1、Sample Level III Item-Set Questions Questions 1 through 6 relate to Ethical and Professional Standards. Weiying Shao Scenario Weiying Shao, CFA, is an investment officer employed by Zhang Financial Services. Zhang provides wealth management services solely to high net worth individuals and has adopt
2、ed the CFA Institute Standards and Asset Manager Code of Conduct. Shao receives a request from a client asking for an itemized accounting of the actual fees and other costs charged to them for the year. Shao sends the client a document itemizing management fees paid by the client along with an expla
3、nation as to how the fees were derived. Zhang has expanded its services recently to include proprietary mutual funds. Two experienced and respected research analysts were promoted to manage the new mutual funds. Shao meets with Guohua Xu, a client who holds a diversified portfolio of funds. Traditio
4、nally, Shao has invested client assets in long-established funds with strong performance and management continuity. Because he has great respect for Zhangs new products and their portfolio managers, Shao suggests investing a portion of Xus portfolio in one of the new Zhang funds. He recommends a fun
5、d with investment objectives similar to those of Xu. Shao provides performance data based on a simulated application of the funds approach over the past 18 months. He adds, “The new funds simulated performance is comparable to the performance of your current holdings over that period.” Several clien
6、ts ask Shao about hedge funds. After carefully screening for risk and return characteristics, Shao recommends selected hedge funds he finds appropriate for even conservative clients. The funds have had excellent performance so Shao believes they are appropriate despite their three year lock out prev
7、ision. He discusses his research and recommendations with a colleague who responds “I dont believe hedge funds are appropriate for any of our conservative clients, especially those with short-term liquidity needs.” Periodically Shao reviews Zhangs confidential proxy voting policy that is disclosed t
8、o clients only upon request. The policy directs investment officers to be selective when reviewing proxies, and to avoid spending time reviewing and voting routine proxies. In such cases, Zhang considers the cost involved for the client to be greater than the benefit that the client would receive. Z
9、hang has strict trade allocation procedures developed in accordance with the CFA Institute Standards and Asset Manager Code of Conduct. The firm distributes copies of the procedures to clients annually. Occasionally, Shao receives notice from the trading desk at the close of the day informing him th
10、at his block trades were only partially filled. Recently, when the trading desk could not execute the full $750,000 in stock that he had requested for two accounts, he allocated $100,000 of the stock to the $5 million dollar private account and the remaining $500,000 of stock to a $25 million dollar
11、 institutional account. During the next month, Zhangs founder is accused by regulatory authorities of a number of violations including misappropriation of client funds. The same day, a team of senior portfolio managers leave Zhang to start their own firm. Zhang instructs its personnel not to discuss
12、 either of these developments with current or prospective clients. 1. Are the fee disclosures made by Shao to his client consistent with the CFA Institute Asset Manager Code of Professional Conduct? A. No. B. Yes, because Shao disclosed how fees are derived. C. Yes, because Shao itemized the managem
13、ent fees paid on the clients behalf. 2. By recommending that Xu switch a portion of his portfolio to a new Zhang fund, does Shao violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he has a conflict of interest as the new funds are proprietary. C. Yes, because the fun
14、d data used in the performance comparison was simulated. 3. By recommending hedge funds, does Shao violate any CFA Institute Standards? A. No. B. Yes, because hedge funds have risk characteristics that are not suitable for conservative investors. C. Yes, because the hedge funds recommended are not s
15、uitable for conservative investors with short-term liquidity requirements. 4. Is Zhangs proxy voting policy consistent with the requirements and recommendations of CFA Institute Standards and the Asset Manager Code of Conduct? A. Yes. B. No, because the proxy voting policy should be disclosed to all
16、 clients. C. No, because voting of all proxies is a part of the management of client investments. 5. When allocating the shares on the partially filled block order does Shao violate any CFA Institute Standards? A. No. B. Yes, because he fails to disclose the firms trade allocation policies. C. Yes,
17、because he should allocate shares to client accounts only after the order is completely filled. 6. According to the CFA Institute Asset Manager Code of Conduct, Zhang must disclose the information regarding its: A. founder only. B. team of senior portfolio managers only. C. both the founder and the
