2019 CFA level 3 qbank reading 37 overview of the global investment performance standards answers

10/12/2018 Learning Management System Question #1 of 103 Handley Asset Management (HAM), an investment management rm founded in 2000, manages wrap and other non-wrap accounts HAM is preparing a wrap fee presentation for its small-cap value composite The performance results in the presentation date back to 2002; however, the rm began including wrap fee portfolios in the composite in 2006 Which of the following statements is most accurate? A) To be compliant with GIPS, HAM must disclose each period when an actual wrap in fee portfolio was not in the composite being identi ed B) To be compliant with GIPS, HAM must exclude the wrap fee portfolios from its en tre presentation results C) HAM’s presentation is compliant with GIPS as is and no change or disclosure is required bo ok c Explanation According to standard 8.A.2, when presenting composite returns in wrap fee/SMA compliant presentations, the rm must disclose each period in which the composite does not contain actual wrap fee portfolios Related Material w w o SchweserNotes - Book m (Study Session 19, Module 37.8, LOS 37.p) w Question #2 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 1/73 10/12/2018 Learning Management System In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA) All three of these individuals have enjoyed considerable success in their careers Freeman is highly regarded for her expertise in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of xedincome and equity portfolios, respectively In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to $2 million In the e ort to attract new clients and improve the information it provided for its current clients, FPA prepared and distributed performance presentations that re ected the results of its three primary in investment styles That is, FPA presented performance results for an intermediate xed-income composite, a broad equity composite, and a balanced composite The following list describes en tre some of the actions that FPA took when preparing its performance presentations Action Number Description Accrual accounting and book values were used to compute xed-income returns Trading expenses were deducted prior to calculating returns Fee schedules were included in the presentations .o m bo ok c All composites included only assets under management and were not linked with simulated or model portfolio performance All actual fee-paying discretionary accounts were included in at least one of the three composites Asset-weighted composite returns were calculated using endof-period weightings The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results The S&P 500 index was used as the benchmark for all three composite performance presentations Equal-weighted rates of return that adjust for cash ows were used w w w Which of FPA's actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 2/73 10/12/2018 Learning Management System A) Actions and B) Actions and C) Actions and Explanation Listed below are the actions that are not GIPS-compliant and the reason for noncompliance Portfolio valuations must be based on fair value (not cost basis or book values) (Standard 1.A.2) Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using beginning-of-period values or a method that re ects both beginning-of-period values and external cash ows (Standard 2.A.3) Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as such, are not permitted to be included in composite returns When a single asset class is carved out of a multiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be allocated to the carve-out returns in a timely and consistent manner Beginning January 1, 2010, carve-out returns are not permitted to be included in single asset class composite returns unless the carve-out is actually managed separately with its own cash balance (Standard 3.A.7) Action 8: The total return for the benchmark (or benchmarks) that re ects the investment strategy or mandate represented by the composite must be presented for each annual period If no benchmark is presented, the presentation must explain why no benchmark is disclosed (Standard 5.A.6) w w w o m bo ok c en tre in Action 2: Action 9: Time-weighted rates of return that adjust for cash ows must be used Periodic returns must be geometrically linked (Standard 2.A.2) (Study Session 19, Module 37.2, LOS 37.c) Related Material SchweserNotes - Book Question #3 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 3/73 10/12/2018 Learning Management System If DeLecrette Investment Management wishes to claim compliance with the Global Investment Performance Standards (GIPS®) for their annual nancial report, the report must include which of the following statements? A) DeLecrette Investment Management claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in li ih h G S d d h B) DeLecrette Investment Management has prepared and presented this report in compliance with the Global Investment Performance Standards (GIPS®) C) DeLecrette Investment Management has prepared and presented this report in in compliance with the Global Investment Performance Standards of the CFA Institute Explanation en tre To claim compliance, a rm must meet all required composite, calculation, disclosure, and presentation Standards The rm is also encouraged to comply with all recommended Standards and must comply with local laws and regulations Firms that claim compliance to the GIPS may attach the following statement to performance presentations: bo ok c "[Insert name of rm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards [Insert name of rm] has not been indpendently veri ed." Note that no statement about CFA Institute's involvement with the