Schweser QBank 2017 portfolio management and wealth planning 12 global investment performance standards

LeReaux Investment Management, Incorporated Equity CompositeJanuary 1, 2001, through December 31, 2005 Total Assets at End of Period Percentage of Firm Assets Total Firm Assets LeReaux h

Test ID: 7427902Global Investment Performance Standards

Which of the following statements best describes possible investment strategies of a firm's composites?

Strategies should be as fully defined as possible so that portfolios within the

composites closely match each other

The strategies should not overlap, so as to prevent portfolios falling under multiple

composite descriptions

Strategies should avoid having too many qualifiers to prevent the manager from

having a large number of small composites

Explanation

Strategies may overlap, and portfolios may fall under two descriptions Strategies should have a suitable number of qualifiers(such as sector, style, benchmark or capitalization) - having too many qualifiers results in a large number of composites eachcontaining too few portfolios; having too few qualifiers results in composites that are too broad

PTN, Inc., is an investment consulting firm It has used Global Investment Performance Standards (GIPS) since its inceptiontwo years ago PTN claims to be in compliance with GIPS Could this statement be CORRECT?

No, PTN does not have a five-year compliance track record

No, consulting firms cannot be GIPS compliant

Yes, PTN does not have a five-year track record, so since inception is sufficient

fixed-In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million

In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to

$2 million In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared anddistributed performance presentations that reflected the results of its three primary investment styles That is, FPA presentedperformance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite The

2 Accrual accounting and book values were used to compute fixed-income returns.

3 Trading expenses were deducted prior to calculating returns.

4 Fee schedules were included in the presentations.

5 All actual fee-paying accounts were included in at least one of the three composites.

6 Asset-weighted composite returns were calculated using end-of-period weightings.

7 The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results.

8

The S&P 500 index was used as the benchmark for all three composite performance presentations.

9 Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA's actions indicated below is in compliance with the Global Investment Performance Standards (GIPS)?

Action 6

Action 1

Action 2

Explanation

Listed below are the actions that are not GIPS-compliant and the reason for noncompliance

Action 2: Portfolio valuations must be based on market values (not cost basis or book values) (Standard

1.A.2)

Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using

beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows (Standard 2.A.6)

Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as

such, are not permitted to be included in composite returns When a single asset class is carved out of amultiple asset class portfolio and the returns are presented as part of a single asset composite, cash must beallocated to the carve-out returns in a timely and consistent manner Beginning January 1, 2010, carve-outreturns are not permitted to be included in single asset class composite returns unless the carve-out is actuallymanaged separately with its own cash balance (Standard 3.A.8)

Action 8: The total return for the benchmark for each annual period The benchmark must reflect the investment

mandate, objective, or strategy of the composite (Standard 5.A.1.e)

Action 9: Time-weighted rates of return that adjust for cash flows must be used Periodic returns must be

Question #4 of 105 Question ID: 465960

geometrically linked (Standard 2.A.2)

According to the GIPS valuation principles, for periods beginning January 1, 2011, firms must:

disclose the use of any subjective valuation inputs if the portfolio is a

significant portion of the composite

disclose the use of any subjective valuation inputs

use only objective valuation methods

Explanation

For periods beginning on or after January 1, 2011, firms must disclose the use of any subjective valuation inputs if the portfoliovalued using the subjective input represents a significant portion of the composite

LeReaux Investment Management has created the performance presentation shown below LeReaux, in existence since

1993, believes its presentation complies with the Global Investment Performance Standards (GIPS)

LeReaux Investment Management, Incorporated

Equity CompositeJanuary 1, 2001, through December 31, 2005

Total Assets

at End of Period

Percentage of Firm Assets

Total Firm Assets

LeReaux has performed all calculations in this presentation in accordance with the Global Investment

Performance Standards (GIPS).