18、team of senior portfolio managers. Questions 7 through 12 relate to Risk Management Applications of Derivatives. Joenia Dantas Case Scenario Joenia Dantas is a financial risk manager for Alimentos Serra (AS), a Brazilian manufacturer and exporter of soybean-based food products. AS is a privately hel
19、d corporation, wholly owned by Cesar Serra. Recently, AS took out a R25,000,000, four-year, floating-rate bank loan requiring semi-annual payments of interest based on SELIC (Banco Central do Brasils overnight lending rate) plus a spread of 4.50 percent and repayment of principal at maturity. Serra
20、believes that interest rates will rise in the near future and worries that AS will be unable to absorb the higher loan costs associated with an increase in rates. Dantas tells him that she will convert the loan to a 10.80 percent fixed rate by entering into the pay-fixed side of a four-year, R25,000
21、,000 notional principal interest rate swap with semi-annual payments that exchanges SELIC for a fixed rate of 10.80 percent. She explains that the swap will act as a hedge for the loan, reducing the companys net cash flow risk and net market value risk. Discussions with Dantas about using interest r
22、ate swaps to reduce risk cause Serra to think about the fixed income portion of his personal investment portfolio, which includes R12.0 million in bonds that have a modified duration of 5.50 years. Serras beliefs about rising interest rates make him want to reduce the bond portfolios modified durati
23、on to 2.00 years using interest rate swaps. In order to determine the correct swap position, he needs to learn how to calculate the modified duration of a swap. He asks Dantas how to do this. She explains it to him, using the example described in Exhibit 1. Exhibit 1 Data for Swap Example Maturity o
24、f swap 4 years Payment structure semiannual Fixed rate on swap 10.8% Duration of 4-year, 10.8% coupon bond 2.91 years Serra decides to use a swap that has a modified duration of -2.40 years for the pay-fixed side to reduce his bond portfolios duration to the desired level. Dantas knows that AS curre
25、ntly needs to borrow an additional R30,000,000 for 5 years to fund its growth. Brazilian credit markets have tightened and it would cost 17.70 percent per year to borrow this amount locally, but AS can obtain a yen-denominated loan at a fixed rate of 9.50 percent. This would expose it to substantial
26、 currency risk. A 5-y e a r currency swap is available in which AS would pay interest in real to the counterparty at 12.20 percent and receive interest in yen from the counterparty at 7.10 percent. The current exchange rate is 40/R. In addition to the current needs, in six months AS will enter into
27、a four-year, quarterly payment, R50,000,000 loan to fund local projects. Dantas expects to borrow these funds at a floating rate and convert the loan to fixed using an interest rate swap. She explains to Serra that AS can commit to a fixed rate of 14.3 percent for the future loan by buying a payer s
28、waption today with an exercise rate of 14.3 percent for a four-year swap with quarterly payments and a notional principal amount of R50,000,000. 7. Dantas explanation of her plan to convert the four-year loan from floating to fixed is most likely: A. correct. B. incorrect, because the fixed loan rat
29、e will be 15.30%. C. incorrect, because the swap should be entered to pay SELIC. 8. Dantas characterization of the interest rate swap as a hedge for the bank loan is most likely: A. correct. B. incorrect, because the swap increases the cash flow risk of AS. C. incorrect, because the swap increases t
30、he market value risk of AS. 9. The duration of the interest rate swap described in Exhibit 1 is closest to: A. -2.41 years. B. -2.66 years. C. -2.91 years. 10. In order to reduce the duration of his bond portfolio to the desired level, Serra will enter into a pay-fixed swap position with a notional
31、principal closest to: A. R17.5 million. B. R27.5 million. C. R42.0 million. 11. If AS enters into the yen-real currency swap with a notional principal of 1.2 billion (R40.0 million), net yen interest expense for each year is closest to: A. 28.80 million. B. 85.20 million. C. 114.00 million. 12. Dant
32、as description of the use of a swaption in anticipation of future borrowing is: A. correct. B. incorrect, because AS should enter into a receiver swaption. C. incorrect, because the fixed rate paid on the loan may be less than 14.3%. Questions 13 through 18 relate to GIPS. Redlands Case Scenario Red
33、lands Asset Management (RAM) is an active equity manager specializing in the Asian Pacific region. The firm was founded by Carol Schroeder, CFA at the beginning of 2006, with several members of her family serving as the firms first clients providing the initial managed assets for the firm. Schroeder