preparation or review of the report is included m (Study Session 19, Module 37.2, LOS 37.b) o Related Material w w SchweserNotes - Book w Question #4 of 103 Which of the following statements most accurately describes why the Global Investment Performance Standards (GIPS) were created? To: A) meet the need for a single globally accepted set of investment performance presentation standards B) provide comparability of performance results among nations for which no presentation guidelines currently exist C) meet the need for a single globally accepted set of regulatory guidelines among developed securities markets https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 4/73 10/12/2018 Learning Management System Explanation Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute sponsored and funded the Global Investment Performance Standards Committee to develop and publish a single global standard by which all rms in all countries calculate and present performance to clients and prospective clients (Study Session 19, Module 37.1, LOS 37.a) Related Material SchweserNotes - Book in Question #5 of 103 en tre Jonathan Goolsby, a performance-reporting analyst at Handley Asset Management (HAM), is preparing after-tax returns for inclusion in a performance presentation and needs to determine the most appropriate method to incorporate the e ects of taxes on returns HAM employs taxaware portfolio management strategies If Goolsby uses the mark-to-liquidation method when bo ok c computing after-tax returns, the most likely e ect is that returns will be: A) correctly stated B) understated m C) overstated .o Explanation w w w The mark-to-liquidation method assumes all gains, whether recognized or not, are taxed each period Under this method, taxes will be overstated and returns will be understated for a portfolio that uses tax-aware strategies For example, HAM may delay selling a stock that has had capital gains to delay taxes to a future period, thus increasing the returns of the portfolio Under the mark-to-liquidation method, the returns would be calculated as if the stock had been sold and the gains realized in that period Thus increasing taxes for that period and decreasing returns (Study Session 19, Module 37.9, LOS 37.t) Related Material SchweserNotes - Book Question #6 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 5/73 10/12/2018 Learning Management System Which of the following ratios is least likely to be shown in a performance presentation under the GIPS provisions for private equity? A) Total value to residual value B) Paid-in capital to committed capital C) Cumulative distribution to paid-in capital Explanation The required ratios for presentation are: total value to paid-in capital, cumulative distributions to paid-in capital, paid-in capital to committed capital, and residual value to paid-in capital .in (Study Session 19, Module 37.7, LOS 37.o) Related Material bo ok c Question #7 of 103 en tre SchweserNotes - Book Which of the following is NOT a composite construction requirement under the Global Investment Performance Standards (GIPS)? m A) Firm composites must be de ned according to similar investment objectives and/or o strategies B) Carve-out returns excluding cash cannot be used to create a stand-alone w w composite w C) Firms must disclose the use of simulated or model portfolio results Explanation Under GIPS standard 3.A.2, composites must include only assets under management and under Standard 3.A.3 rms may not link simulated or model portfolios with actual performance Simulated, back-tested, or model portfolio results not represent the returns of actual assets under management and, thus, may not be included in composites performance results (Study Session 19, Module 37.4, LOS 37.h) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 6/73 10/12/2018 Learning Management System Question #8 of 103 Firm X currently claims compliance with the Global Investment Performance Standards (GIPS) but uses settlement-date accounting Beginning January 1, 2005, what must Firm X to remain compliant? A) Nothing, there is no change in requirements B) Begin using trade-date accounting and recalculate historical performance of its composites C) Begin using trade-date accounting .in Explanation (Study Session 19, Module 37.2, LOS 37.c) SchweserNotes - Book m Question #9 of 103 bo ok c Related Material en tre Standard 1.A.45 requires that rms use trade-date accounting for periods beginning January 1, 2005 These rms, however, will not be required to recalculate performance results that were presented in accordance with the Standards for periods prior to January 1, 2005 .o Which of the following best describes the underlying principles upon which the Global w w Investment Performance Standards (GIPS) are based? A) Uniformity and consistent application of standards for the global regulation of the w securities industry B) Fair and consistent application of a global set of regulatory requirements C) Full disclosure and fair representation of performance results Explanation The GIPS standards are a set of voluntary standards based on the fundamental principles of full disclosure and fair representation of performance results (Study Session 19, Module 37.1, LOS 37.a) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 7/73 10/12/2018 Learning Management System Question #10 of 103 Which of the following lines of argument has/have been put forth to justify the establishment of the Global Investment Performance Standards (GIPS)? A) All of these choices are correct B) To enhance consistency in the use of the standards C) To increase the dence that prospective and existing clients have in the industry Explanation (Study Session 19, Module 37.1, LOS 37.a) Related Material w w w o