Which of the following is NOT an error or omission in LeReaux's presentation that renders it non-compliant with GIPS? GIPSrequires firms to:

disclose whether accrual accounting was used for dividends

disclose whether performance results are calculated gross or net of fees

present five years of compliant performance

Explanation

There is no disclosure requirement regarding the use of accrual accounting for dividends However, Standard 1.B.3

Question #6 of 105 Question ID: 412676

in the composite is John Randolph, a wealthy entrepreneur Randolph is the only client who does not give her discretion overthe assets and makes every decision himself, getting suggestions from French and using her to implement decisions French:

has violated GIPS because it includes her father's account, but not because it

includes Randolph's account

has violated GIPS because it includes Randolph's account, but not because it includes

her father's account

conforms to GIPS, if disclosures are made about the non-fee-paying account

Uniformity and consistent application of standards for the global regulation of

the securities industry

Fair and consistent application of a global set of regulatory requirements

Full disclosure and fair representation of performance results

Explanation

The GIPS standards are a set of voluntary standards based on the fundamental principles of full disclosure and fair

representation of performance results

In the presentation of a private equity fund, a firm reports an annualized since-inception (SI) internal rate of return (IRR) of-fees but not gross-of-fees The net-of-fees returns are not net of carried interest With respect to GIPS, the firm has:

net-made an error by not reporting returns gross-of-fees and by not netting out

carried interest

made an error by not reporting returns gross-of-fees but netting out carried interest is

not required so that is not an error

made an error by not netting out carried interest but not by omitting returns calculated

gross-of-fees

Explanation

Standard 7.A.21: The GIPS provision for private equity presentation and reporting require firms to present both the net-of-feesand the gross-of-fees annualized SI-IRR of the composite for each year since inception Standard 7.A.46: The net-of-feesmust be net of carried interest, representing the percentage of profits on the fund's investments that general partners receive,

as well as investment management fees and transaction expenses

Which of the following statements about the Global Investment Performance Standards (GIPS) is least accurate?

Performance must be calculated after deducting trading costs

Composites must be asset weighted using end-of-period weightings

When returns are calculated net of taxes, only those taxes that are not later reclaimed should

reporting Flay asks two of his performance analysts, Catherine Cora and Luigi Batali for suggestions as to how Mesa canincorporate the recommendations

Cora: "Mesa is permitted to link our noncompliant annual performance data from 1996-1999 to our GIPS compliant data, aslong as we meet the disclosure requirements GIPS reporting recommendations suggest that we eliminate all non-compliant data after presenting the required 5 years of compliant historical performance."

Batali: "Including a measure of the standard deviation of composite returns is extra information that will provide prospectiveclients with information regarding the fluctuation of composite returns over time."

After listening to their statements, Flay should:

disagree with both Cora and Batali

agree with Cora, but disagree with Batali

disagree with Cora, but agree with Batali

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Question #11 of 105 Question ID: 465871

Flay should disagree with both Cora and Batali According to Standard 5.A.2 For periods beginning on or after January 1,

2011, firms must present for each annual period:

a Three-year annualized ex-post standard deviation using monthly returns for the composite and benchmark

b An additional 3-year ex-post risk measure if management feels standard deviation is inappropriate The firm must matchthe periodicity of calculated returns used for the composite and benchmark

Note that this standard deviation measure would be different from the internal dispersion measure that measures the standarddeviation within the composite (relative to the average composite return) Recommendations for presenting relevant

composite-level risk measures include: Standard 5.B.5 For each year that annualized composite and benchmark returns arereported, the corresponding annualized standard deviation of monthly returns for the composite and benchmark Standard5.B.6 Additional ex-post composite risk measures

Although the recommendations do not suggest eliminating non-compliant data according to Standard 5.B.8, Firms shouldcomply with the GIPS for all historical periods, this indicates firms should bring non-compliant data that is linked with compliantdata into compliance

All of the following are reasons why the Global Investment Performance Standards (GIPS) are necessary EXCEPT enhancing:

market efficiency

competition in global markets

investor confidence

Explanation

The GIPS are necessary for the following reasons:

Enhancing consistency in performance presentation for inter-country holdings The financial markets are becomingincreasingly more global in nature Because of extensive inter-country holdings, standardization of presentation is vital formeaningful and consistent performance presentations to occur

