is most consistent with The Guidelines concerning best execution Both buyer and seller – or their appointed agents – must jointly determine what best execution is for every trade as trading is a negotiation between two parties This implies that best execution is trade specific Furthermore, best execution is a prospective concept which cannot be known with certainty ex ante Characteristic is not consistent with The Guidelines Although trading occurs in a volatile environment and is subject to variability, best execution has many aspects which need to be measured and analyzed over time on an ex-post basis Such a measurement will not be meaningful in isolation Characteristic is not consistent with The Guidelines Best execution is not an outcome of a process but is rather interwoven in complicated, repetitive, continuing practices and relationships 51 The trade order for the Gratex Corp stock is most likely classified as: A reserve order B participate order C best efforts order Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 16, Reading 29, LOS c The trade order is classified as a reserve order as evidenced by the trader’s intention to partially display the order size Furthermore, this type of order is used when traders place large orders and are concerned about the price impact of their trades In such a scenario partially concealing the order will allow traders to conceal their trading intentions FinQuiz.com © 2017 - All rights reserved 56 CFA Level III Mock Exam – Solutions (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 Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 16, Reading 29, LOS c B is correct A limitation of electronic crossing networks is that they not provide price discovery which leads to partially filled orders Because crossing networks not provide price discovery, prices not adjust upward to uncover additional selling interest to satisfy the trader’s demand to buy A is incorrect Electronic crossing networks avoid the dealer bid-ask spreads Furthermore, commissions are paid but they are typically low C is incorrect Electronic crossing networks help reduce the impact large trades have on prices 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 Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 16, Reading 29, LOS f Implicit cost = Order size × (Execution price – VWAP) = 30,000 × ($51.80 – $51.50) = $9,000 FinQuiz.com © 2017 - All rights reserved 57 CFA Level III Mock Exam – Solutions (PM) 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 Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 16, Reading 29, LOS h B is correct Limitation reflects the fact that VWAP can be gamed A broker with trading discretion who receives a buy order towards the end of the trading day, when the stock’s ask price exceeds the VWAP up to that point, might try to move the trade to the next trading day, when they will be benchmarked against a fresh VWAP Limitation reflects the fact that the VWAP measure is less informative for trades representing a large faction of daily trading volume Because of price impact, a large trade will distort the VWAP benchmark by moving it closer to the average price of the trade Therefore, the trade would appear to be good regardless of how high the prices paid FinQuiz.com © 2017 - All rights reserved 58 CFA Level III Mock Exam – Solutions (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 59 CFA Level III Mock Exam – Solutions (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 Correct Answer: A FinQuiz.com © 2017 - All rights reserved 60 CFA Level III Mock Exam – Solutions (PM) Reference: CFA Level III, Volume 6, Study Session 18, Reading 32, LOS n Fund AX represents a closed-end commingled real estate fund; commingled funds are defined as real estate by the GIPS glossary and are thus subject to the GIPS real estate provisions Fund BY represents a mortgage REIT which is excluded from the real estate provisions and instead subject to the GIPS general provisions 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 Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 18, Reading 32, LOS o FinQuiz.com © 2017 - All rights reserved 61 CFA Level III Mock Exam – Solutions (PM) A is correct The real estate provisions require that firms calculate portfolio returns at least quarterly (I.6.A.6) HPI’s policy (I) is consistent with the standards in this regard B is incorrect The standards require firms to present both total and component returns Firms are free to choose whether they would like to present component returns which are gross-of-fees, net-of-fees, or both If the firm presents only gross-of-fees total returns it should present gross-of-fees component returns If the firm presents only net-of-fees total returns it should also present net-of-fees component returns in addition to gross-of-fees component returns Given that the firm has presented both gross- and net-of-fees total returns it should present component returns before and after the deduction of fees The current policy (III) is inconsistent with the GIPS standards in this regard C is incorrect GIPS real estate provisions require income and capital returns to be calculated separately using geometrically linked time-weighted rates of return for periods beginning on or after January 1, 2011 (I.6.A.8) HPI’s returns calculation policy (II) is inconsistent with the GIPS real estate provision because the modified Dietz method will generate a money weighted return as opposed to a timeweighted 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 Correct Answer: C Reference: CFA Level III, Volume 6, Study Session 18, Reading 32, LOS o FinQuiz.com © 2017 - All rights reserved 62 CFA Level III Mock Exam – Solutions (PM) Component I of HPI’s valuation policy is consistent with the GIPS real estate provisions which require firms to disclose material changes to valuation policies and/or methodologies for periods beginning on or after January 1, 2011 (I.6.A.10.b-e) with earlier disclosure being encouraged (I.6.B.5) Component I reflects such a disclosure Component II of HPI’s valuation policy is also consistent with the provisions which require firms to disclose material changes in the valuation policy for periods beginning on or after January 1, 2011 (I.6.A.10.b-e) 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 Correct Answer: A Reference: CFA Level III, Volume 6, Study Session 18, Reading 32, LOS o A is correct Component I reflects a recommendation of the GIPS real estate provisions which recommend firms to disclose the basis of accounting (U.S GAAP or IFRS) for portfolios in the composite (I.6.B.3) C is correct Component III reflects a requirement of the provisions which require firms to disclose the internal valuation methodology used to value real estate investments for the most recent period (I.6.A.10.b-e) B is incorrect Component II inaccurately reflects a recommendation of the provisions which recommend firms to disclose the percentage of the total value of composite assets that are not real estate, as defined, at the end of each annual period (I.6.B.7) FinQuiz.com © 2017 - All rights reserved 63 CFA Level III Mock Exam – Solutions (PM) 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% Correct Answer: B Reference: CFA Level III, Volume 6, Study Session 18, Reading 32, LOS o The GIPS standards require firms to calculate the annualized SI-IRR using quarterly cash flows at a minimum (I.6.A.17-18) Using a financial calculator and inserting the data in the exhibit as cash flows, we get: CF0 = - 300,000 C01 = C02 = C03 = - 50,000 C04 = C05 = 10,540 C06 = 12,420 C07 = C08 = 378,900 CPT IRR = 1.8750 Annualizing the IRR, we get the SI-IRR as 7.71% [(1 + 0.01875)4 - 1] × 100 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 Correct Answer: B FinQuiz.com © 2017 - All rights reserved 64 CFA Level III Mock Exam – Solutions (PM) Reference: CFA Level III, Volume 6, Study Session 18, Reading 32, LOS o A specific measure for internal dispersion for the individual portfolios in a composite must be presented for each compliant performance presentation of a composite that includes more than five portfolios Therefore, HPI must present an internal dispersion measure for the years 2014 and 2015 FinQuiz.com © 2017 - All rights reserved 65 ...CFA Level III Mock Exam – Solutions (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 – Solutions (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 – Solutions (PM) Marshall notifies