m Question #11 of 103 bo ok c SchweserNotes - Book en tre in The GIPS are needed are to enhance consistency in performance presentation for intercountry holdings, consistency in the use of standards, competition in global markets, and investor dence https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 8/73 10/12/2018 Learning Management System In October of 2008, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA) All three of these individuals have enjoyed considerable success in their careers Freeman is highly regarded for her expertise in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of xedincome and equity portfolios, respectively In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million In early 2010, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to $2 million In the e ort to attract new clients and improve the information it provided for its current clients, FPA prepared and distributed performance presentations that re ected the results of its three primary in investment styles That is, FPA presented performance results for an intermediate xed-income composite, a broad equity composite, and a balanced composite The following list describes en tre some of the actions that FPA took when preparing its performance presentations Action Number Description Accrual accounting and book values were used to compute xed-income returns Trading expenses were deducted prior to calculating returns Fee schedules were included in the presentations .o m bo ok c All composites included only assets under management and were not linked with simulated or model portfolio performance All actual fee-paying accounts were included in at least one of the three composites Asset-weighted composite returns were calculated using endof-period weightings The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results The S&P 500 index was used as the benchmark for all three composite performance presentations Equal-weighted rates of return that adjust for cash ows were used w w w Which of FPA's actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 9/73 10/12/2018 Learning Management System A) Actions 6, 8, and B) Actions 1, 6, and C) Actions 2, 3, and Explanation Listed below are the actions that are not GIPS-compliant and the reason for noncompliance Portfolio valuations must be based on fair value (not cost basis or book values) (Standard 1.A.2) Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using beginning-of-period values or a method that re ects both beginning-of-period values and external cash ows (Standard 2.A.3) Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as such, are not permitted to be included in composite returns When a single asset class is carved out of a multiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be allocated to the carve-out returns in a timely and consistent manner Beginning January 1, 2010, carve-out returns are not permitted to be included in single asset class composite returns unless the carve-out is actually managed separately with its own cash balance (Standard 3.A.7) Action 8: The total return for the benchmark (or benchmarks) that re ects the investment strategy or mandate represented by the composite must be presented for each annual period If no benchmark is presented, the presentation must explain why no benchmark is disclosed (Standard 5.A.6) w w w o m bo ok c en tre in Action 2: Action 9: Time-weighted rates of return that adjust for cash ows must be used Periodic returns must be geometrically linked (Standard 2.A.2) (Study Session 19, Module 37.3, LOS 37.d) Related Material SchweserNotes - Book Question #12 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 10/73 10/12/2018 Learning Management System In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA) All three of these individuals have enjoyed considerable success in their careers Freeman is highly regarded for her expertise in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of xedincome and equity portfolios, respectively In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to $2 million In the e ort to attract new clients and improve the information it provided for its current clients, FPA prepared and distributed performance presentations that re ected the results of its three primary in investment styles That is, FPA presented performance results for an intermediate xed-income composite, a broad equity composite, and a balanced composite The following list describes en tre some of the actions that FPA took when preparing its performance presentations Action Number Description Accrual accounting and book values were used to compute xed-income returns Trading expenses were deducted prior to calculating returns The fee schedules were included in the presentations .o m bo ok c All composites included only assets under management and were not linked with simulated or model portfolio performance All actual fee-paying discretionary portfolios were included in at least one of the three composites Asset-weighted composite returns were calculated using endof-period weightings The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results The S&P 500 index was used as the benchmark for all three composite performance presentations Equal-weighted rates of return that adjust for cash ows were used w w w Which of FPA's actions indicated below is NOT in compliance with the Global Investment Performance Standards (GIPS)? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 59/73 10/12/2018 Learning Management System A) Action B) Action C) Action Explanation Listed below are the actions that are not GIPS-compliant and the reason for noncompliance Portfolio valuations must be based on market values (not cost basis or book values) (Standard 1.A.2) Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using beginning-of-period values or a method that re ects both beginning-of-period values and external cash ows (Standard 2.A.6) Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as such, are not permitted to be included in composite returns Beginning January 1, 2010, a carve-out must not be included in a composite unless the carve-out is managed separately with its own cash balance For periods prior to January 2010, if carve-outs were included in a composite, cash must have been allocated to the carve-out in a timely and consistent manner (Standard 3.A.8) Action 8: The total return for the benchmark for each annual period The benchmark must re ect the investment mandate, objective, or strategy of the composite (Standard 5.A.1.e) o m bo ok c en tre in Action 2: w w Time-weighted rates of return that adjust for cash ows must be used Periodic returns must be geometrically linked (Standard 2.A.2) Action 9: w (Study Session 19, Module 37.4, LOS 37.i) Related Material SchweserNotes - Book Question #87 of 103 According to GIPS, when presenting performance to a prospective wrap fee sponsor, an investment manager must: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 60/73 10/12/2018 Learning Management System A) present performance of all wrap fee accounts in the composite being presented B) not link non-compliant performance that occurs before January 2006 with compliant performance C) disclose the names of the wrap fee sponsors when presenting sponsor-speci c composites Explanation According to standard 8.A.5, when soliciting business from potential SMA/wrap fee clients, rms must provide presentations that include all SMA/wrap fee accounts managed to the stated objective or strategy .in In standard 8.A.4, sponsor-speci c composite results are presented to an existing wrap fee sponsor, not a potential sponsor (Study Session 19, Module 37.8, LOS 37.p) SchweserNotes - Book m Question #88 of 103 bo ok c Related Material en tre According to standard 8.A.7, rms may link non-compliant performance with compliant performance as long as the non-compliant performance pertains to periods before January 2006 and only compliant data is presented for periods after January 2006 .o With respect to reporting a composite's creation date and any changes in a composite's name, w w which is a requirement of GIPS? A) Changes in a composite’s name but not its creation date w B) The creation date but not changes in a composite’s name C) Both the creation date and any changes in a composite’s name Explanation Standard 4.A.10: rms must disclose the composite creation date Standard 4.A.18: rms must disclose any changes in a composite's name (Study Session 19, Module 37.5, LOS 37.j) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 61/73 10/12/2018 Learning Management System Question #89 of 103 Which of the following descriptions are appropriate quali ers for a composite? "Small Cap" "High Duration" "Above €10 million" A) Appropriate Appropriate Not appropriate B) Appropriate Not appropriate Appropriate C) Appropriate Appropriate Appropriate in Explanation (Study Session 19, Module 37.4, LOS 37.g) Related Material m Question #90 of 103 bo ok c SchweserNotes - Book en tre All three quali ers are appropriate for a composite Note that each composite should have su cient quali ers to make it meaningful, but not too many so as to avoid fragmentation of portfolios Three portfolio managers left their previous employer two years ago to form Atomic o Investment Management The reason for their departure was a desire to be solely responsible w w for investment decisions as opposed to the consensus approach that was utilized at their old rm Atomic wants to claim compliance with the Global Investment Performance Standards (GIPS), but does not have a 5-year minimum compliance history Under the GIPS standards, w which of the following actions may Atomic take in order to claim compliance? Atomic may: A) not present its performance in compliance with the GIPS until it has established a 5year performance history B) link three years of the managers' performance history from the previous employer to the 2-year history since Atomic's inception with a clear and unambiguous di l C) present a 2-year GIPS-compliant performance history Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 62/73 10/12/2018 Learning Management System Atomic does not meet the test of performance portability under GIPS standard 5.A.48.a Thus, performance results from the previous employer cannot be linked to or used to represent Atomic's historical record In any case, Atomic is not required to present a 5-year GIPScompliant performance record Since Atomic is less than ve years old, it can claim compliance with GIPS by presenting a GIPS-compliant performance history for the two years since its inception (Study Session 19, Module 37.6, LOS 37.l) Related Material in SchweserNotes - Book en tre Question #91 of 103 Assume that on January 1, 2005, a 15-year old rm with no Global Investment Performance Standards (GIPS) compliant performance history wishes to claim compliance with the GIPS standards Which of the following accurately re ects the appropriate action for the rm to take? bo ok c A) Comply with the GIPS standards for the 5-year period January 1, 2000, through December 31, 2004, and report ve additional years of non-GIPS-compliant f d di l f h h f i h li i G S B) Comply with GIPS for the year beginning January 1, 2004, and report four additional years of performance history ( ve total) and disclose why the earlier years are not m G S li C) Comply with GIPS for the year beginning January 1, 2004, and report nine additional G S li w w Explanation o years of performance history (ten total) and