Enhancing consistency in the use of standards: Return calculation and performance presentation guidelines, if present,vary greatly among countries Even when guidelines exist in a county, they may not be extensively followed

Enhancing competition in global markets: The establishment of global standards places managers from all countries on anequal footing in soliciting clients Managers from countries that previously had inferior standards will be taken moreseriously when presenting their performance, while managers from countries with stronger standards will not be penalizedwhen competing in markets where inferior standards prevail

Enhancing investor confidence: Global standards increase the confidence that prospective and existing clients have in theindustry and allow them to make more meaningful comparisons

Which of the following is NOT a composite construction requirement under the Global Investment Performance Standards(GIPS)?

Firms must disclose the use of simulated or model portfolio results

Carve-out returns excluding cash cannot be used to create a stand-alone composite.

Firm composites must be defined according to similar investment objectives and/or

strategies

Explanation

Under GIPS standard 3.A.2, composites must include only assets under management and under Standard 3.A.3 firms may notlink simulated or model portfolios with actual performance Simulated, back-tested, or model portfolio results do not representthe returns of actual assets under management and, thus, may not be included in composites performance results

A firm calculates income return, capital return and total return for their real estate composite using the GIPS provisions for realestate Is it necessary for the sum of income return plus capital return to equal total return in each quarter, and the sum of thefour quarterly income returns to equal the income return for the year?

Quarterly Sum Annual Sum

A firm does not disclose the valuation hierarchy that they are employing to value an asset, but the firm is properly followingGIPS valuation principles If the valuation of the asset cannot be determined through objective and observable pricing forsimilar investments in active markets, which of the following should be the "next source" of a valuation estimate, in accordancewith CFA Institute GIPS recommendations?

Subjective, unobservable inputs

Market-based input other than quoted pricing that is observable for the asset

Quoted pricing for similar and/or identical assets in markets that are not active

Explanation

If the firm does not disclose the valuation hierarchy that they are employing and is following the GIPS valuation principles, thenthe firm is using the recommended GIPS valuation hierarchy The GIPS valuation hierarchy is as follows:

1 Quoted prices from an active market for the same or similar security

2 Quoted prices from an inactive market for the same or similar security

Question #15 of 105 Question ID: 465873

3 Observable market-based inputs other than quoted prices

4 Subjective, unobservable inputs

Based on this hierarchy, if observed market prices from an active market are not available, the next best valuation basis is touse quoted prices from an inactive market

The Global Investment Performance Standards (GIPS) are necessary for all of the following reasons EXCEPT to:

enhance competition in global markets by creating a universal set of standards

that places managers from all countries on an equal footing in soliciting

clients

enhance investor confidence and allow investors to make more meaningful

comparisons

broaden the application and acceptance of the performance presentation guidelines of

foreign and domestic regulatory entities

Explanation

GIPS are necessary for the following reasons:

Enhancing consistency in performance presentation for inter-country holdings The financial markets are becomingincreasingly more global in nature Because of extensive inter-country holdings, standardization of presentation is vital formeaningful and consistent performance presentations to occur

Enhancing consistency in the use of standards: Return calculation and performance presentation guidelines, if present,vary greatly among countries Even when guidelines exist in a county, they may not be extensively followed

Enhancing competition in global markets: The establishment of global standards places managers from all countries on anequal footing in soliciting clients Managers from countries that previously had inferior standards will be taken moreseriously when presenting their performance, while managers from countries with stronger standards will not be penalizedwhen competing in markets where inferior standards prevail

Enhancing investor confidence: Global standards increase the confidence that prospective and existing clients have in theindustry and allow them to make more meaningful comparisons

The Global Investment Performance Standards (GIPS) apply to investment management firms They are NOT intended toserve which of the following?

Consultants that advise investors

Securities market regulators

Prospective clients of investment firms

Explanation

The GIPS are intended to serve potential and existing clients and consultants that advise these investors

Question #17 of 105 Question ID: 465923

Which of the following descriptions are appropriate qualifiers for a composite?