34、 has compiled the information in Exhibit 1 and plans to use it to market RAM to institutional investors. Exhibit 1 Redlands Asset Management GIPS Compliant Performance Asia-Pacific Composite. (1/Jan/2006 thru 31/Dec/2008) Year 2006 2007 2008 Return Gross of Fees 44.8% 66.9% 80.7% Benchmark Return 43
35、.1% 60.2% 85.6% # of Portfolios 5 15 33 Composite Dispersion 6.7% 5.1% Period Ending Total Assets ($ millions) 350 760 1,630 % of Firm Assets 14% 25% 52% Notes: 1. Performance results are presented gross-of fee so that they represent the return on assets reduced by any trading expenses incurred duri
36、ng the period. 2. The Asia-Pacific composite includes two non-fee-paying accounts of the Schroeder family. 3. A complete list and description of composites and their strategies, including any that have been discontinued within the last five years, is available upon request. 4. Portfolio valuations a
37、re computed monthly and are denominated in US dollars. 5. RAM uses cash-basis accounting for the recognition of interest income on its holdings of preferred stock. 6. The pricing source was changed prior to the end of the reporting period because, in managements opinion, performance was not fairly r
38、epresented. The new source has significantly improved the firms results. 7. RAM trades securities in illiquid markets with substantial political and economic risks so trades are recorded on a settlement date basis to ensure that these trades have been completed before they are included in performanc
39、e calculations. 8. The composite presented above has been GIPS verified. 13. Which of the following performance presentation notes contains an error or omission that is most likely to prevent RAM from being in compliance with the GIPS standards? A. Composite list availability. B. Non-fee paying acco
40、unts disclosure. C. Disclosure concerning discontinued composites. 14. Which of the following performance presentation notes most likely comply with the recommendations and requirements of the GIPS standards? A. Pricing source. B. Cash-basis accounting. C. Returns calculated gross of fees. 15. Which
41、 of the following performance presentation notes would least likely prevent RAM from being in compliance with the GIPS standards? A. Monthly valuations. B. Non-fee paying accounts. C. Settlement-date accounting. 16. Which of the following concerning fees in RAMs performance presentation most likely
42、meets GIPS standards? A. Gross of fee labeling. B. The firms fee schedule. C. The deduction of any other fees. 17. Does RAMs performance presentation most likely meet GIPS standards concerning dispersion? A. Yes. B. No, the method chosen must be disclosed. C. No, the standard deviation must be prese
43、nted. 18. RAMs verification most likely does not meet GIPS standards concerning verification because: A. composite verification is not allowed. B. the minimum time period has not been met. C. the calculation methodology must be disclosed. Answers are provided beginning on the next page. Answers to S
44、ample Level II Item-Set Questions Weiying Shao Scenario 1. Are the fee disclosures made by Shao to his client consistent with the CFA Institute Asset Manager Code of Professional Conduct? A. No. B. Yes, because Shao disclosed how fees are derived. C. Yes, because Shao itemized the management fees pa
45、id on the clients behalf. Answer: A Asset Manager Code of Professional Conduct, CFA Institute 2009 Modular Level III, Volume 1, p. 215 Study Session 2-6-b Interpret the Asset Manager Code in situations presenting issues of compliance, disclosure, or professional conduct. The Asset Manager Code of Co
46、nduct requires that managers disclose to each client the actual fees and other costs charged to them, together with itemizations of such charges, when requested by clients. The disclosure should include the specific management fee, incentive fee, and the amount of commissions the manager has paid on
47、 the clients behalf during the period plus any other costs such as custodian fees. The Asset Manager Code of Conduct also requires managers to use plain language in presenting information to clients. Shao did not disclose all fees as commissions were left out and a description using plain language w
48、as also not used. 2. By recommending that Xu switch a portion of his portfolio to a new Zhang fund, does Shao violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he has a conflict of interest as the new funds are proprietary. C. Yes, because the fund data used in the
49、performance comparison was simulated. Answer: A “Guidance for Standards I-VII,” CFA Institute 2009 Modular Level III, Volume 1, pp. 64-66, example 4 Study Session 1-2-a Demonstrate a thorough knowledge of the Code of Ethics and Standards of Professional Conduct by interpreting the Code and Standards in various situations involving issues of professional integrity. Shao does not violate the Standards. He recommends a fund with similar investment objectives and discloses the use of simulated data in accordance with Standard III (D). The Standard req