disclose why the earlier years are not w In order to claim GIPS compliance, a rm must present at least ve years of annual investment performance that is compliant with GIPS If a rm or composite is less than ve years old, the performance since the inception of the rm or composite must be presented A rm may link a non-GIPS-compliant performance record to their 5-year compliant history as long as only GIPS-compliant performance is presented for periods after January 1, 2000, and the rm discloses the periods of non-compliance with an explanation of why the presentation is not GIPS compliant (Standard 4.A.15 and 5.A.1.a) (Study Session 19, Module 37.6, LOS 37.k) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 63/73 10/12/2018 Learning Management System w w w o m bo ok c en tre in Question #92 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 64/73 10/12/2018 Learning Management System In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA) All three of these individuals have enjoyed considerable success in their careers Freeman is highly regarded for her expertise in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of xedincome and equity portfolios, respectively In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to $2 million In the e ort to attract new clients and improve the information it provided for its current clients, FPA prepared and distributed performance presentations that re ected the results of its three primary in investment styles That is, FPA presented performance results for an intermediate xed-income composite, a broad equity composite, and a balanced composite The following list describes en tre some of the actions that FPA took when preparing its performance presentations Action Number Description Accrual accounting and book values were used to compute xed-income returns Trading expenses were deducted prior to calculating returns Fee schedules were included in the presentations .o m bo ok c All composites included only assets under management and were not linked with simulated or model portfolio performance All actual fee-paying accounts were included in at least one of the three composites Asset-weighted composite returns were calculated using endof-period weightings The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results The S&P 500 index was used as the benchmark for all three composite performance presentations Equal-weighted rates of return that adjust for cash ows were used w w w Which of FPA's actions indicated below is in compliance with the Global Investment Performance Standards (GIPS)? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 65/73 10/12/2018 Learning Management System A) Action B) Action C) Action Explanation Listed below are the actions that are not GIPS-compliant and the reason for noncompliance Portfolio valuations must be based on market values (not cost basis or book values) (Standard 1.A.2) Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using beginning-of-period values or a method that re ects both beginning-of-period values and external cash ows (Standard 2.A.6) Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as such, are not permitted to be included in composite returns When a single asset class is carved out of a multiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be allocated to the carve-out returns in a timely and consistent manner Beginning January 1, 2010, carve-out returns are not permitted to be included in single asset class composite returns unless the carve-out is actually managed separately with its own cash balance (Standard 3.A.8) Action 8: The total return for the benchmark for each annual period The benchmark must re ect the investment mandate, objective, or strategy of the composite (Standard 5.A.1.e) w w o m bo ok c en tre in Action 2: w Action 9: Time-weighted rates of return that adjust for cash ows must be used Periodic returns must be geometrically linked (Standard 2.A.2) (Study Session 19, Module 37.4, LOS 37.e) Related Material SchweserNotes - Book Question #93 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 66/73 10/12/2018 Learning Management System Of the following, with respect to GIPS, the one that is not a requirement and is only a recommendation is: A) how the rm de nes itself to determine the total assets B) a list of any composites that have been discontinued within the last ve years C) a list of other rms contained within a parent company Explanation Standard 4.B.5: The Standards make the recommendation that if a parent company contains multiple de ned rms, each rm within the parent company should disclose a list of the other rms contained within the parent company .in Standard 4.A.2: The de nition of the " rm" used to determine the rm's total assets and rm wide compliance is a required disclosure (Study Session 19, Module 37.5, LOS 37.j) Related Material bo ok c SchweserNotes - Book en tre Standard 0.A.10: The list must include not only all the rm's current composites but also any that have been discontinued within the last ve years Jessica Yee, a portfolio manager for the National Investing Alliance (NIA), wants to create a high m yield composite portfolio for marketing purposes from several other portfolios The portfolios to be drawn from include a high yield bond portfolio, a convertible debt portfolio, and a large o cap equity growth portfolio In the composite she did not wish to include any historical results w w from terminated portfolios, nor did she feel it was important to include the cash associated with these portfolios (since the cash was managed by another department of NIA) Yee believed that hedging was a very important element of her investment philosophy in these volatile w markets, so she delegated this responsibility to