) 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.