TO 60 RELATE TO GLOBAL INVESTMENT PERFORMANCE STANDARDS B...

Questions 55 to 60 relate to Global Investment Performance Standards

Bud Walter Case Scenario

Bud Walter is the chief investment officer of Wryte Capital Management (WCM). He is meeting with

T.M. McGourn, a prospective client, to discuss Wryte’s investment performance as presented in Exhibit

1 and subsequent disclosure notes:

Exhibit 1

Wryte Capital Management

U.S. Large-Cap Equity Composite

Number

Gross

Firm

Benchmark

Composite

Internal

Assets ($m)

Assets

of

Dispersion

Return

Return

Year

%

Portfolios

($m)

2007 15 15 5.2 20 100 175

2008 22 20 6.1 40 200 275

2009 –20 –25 5.7 30 150 200

2010 11 10 5.2 45 225 300

2011 20 20 4.7 50 250 350

Wryte Capital Management (WCM) has prepared this report in compliance with Global Investment

Performance Standards (GIPS). The U.S. Large-Cap Equity Composite has been independently verified by

a qualified third party to be GIPS compliant. The verification report was issued only for the composite

and not for WCM. It states that during 2009, 2010, and 2011, WCM complied with all composite

construction requirements for the composite and that WCM policies are designed to calculate and

present performance in compliance with GIPS standards.

Notes:

1. The firm is defined as an independent investment manager that invests exclusively in U.S. large-cap,

U.S. midcap, and U.S. small-cap equity securities for U.S. resident clients. WCM’s policy for valuing

portfolios and calculating performance is available upon request. WCM’s calculation methodology is

to use time-weighted rates of return. Subperiod rates of return are geometrically linked. Cash

equivalent instruments are included in rate-of-return calculations. Returns are calculated quarterly

or when large external cash flows (as defined by WCM) take place.

2. The U.S. Large-Cap Equity Composite includes all actual fee-paying portfolios. Each portfolio

contains positions in large-cap stocks, which are selected by WCM following an extensive

independent analysis. Nondiscretionary portfolios are not included in any composite. WCM does not

include in any composite its large-cap model portfolio, which is utilized during the investment

selection process.

3. The composite benchmark is the S&P 500 Index, which represents the size-weighted returns of the

500 largest (as measured by market capitalization) U.S.-based publicly traded companies.

4. Gross-of-fees returns are presented before investment management fees and custodial fees but

after trading expenses. All clients pay an investment management flat fee of 75 basis points on the

month-end account value plus a 10-basis-point performance fee whenever the composite return

exceeds the benchmark return by 100 basis points.

5. Internal dispersion is the equal-weighted standard deviation of the annual gross returns of the five

portfolios included in WMC’s Large-Cap Equity Composite.

McGourn asks Walter why he uses standard deviation as the measure of internal dispersion and

whether there are better dispersion measures. Walter responds, “Standard deviation has the advantage

of comparability across investment firms. Other measures, such as the high/low range and the

interquartile range, are skewed by outliers.”

Finally, McGourn asks Walter about WCM’s policies regarding the valuation of its investments. Walter

states that WCM uses a valuation hierarchy based on items 1 through 4 as follows:

Item 1. Observable quoted market prices for similar investments in active markets.

Item 2. Quoted prices for similar investments in markets that are not active.

Item 3. Market-based inputs other than quoted prices that are not observable for the investment.

Item 4. When no quotes or other market inputs are available, we use WCM estimates based on

quantitative models and assumptions.

55. Is WCM most likely correct in claiming compliance based on the verification report?

A. Yes

B. No, because of the level at which verification is claimed

C. No, because of the timeframe for which verification is claimed

56. WCM’s methodology for calculating performance, as disclosed in Note 1, is least likely consistent

with GIPS standards for:

A. external cash flows.

B. geometrically linked returns.

C. frequency of return calculations.

57. Is WCM most likely compliant with GIPS required standards for composite construction as

disclosed in Note 2?

A. Yes

B. No, because of how the large-cap model portfolio is treated

C. No, because of how nondiscretionary portfolios are treated

58. With respect to gross-of-fees returns, Note 4 is least likely compliant with GIPS required

standards in its treatment of:

A. custodial fees.

B. performance fees.

C. trading expenses.

59. With respect to relative merits of internal dispersion measures, Walter is least likely correct

about:

A. high/low range.

B. interquartile range.

C. standard deviation.

60. Is Walter’s response to McGourn’s inquiry regarding WCM’s valuation hierarchy most likely

correct?

A. Yes.

B. No, item 4 from the valuation hierarchy should be excluded.

C. No, the valuation hierarchy should be reordered as item 2, item 1, item 3, and item 4.