) BASED ON THE INFORMATION PROVIDED REGARDING THE TAX-ADVANTAGED SAV...

6.) Based on the information provided regarding the tax-advantaged savings plan, the Harvest supervisor is least likely to have violated the Standard relating to: A. Responsibilities of Supervisors B. Independence and Objectivity C. Suitability CME The United States–based CME Foundation serves a wide variety of human interest causes in rural areas of the country. The fund’s investment policy statement sets forth allocation ranges for major asset classes, including U.S. large, mid-, and small-cap stocks, international equities, and domestic and international bonds. When revising its outlook for the capital markets, CME typically applies data from GloboStats Research on the global investable market (GIM) and major asset classes to produce long-term estimates for risk premiums, expected return, and risk measurements. Although they have worked with GloboStats for many years, CME is evaluating the services of RiteVal, a competing research firm, via a trial offer. Unlike the equilibrium modeling approach applied to GloboStats’s data, RiteVal prefers to use a multifactor modeling approach. Both research firms also provide short- and long-term economic analysis. CME has asked Pauline Cortez, chief investment officer, to analyze the benefit of adding U.S. real estate equities as a permanent asset class. To determine the appropriate risk premium and expected return for this new asset class, Cortez needs to determine the appropriate risk factor to apply to the international capital asset pricing model (ICAPM). Selected data from GloboStats is shown in Exhibit 1. Exhibit 1 Selected Data from GloboStats Covariance Integration Asset Class Standard Deviation with GIM Sharpe Ratio with GIM U.S. real estate 14.0% 0.0075 0.60 n/a Global investable market 0.36 Additional Information Risk-free rate: 3.1% Expected return for the GIM: 7.2% Cortez’s colleague Jason Grey notes that U.S. real estate is a partially segmented market. For this reason, Grey recommends using the Singer–Terhaar approach to the ICAPM and assumes a correlation of 0.39 between U.S. real estate and the GIM. Cortez reviews RiteVal data (Exhibit 2) and preferred two-factor model with global equity and global bonds as the two common drivers of return for all other asset classes. Exhibit 2 Selected Data from RiteVal Factor Sensitivities Asset Class Global Equity Global Bonds Residual Risk (%) U.S. real estate equities 0.60 0.15 4.4 Global timber equities 0.45 0.20 3.9 Additional Information Variances 0.025 0.0014 Correlation between global equities and global bonds: 0.33 Grey makes the following observations about the two different approaches the research firms use to create their respective covariance matrices: • GloboStats uses a historical sample to estimate covariances, whereas • RiteVal uses a target covariance matrix by relating asset class returns to a particular set of return drivers. Grey recommends choosing the GloboStats approach. Cortez states: I disagree. We will use the results of both firms by calculating a weighted average for each covariance estimate. Grey finds that RiteVal’s economic commentary reveals a non-consensus view on inflation. Specifically, they believe that a near-term period of deflation will surprise many investors but that the current central bank policy will eventually result in a return to an equilibrium expected level of inflation. Grey states: If RiteVal is correct, in the near-term our income producing assets, such as Treasury bonds and real estate, should do well because of the unexpected improvement in purchasing power. When inflation returns to the expected level, our equities are likely to perform well. Cortez points out that RiteVal uses an econometrics approach to economic analysis, whereas GloboStats prefers a leading indicator–based approach. Cortez and Grey discuss these approaches at length. Cortez comments: The big disadvantage to the leading indicator approach is that it has not historically worked because relationships between inputs are not static. One major advantage to the econometric approach is quantitative estimates of the effects on the economy of changes in exogenous variables.”