another department within NIA, but she did not wish to include their hedging results with her composite results Yee wants to be able to claim compliance under Global Investment Performance Standards (GIPS®) Question #94 of 103 Which of the following statements describes how Yee should approach the formation of the composite? A) The large cap equity growth portfolio must not be included in the composite https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 67/73 10/12/2018 Learning Management System B) The high yield bond portfolio and convertible debt portfolio should be in di erent composites since they represent di erent investment objectives C) Since the large cap equity growth portfolio is part of the overall portfolios managed by NIA it can be included in the same composite with the high yield bond and ibl d b f li Explanation bo ok c (Study Session 19, Module 37.4, LOS 37.e) en tre in Given the investment style of the composite, the only portfolios that could appropriately be included in her composite are the high yield bond portfolio and the convertible debt portfolio Thus, the large cap equity growth portfolio must not be included in the composite However, the large cap equity growth portfolio may be included in its own separate composite According to GIPS, rm composites must be de ned according to similar investment objectives and/or strategies Composites should be de ned such that clients are able to compare the performance of one rm to another Composites must be representative of the rm's products and be consistent with the rm's marketing strategy Firms are not permitted to include portfolios with di erent investment strategies or objectives in the same composite Portfolios may not be moved into and out of composites except in the case of valid, documented, client-driven changes in investment objectives or guidelines or in the case of the rede nition of the composite Related Material m SchweserNotes - Book o Question #95 of 103 w w With respect to the exclusion of terminated portfolios, is her approach correct? A) Yee should include the results of terminated portfolios w B) Terminated portfolios are allowed to be dropped from composites when the portfolio is no longer actively managed C) Yee should include the results of terminated portfolios through the date the portfolio was last managed Explanation Terminated portfolios must be included in the historical record of the appropriate composite(s) through the last full measurement period that the portfolio was under management This requirement prevents the inclusion of the performance of a terminated portfolio for partial periods in a composite's return Also, retaining the performance of a terminated portfolio while it was still being managed to a composite's strategy prevents survivorship bias (Study Session 19, Module 37.4, LOS 37.e) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 68/73 10/12/2018 Learning Management System Related Material SchweserNotes - Book Question #96 of 103 Which of the following best describes the cash portfolio results with respect to the overall portfolio results? A) Since the cash component of the portfolio is managed by another department it is in not necessary to include it in the overall portfolio results B) The returns from the cash component of Yee’s portfolio must be included in the en tre overall portfolio results C) If a third party entity manages the cash component of the portfolio it is not necessary to include the cash returns in the overall portfolio results bo ok c Explanation o m The returns from the cash component of her portfolio must be included in her portfolio results, even though it may be managed by another department of the rm (for GIPS compliance, the Firm must claim compliance) Cash returns must be included in portfolio total-return calculations as long as the portfolio manager has control over the amount of the portfolio that is allocated to cash This requirement stands even if the manager does not actually control the investment of the cash, as the case is when excess cash is held in a money market account Keep in mind that the inclusion of cash is likely to reduce portfolios experiencing positive gains w w (Study Session 19, Module 37.4, LOS 37.e) Related Material w SchweserNotes - Book Question #97 of 103 Is Yee correct in excluding the hedging activity results with her portfolio results? A) Yes, since the use of hedging is negligible the hedging results need not be included in the overall portfolio results B) Yes, since Yee is not actually managing the hedging activities she should not include these results into the overall portfolio results https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 69/73 10/12/2018 Learning Management System C) No, given Yee’s investment philosophy, the hedging results should be included in her portfolio results Explanation Since hedging is an important part of her investment activity, the hedging results must also be included in her portfolio results in order to be GIPS compliant Such results are considered to be carve-out returns and may not be included in a separate composite According to GIPS, carve-out returns excluding cash cannot be used to create a stand-alone composite When a single asset class is carved out of a multiple-asset portfolio and the returns are presented as part of a single-asset composite, cash must be allocated to the carve-out returns and the allocation method must be disclosed Beginning January 1, 2010, carve-out returns must not be included in single asset class composite returns unless the carve-outs are actually managed separately with their own cash allocations en tre Related Material in (Study Session 19, Module 37.4, LOS 37.e) Question #98 of 103 bo ok c SchweserNotes - Book