THROUGH 60 RELATE TO GLOBAL INVESTMENT PERFORMANCE STANDA...

Questions 55 through 60 relate to Global Investment Performance Standards Brooks Wealth Management Case Scenario Brooks Wealth Management (BWM) is an asset advisory firm situated in Brooklyn, New York. BWM manages the accounts of individual clients. Its subsidiary, Thuraiya Associates, handles institutional client accounts. Each firm has its own team of portfolio managers, trading desks, and marketing staff. Managers from both departments base their investment decisions on research reports issued by a centralized in-house research department. Access to this department is shared. BWM is currently in the process of seeking compliance with the Global Investment Performance Standards (GIPS). Three of its policies are believed to comply with the requirements of these standards. Large External Cash Flows: Portfolios belonging to the developed market equity composite are revalued when capital equal to 10% of the fair value is contributed or withdrawn. Portfolios belonging to the emerging market equity composite are revalued when capital equal to 30% of the fair value is contributed or withdrawn. This policy is documented. Portfolio Valuation: The beginning value of investments is measured at cost. Subsequent to initial recognition, investments are valued at fair value. Valuation Frequency: Due to the illiquid nature of emerging market investments, portfolios belonging to the emerging market equity composite are revalued semi-annually. Liquid investments are revalued on the last day of the calendar month. James Marco, BWM’s client, has requested BWM to demonstrate how his account’s performance is calculated in accordance with the GIPS standards. Dmitri Solvang, CFA, Marco’s portfolio manager, compiles relevant portfolio information (Exhibit 1). Exhibit 1 Marco’s Portfolio Activity for the Month of January, 2011 (in $) January 1 (Beginning value) 180,000 External cash flows: 12 January + 4,500 27 January ─ 3,450 Value on 12 January* 197,500 Value on 27 January* 220,000 January 31, 2010 (Ending value) 222,000 *Portfolio values include the relevant cash flows When presenting performance to clients, Solvang believes it is necessary to report internal dispersion of returns earned by individual portfolios in the composite. Such information will enable users to evaluate how consistently the firm was able to achieve its strategy across individual portfolios. To measure internal dispersion, BWM reports an annual VAR for all measured portfolios on an annual basis. Gene Davis is another client of BWM. Her contract with the firm expires on August 31, 2011. Unsatisfied with her account’s performance, she instructs her portfolio manager to cease trading and liquidate her holdings with immediate effect on August 12. Her account’s performance is calculated on a monthly basis. 55. Which of the following entities meets the definition of a firm as outlined by the GIPS standards? A. both entities. B. BWM only. C. Thuraiya Associates only. 56. BWM’s Large External Cash Flows policy most likely satisfies the requirements of the GIPS standards with respect to: A. both composites. B. the developed market equity composite only. C. the emerging market equity composite only. 57. Do BWM’s policies concerning portfolio valuation and valuation frequency, respectively, satisfy the requirements of the GIPS standards? Portfolio Valuation Valuation Frequency A. No No B. No Yes C. Yes No 58. The true time-weighted rate of return on Marco’s portfolio is closest to: A. 13.1%. B. 18.6%. C. 22.4%. 59. Does BWM’s internal dispersion policy satisfy the GIPS standards? A. Yes. B. No, firms are required to report VAR on a monthly basis. C. No, VAR is not an acceptable measure of internal dispersion. 60. In order to comply with the requirements of the standards, BWM’s best course of action with respect to Davis’s account at a minimum, is to: A. retain her performance record up to July 31, 2011. B. retain her performance record up to August 12, 2011. C. transfer her performance record to her new asset advisor.