"Small Cap" "High Duration" "Above ​10 million"

Appropriate Not

appropriate Appropriate

Appropriate Appropriate Not appropriate

Appropriate Appropriate Appropriate

Explanation

All three qualifiers are appropriate for a composite Note that each composite should have sufficient qualifiers to make itmeaningful, but not too many so as to avoid fragmentation of portfolios

Which of the following is least likely a GIPS valuation requirement?

If local laws or regulations related to valuation conflict with GIPS, firms are

required to follow the more strict of the law or standard

Firms must disclose if their valuation hierarchy differs from the GIPS recommended

DeLecrette Investment Management claims compliance with the Global

Investment Performance Standards (GIPS ) and has prepared and presented

this report in compliance with the GIPS standards DeLecrette Investment

Management has not been independently verified

DeLecrette Investment Management has prepared and presented this report in

compliance with the Global Investment Performance Standards of the CFA Institute

(CFA Institute-GIPS ) The CFA Institute Global Investment Performance Standards

Committee has not been involved with the preparation or review of this report

DeLecrette Investment Management has prepared and presented this report in

compliance with the Global Investment Performance Standards (GIPS )

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®

®

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Question #20 of 105 Question ID: 465919

"[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared andpresented this report in compliance with the GIPS standards [Insert name of firm] has not been indpendently verified."

Note that no statement about CFA Institute's involvement with the preparation or review of the report is included

Which of the following portfolios is least likely to be included in a composite described as "U.S Equity composite"? A portfolio:

consisting mostly of U.S equities that is already included in the same

manager's "Global Equity composite"

of U.S equities that must hold at least 20% in cash

of U.S equities that may not diverge from the S&P 500 index performance by more

than 100 basis points per year

Explanation

A very limited tracking error is likely to remove the discretion from a portfolio, preventing it from being included in a composite

A portfolio may be in two composites provided it falls under both composite descriptions

Judy Picoo, CFA, a portfolio manager for the JP Fund, needed to compute her portfolio performance results for the 2003 firstcalendar quarter in compliance to GIPS The following monthly results and information were available:

Question #22 of 105 Question ID: 465909

R = return for month 1

R = return for month 2

R = return for month 3

R = [(1 + 0.023) × (1 + (-0.01)) × (1 + 0.0402)] − 1 = 5.35% for the first quarter of 2003

Which of the following statements most accurately describes why the Global Investment Performance Standards (GIPS) werecreated? To:

meet the need for a single globally accepted set of investment performance

presentation standards

provide comparability of performance results among nations for which no presentation

guidelines currently exist

meet the need for a single globally accepted set of regulatory guidelines among

developed securities markets

Question #24 of 105 Question ID: 465970

Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute

sponsored and funded the Global Investment Performance Standards Committee to develop and publish a single globalstandard by which all firms in all countries calculate and present performance to clients and prospective clients

A portfolio manager whose firm follows GIPS is concerned about the effect on his reported investment performance of a largeclient-directed withdrawal and the resulting liquidation of certain securities What would be the best method for adjustingresults for client-directed withdrawals in discretionary portfolios, in accordance with GIPS?

In this situation, the portfolio should be labeled non-discretionary, and all

current and historical returns should be removed from the composite results

GIPS recommend that the manager assumes a proportionate amount of each security

is sold, in determining a fair tax adjustment to "add back."

The manager is not permitted to add back the non-discretionary taxes in order to

improve the reported composite returns

Explanation

This proportional adjustment method should be used in order to properly comply with GIPS This method is preferred, in order

to avoid the temptation to assume the security with the greatest embedded capital gain was sold, in order to improve theadjustment, and resulting reported returns

LNJ Asset Management, Inc., would like to claim compliance with the Global Investment Performance Standards (GIPS) Which of thefollowing statements would render LNJ ineligible for this claim?

Prior to 2010, LNJ portfolios were not revalued on the date of large cash flows

Portfolio valuations are on a cost basis

LNJ has only been in existence for four years

Explanation

Portfolios are to be valued on a market value basis Both remaining statements are consistent with GIPS

Achieving comparability among investment management firms' performance presentations requires uniformity in methodsused to calculate returns Which of the following statements concerning Global Investment Performance Standards (GIPS)calculation methodology is least accurate?