A composite contains portfolios A, B, C and D that had returns during the year of 3.8 percent, -4.6 percent, 16.1 percent and 7.4 percent respectively Which of the following statements best m describes the provisions of GIPS with respect to measures of dispersion? o A) The standard deviation should be shown using either equal weightings or asset w w weightings B) No measure of dispersion needs to be presented C) The standard deviation is the most appropriate measure, but the rm should w disclose whether the denominator in the calculation is the number of portfolios or h b Explanation f f li i No measures of dispersion need to be shown since the composite contains fewer than six portfolios (Study Session 19, Module 37.6, LOS 37.m) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 70/73 10/12/2018 Learning Management System Question #99 of 103 Which of the following items is NOT required to be included as part of a private equity performance presentation? A) Capital drawn down from partners during the year B) Gross-of-fees since inception internal rate of return C) Net-of-fees since inception internal rate of return Explanation in The SI-IRR must be presented both gross and net of fees Since inception paid-in capital must be shown not just the capital drawn down for the year (Study Session 19, Module 37.7, LOS 37.o) en tre Related Material Question #100 of 103 bo ok c SchweserNotes - Book Which of the following is NOT a Global Investment Performance Standards (GIPS) input data m requirement? o A) For periods beginning January 1, 2005, rms must use settlement date accounting w w B) Portfolio valuations must be based on fair value (not cost basis or book values) C) For periods beginning January 1, 2010, portfolios must be valued on the date of all large cash ows w Explanation Standard 1.A.5 states that for periods beginning January 1, 2005, rms must use trade date accounting Standard 1.A.3 states that for periods beginning January 1, 2010, rms must value portfolios on the date of all large cash ows (Study Session 19, Module 37.2, LOS 37.c) Related Material SchweserNotes - Book Question #101 of 103 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 71/73 10/12/2018 Learning Management System Which of the following is NOT a Global Investment Performance Standards (GIPS) presentation and reporting requirement? A) The composite creation date B) A measure of the dispersion of individual component portfolio returns around the aggregate composite return C) Performance for periods of less than one year must be annualized Explanation Standard 5.A.4 requires that performance for periods of less than one year must not be annualized .in (Study Session 19, Module 37.6, LOS 37.k) en tre Related Material Question #102 of 103 bo ok c SchweserNotes - Book Achieving comparability among investment management rms' performance presentations requires uniformity in methods used to calculate returns Which of the following statements m concerning Global Investment Performance Standards (GIPS) calculation methodology is least o accurate? w w A) Performance must be calculated prior to the deduction of all trading expenses B) In both the numerator and the denominator, the market values of xed-income securities must include accrued income w C) If a rm sets a minimum asset level for portfolios to be included in a composite, no portfolios below that initial asset level can be included in that composite Explanation Performance must be calculated after the deduction of all trading expenses (GIPS Standard 2.A.4) It's possible due to market volatility that portfolio values may temporarily fall below the minimum allowable asset level to be included in a composite Those portfolios are not automatically excluded from the composite (Study Session 19, Module 37.3, LOS 37.d) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 72/73 10/12/2018 Learning Management System Question #103 of 103 The investment management rm of Rakes, Finch, and Weeks (RFW) manages several feepaying portfolios to a long-short strategy RFW does not ever intend to market this strategy, so they not include the performance of these portfolios in any of the rm's composites Which of the following statements indicates what RFW must if it intends to claim compliance with the Global Investment Performance Standards (GIPS)? RFW must: A) disclose the fact that the long-short portfolios are not included in any of the rm's in composites B) include the long-short portfolios in at least one of the rm's composites that the rm does not intend to market Explanation en tre C) include the long-short portfolios in a composite of portfolios managed to a strategy bo ok c GIPS Standard 3.A.1 requires that all actual fee-paying discretionary portfolios are included in at least one composite It is irrelevant whether or not the rm ever plans to market a particular strategy to which a portfolio is being managed If the portfolio is fee-paying and discretionary, it must be included in a composite Related Material w w w o SchweserNotes - Book m (Study Session 19, Module 37.4, LOS 37.f) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83448709/print 73/73 ... Session 19, Module 37 .7, LOS 37 .o) Related Material m SchweserNotes - Book w w o Question #46 of 1 03 All of the following are requirements of the Global Investment Performance Standards (GIPS)... Session 19, Module 37 .4, LOS 37 .g) Related Material Question #20 of 1 03 bo ok c SchweserNotes - Book As countries adopt the Global Investment Performance Standards (GIPS), which of the following m... the establishment of the Global Investment Performance Standards (GIPS)? A) All of these choices are correct B) To enhance consistency in the use of the standards C) To increase the dence that prospective