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

Questions 55 to 60 relate to Global Investment Performance Standards Walk Associates Case Scenario Walk Associates (WA) is a firm providing brokerage and asset management services. The firm is seeking to present its financial statements in compliance with the requirements and recommendations of the Global Investment Performance Standards (GIPS). Clarence Long is WA’s senior compliance officer who will be overseeing the conversion process. Long evaluates the performance presentation of WA’s large-cap equity composite whose equity holdings are benchmarked to the Russell 3000 index (Exhibit 1). The composite commenced on January 1, 2010. The presentation has been prepared by a senior equity fund manager and includes note disclosures. During his evaluation of the presentation, Long identifies numerous inconsistencies which require rectification. Exhibit 1: Large-Cap Equity Composite Performance Presentation and Note Disclosures Composite Value of Benchmark Total Gross-of-Cash Non-Holdings Discretionary Firm Downside Fees Assets Returns ($ Deviation ($ millions) (%) Millions) Year 2010 8.9 7.8 2.5 0.1 0.1 - 4.5% 2011 9.1 9.0 2.8 0.2 0.1 - 8.8% 2012 9.5 9.5 3.4 0.1 0.3 - 2.2% 2013 9.0 9.8 3.0 0.3 0.2 - 7.1% 2014 8.9 9.8 3.1 0.3 0.4 - 12.0 Note 1: Gross-of-fees returns represent a return net of an all-in-fee comprising advisory, custody and administrative fees. The portion of advisory fees including actual trading expenses has been omitted from return calculations as these expenses are highly variable and an estimate for trading expenses cannot otherwise be derived with a reasonable degree of accuracy. Note 2: Total firm assets include discretionary fee- and non-fee paying portfolios. Note 3: Cash holdings represent investments in Treasury bills which are being managed by a client-designated external fixed-income specialist firm. Returns from cash holdings have been included in portfolio return calculations. Note 4: The firm routinely employs option strategies such as protective put and bear spreads to provide downside protection on its equity holdings. Note 5: Due to the existence of embedded options for hedging purposes, the firm has elected to present downside deviation as an additional risk measure to standard deviation, which assumes normal distribution and is thus inappropriate for evaluating the performance of a skewed return distribution. Note 6: Non-discretionary portfolios include those managed with an active mandate but are prohibited by portfolio holders from participating in small-cap equities. Long would like to evaluate how composite portfolio returns are calculated and thus breaks down the performance of one portfolio in terms of cash flow activity and market values for a five month period (Exhibit 2). Exhibit 2: Five-Month Portfolio Valuation and External Cash Flow Activity (2014-2015) Market Value Market value External Cash Including Cash Portfolio Date ($) Flows ($) 31 December 2014 250,000 + 15,000 270,000 25 February 2015 275,000 - 2,000 280,000 29 March 2015 282,000 + 3,500 286,000 16 April 2015 275,000 + 4,000 285,000 30 April 2015 285,000 - 1,000 283,000 55. WA’s fee presentation policy presented in Note 1 is inconsistent with the requirements of the GIPS standards and requires modification. Which of the following statements represents an appropriate adjustment? A. Trading expenses should be included even if they cannot be estimated with accuracy. B. Administrative fees must be excluded as they are generally not within the control of a firm. C. The portion of advisory fees including actual trading expenses must represent the sole deduction from gross-of-fees returns. 56. Are Note 2 and Note 3 consistent with the requirements and recommendations of the GIPS standards? Note 2? Note 3? A. Consistent Inconsistent B. Inconsistent Consistent C. Inconsistent Inconsistent 57. Note 4 is inconsistent with the requirements and recommendations of the GIPS standards with respect to WA’s use of derivatives instruments. Which of the following has been omitted by the disclosure and represents a violation? A. presence. B. characteristics. C. frequency of use. 58. Is the firm’s decision to include downside deviation as a measure of internal dispersion appropriate (Note 5)? A. Yes. B. No, the firm may only present standard deviation as a measure of risk. C. No, the GIPS glossary does not define downside deviation as a measure of risk. 59. Has the firm appropriately classified its non-discretionary portfolios (Note 6)? B. No, the restriction does not impede the investment process. C. No, client restrictions on the portfolio manager do not render a portfolio as non-discretionary. 60. Using the data in Exhibit 2, calculate the rate of return for the portfolio for the 1

^st

quarter of 2015 using revaluing the large cash flow methodology. A. 6.21%. B. 16.32%. C. 17.42%.