Performance must be calculated prior to the deduction of all trading expenses

If a firm sets a minimum asset level for portfolios to be included in a composite, no

portfolios below that initial asset level can be included in that composite

In both the numerator and the denominator, the market values of fixed-income

securities must include accrued income

Explanation

Performance must be calculated after the deduction of all trading expenses (GIPS Standard 2.A.4) It's possible due to marketvolatility that portfolio values may temporarily fall below the minimum allowable asset level to be included in a composite.Those portfolios are not automatically excluded from the composite

GIPS guidance for reporting after-tax returns for periods beginning on or after January 1, 2011 is most likely contained in the:

country-specific guidance released by the country sponsors

GIPS standards in the section regarding GIPS valuation principles

GIPS standards in the provision regarding calculation methodology

Explanation

Since after-tax issues are highly dependent on the taxing authority for the country in which the funds are being managed, thespecific guidance on the presentation of after-tax returns was removed from the GIPS standards The responsibility now falls

to the country sponsors and the guidance is to be addressed in the country-specific guidance

McGregor Investment Management promotes itself as a fixed-income investment management firm The vast majority of theportfolios it manages are fixed-income portfolios McGregor does, however, manage a few portfolios, utilizing a growth equityinvestment strategy, but the firm has no intention of ever promoting this strategy Under the Global Investment PerformanceStandards (GIPS), must these portfolios be included in a composite?

Yes, because the portfolios are discretionary and fee paying

No, because the firm does not normally manage portfolios to a growth equity strategy

and is not planning to promote it

Yes, because the portfolios are managed to a widely recognized investment strategy

Explanation

The GIPS Standards require that all actual fee-paying discretionary portfolios are included in at least one composite It doesnot matter if the firm ever plans to promote the particular strategy to which a portfolio is being managed, if the portfolio is fee-paying and discretionary, it must be included in at least one composite Thus, McGregor must include the growth equityportfolios in at least one of its composites

capital is first drawn down from investors.

the composite was created

the first material investment was made

Explanation

By definition, the vintage year is the year in which capital is first called from or drawn down from investors

Jessica Yee, a portfolio manager for the National Investing Alliance (NIA), wants to create a high yield composite portfolio for marketingpurposes from several other portfolios The portfolios to be drawn from include a high yield bond portfolio, a convertible debt portfolio, and

a large cap equity growth portfolio In the composite she did not wish to include any historical results from terminated portfolios, nor didshe feel it was important to include the cash associated with these portfolios (since the cash was managed by another department ofNIA) Yee believed that hedging was a very important element of her investment philosophy in these volatile markets, so she delegatedthis responsibility to another department within NIA, but she did not wish to include their hedging results with her composite results Yeewants to be able to claim compliance under Global Investment Performance Standards (GIPS )

Which of the following statements describes how Yee should approach the formation of the composite?

The high yield bond portfolio and convertible debt portfolio should be in different

composites since they represent different investment objectives

The large cap equity growth portfolio must not be included in the composite

Since the large cap equity growth portfolio is part of the overall portfolios managed by NIA it

can be included in the same composite with the high yield bond and convertible debt

portfolios

Explanation

Given the investment style of the composite, the only portfolios that could appropriately be included in her composite are the high yieldbond portfolio and the convertible debt portfolio Thus, the large cap equity growth portfolio must not be included in the composite.However, the large cap equity growth portfolio may be included in its own separate composite According to GIPS, firm composites must

be defined according to similar investment objectives and/or strategies Composites should be defined such that clients are able tocompare the performance of one firm to another Composites must be representative of the firm's products and be consistent with thefirm's marketing strategy Firms are not permitted to include portfolios with different investment strategies or objectives in the samecomposite Portfolios may not be moved into and out of composites except in the case of valid, documented, client-driven changes ininvestment objectives or guidelines or in the case of the redefinition of the composite

With respect to the exclusion of terminated portfolios, is her approach correct?

