THROUGH 60 RELATE TO GLOBAL INVESTMENT PERFORMANCE STANDA...

Questions 55 through 60 relate to Global Investment Performance Standards Eleanor Moser Case Scenario Eleanor Moser, portfolio manager at Boise Securities, an asset management firm, has been hired by Adrian Gustov. Gustov represents Maritime Corp’s pension plan’s investment portfolio and has approached Moser based on Boise’s advertised claim of compliance to the Global Investment Performance Standards (GIPS). During her first meeting with Gustov, Moser states, “Compliance with the GIPS standards is entirely voluntary. Once a firm claims compliance, it must apply the standards with the goal of full disclosure and fair representation.” Gustov is particularly interested in Boise’s international equity composite and asks Moser to demonstrate how the composite’s performance complies with the standards. Moser responds by stating, “All composite returns are calculated by multiplying individual portfolio returns by the beginning composite assets held in each portfolio and summing the results.” Next, Moser collects data concerning the international equity composite’s assets and related external cash flow activity (Exhibit 1). Exhibit 1 International Equity Composite Assets and External Cash Flows Portfolio ($ 000) Cash flow weighting factor A B C Beginning assets (March 31) 91.5 124.8 140.0 External Cash flows 2 April 0.933 –4.0 + 5.0 + 2.0 10 April 0.667 + 3.8 + 6.0 + 4.0 27 April 0.100 + 5.0 –1.2 + 3.6 Ending assets (April 30) 96.9 135.0 150.8

CFA Level III Mock Exam 3 – Solutions (PM)

Boise’s international equity composite was constructed on January 1, 2006. Composite policies did not meet the requirements of the GIPS standards at that time. Boise’s chief compliance officer, Ramon Martin, drafted three policies on December 31, 2006. These policies were intended to ensure that composites fairly and accurately reflected the performance of the underlying portfolios. Policy 1: All foreign emerging and developed market equities are included in the composite. To capture active returns, the former category is managed using a core-satellite approach while the latter is managed using a short-extension strategy. Policy 2: If a portfolio’s total asset value falls by at least $2 million for two consecutive periods, it will be removed from the composite along with its performance record. Portfolio B belongs to a risk-averse client who exhibits home bias with respect to his investments. His entire portfolio is invested in foreign equities. The client has requested Moser to dispose his foreign stock allocation and avoid further foreign trades. 49. With respect to the statement made during her meeting with Gustov, Moser is most likely: A. correct. B. incorrect, compliance with the GIPS standard is compulsory. C. incorrect, full disclosure cannot be made in performance situations where a standard does not exist. 50. Is Boise’s composite return calculation policy in compliance with the requirements of the GIPS standards? A. Yes. B. No, composite returns must be time-weighted. C. No, composite returns must be weighted according to beginning asset values and external cash flows. 51. Using the data in Exhibit 1, the proportion of portfolio B relative to the composite’s beginning assets and weighted cash flows is closest to: A. 31.20% B. 33.34% C. 35.89% 52. With respect to Policy 1, has Boise complied with the GIPS standards by including developed and emerging equities in one composite? B. No, they each represent distinct geographical segments. C. No, they are each managed using a distinct investment strategy. 53. Is Policy 2 consistent with the GIPS standards? B. No, the historical performance record must not be removed. C. No, portfolios falling below the minimum threshold should be withdrawn at the end of the first period. 54. In order to comply with the GIPS standards, Boise’s best course of action with respect to client B’s portfolio is to: A. remove the portfolio from the composite. B. transfer the portfolio to a more suitable composite. C. retain the portfolio but provide adequate disclosure.