) WITH RESPECT TO ITS CURRENT COMPLIANCE OFFICER, DO TWAIN'S ACTIONS...

6.) With respect to its current compliance officer, do Twain's actions and procedures most

likely comply with the recommendations and requirements of the Asset Manager Code of

Professional Conduct?

A.

Yes

B.

No, with regard to reporting to the CEO

C.

No, with regard to independence

Answer = C

According to the recommendations and guidance in the Asset Manager Code because

the compliance officer should be independent of any investment and operations

personnel.

Asset Manager Code of Professional Conduct, by Kurt Schacht, CFA, Jonathan J. Stokes,

and Glenn Doggett, CFA

Appendix 6–D2

Allison

Amy Allison is a fund manager at Downing Securities. The third quarter ends today, and she is

preparing for her quarterly review with her five largest U.S.-based clients. To complete her

analysis, she has obtained the market data in Exhibit 1.

Exhibit 1

Market Data As of 30 September

Level of NASDAQ 100 Index

1223.14

Level of S&P 500 Index

984.03

Level of S&P/Barra Growth Index

496.24

Level of S&P/Barra Value Index

484.28

Price of December S&P 500 Index futures contract

$245,750

Price of December S&P/Barra Growth futures contract

$117,475

Price of December S&P/Barra Value futures contract

$120,875

Beta of S&P/Barra Growth futures contract

1.15

Beta of S&P/Barra Value futures contract

1.03

Price of December U.S. Treasury-bond futures contract

$106,906

Implied modified duration of U.S. Treasury-bond futures contract

6.87

Macaulay duration of U.S. Treasury-bond futures contract

7.05

Allison’s assistant has prepared the following summaries of each client’s current situation,

including any recent inquiries or requests from the client.

· Client A has a $20 million technology equity portfolio. At the beginning of the

previous quarter, Allison forecasted a weak equity market and recommended adjusting

the risk of the portfolio by reducing the portfolio’s beta from 1.20 to 1.05. To reduce the

beta, Allison sold NASDAQ 100 futures contracts at $124,450 on 25 December. During

the quarter, the market decreased by 3.5%, the value of the equity portfolio decreased

by 5.1%, and the NASDAQ futures contract price fell from $124,450 to $119,347. Client

A has questioned the effectiveness of the futures transaction used to adjust the

portfolio beta.

· Client B’s portfolio holds $40 million of U.S. large-cap value stocks with a portfolio

beta of 1.06. This client wants to shift $22 million from value to growth stocks with a

target beta of 1.21. Allison will implement this shift using S&P/Barra Growth and

S&P/Barra Value futures contracts.

· Client C anticipates receiving $75 million in December. This client is optimistic about

the near-term performance of the equity and debt markets and does not want to wait

until the money is received to invest it. The client wants Allison to establish a position

that allocates 60% of the money to a well-diversified equity portfolio with a target beta

of 1.00 and 40% of the money to a long-term debt portfolio with a target modified

duration of 5.75. Allison plans to use the December U.S. Treasury-bond futures to

establish the debt position.

· Client D’s $100 million portfolio contains $60 million in U.S. large-cap stocks, $20

million in U.S. Treasury bills, and $20 million in U.S. Treasury bonds. The client wants to

create a synthetic cash position because he believes that in three months, the level of

the S&P 500 Index will be 925.00, and Treasury bond yields will have declined.

· Client E’s $60 million portfolio contains $40 million in large-cap growth stocks and

$20 million in U.S. Treasury bonds. The beta of the stock portfolio is 1.25 and the

duration of the bond portfolio is 5.0. The client believes that macro economic conditions

over the next three months are such that the level of the S&P/Barra Growth Index will

be 400.00 and the price of the U.S. Treasury bond futures contract will be $110,400.

· Client F has $10 million in cash and is optimistic about the near-term performance

of U.S. large-cap stocks and U.S. Treasury bonds. The client anticipates positive

performance for approximately three months. Client F asks Allison to implement a

strategy that will create profit from this view if it proves to be correct.