Yee should include the results of terminated portfolios

®

Terminated portfolios are allowed to be dropped from composites when the portfolio is no

longer actively managed

Yee should include the results of terminated portfolios through the date the portfolio was last

managed

Explanation

Terminated portfolios must be included in the historical record of the appropriate composite(s) through the last full measurement periodthat the portfolio was under management This requirement prevents the inclusion of the performance of a terminated portfolio for partialperiods in a composite's return Also, retaining the performance of a terminated portfolio while it was still being managed to a composite'sstrategy prevents survivorship bias

Which of the following best describes the cash portfolio results with respect to the overall portfolio results?

The returns from the cash component of Yee's portfolio must be included in the overall

portfolio results

If a third party entity manages the cash component of the portfolio it is not necessary to

include the cash returns in the overall portfolio results

Since the cash component of the portfolio is managed by another department it is not

necessary to include it in the overall portfolio results

Explanation

The returns from the cash component of her portfolio must be included in her portfolio results, even though it may be managed by anotherdepartment of the firm (for GIPS compliance, the Firm must claim compliance) Cash returns must be included in portfolio total-returncalculations as long as the portfolio manager has control over the amount of the portfolio that is allocated to cash This requirementstands even if the manager does not actually control the investment of the cash, as the case is when excess cash is held in a moneymarket account Keep in mind that the inclusion of cash is likely to reduce portfolios experiencing positive gains

Is Yee correct in excluding the hedging activity results with her portfolio results?

Yes, since Yee is not actually managing the hedging activities she should not include

these results into the overall portfolio results

No, given Yee's investment philosophy, the hedging results should be included in her portfolio

results

Yes, since the use of hedging is negligible the hedging results need not be included in the

overall portfolio results

Explanation

Since hedging is an important part of her investment activity, the hedging results must also be included in her portfolio results in order to

be GIPS compliant Such results are considered to be carve-out returns and may not be included in a separate composite According toGIPS, carve-out returns excluding cash cannot be used to create a stand-alone composite When a single asset class is carved out of amultiple-asset portfolio and the returns are presented as part of a single-asset composite, cash must be allocated to the carve-out returnsand the allocation method must be disclosed Beginning January 1, 2010, carve-out returns must not be included in single asset class

Question #34 of 105 Question ID: 465877

composite returns unless the carve-outs are actually managed separately with their own cash allocations

Which of the following compliance statements is most acceptable under the Global Investment Performance Standards(GIPS)?

[Insert name of firm] has prepared and presented this report in compliance with

the Global Investment Performance Standards (GIPS )

[Insert name of firm] has prepared and presented this report in compliance with the

Global Investment Performance Standards (GIPS ) and the CFA Institute

[Insert name of firm] claims compliance with the Global Investment Performance

Standards (GIPS ) and has prepared and presented this report in compliance with the

GIPS standards [Insert name of firm] has not been independently verified

Explanation

GIPS mandates that firms use the following compliance statement when claiming compliance with the Standards and when thefirm has not been verified: [Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS )and has prepared and presented this report in compliance with the GIPS standards [Insert name of firm] has not beenindependently verified

For firms that are verified:

[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared andpresented this report in compliance with the GIPS standards [Insert name of firm] has been independently verified for theperiods [insert dates] The verification report(s) is/are available upon request Verification assesses whether (1) the firm hascomplied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm'spolicies and procedures are designed to calculate and present performance in compliance with the GIPS standards

Verification does not ensure the accuracy of any specific composite presentation

For composites of a verified firm that have also had a performance examination:

[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared andpresented this report in compliance with the GIPS standards [Insert name of firm] has been independently verified for theperiods [insert dates] Verification assesses whether (1) the firm has complied with all the composite construction requirements

of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and presentperformance in compliance with the GIPS standards The [insert name of composite] composite has been examined for theperiods [insert dates] The verification and performance examination reports are available upon request

Note the registered trademark symbol (®) There is no such thing as partial compliance and CFA Institute should not bereferenced

Which of the following reasons is least likely to explain why a portfolio has been moved from one composite to another?

The portfolio size has recently fallen below the minimum threshold specified

for the "Japanese Value Equities above ¥500 million" composite

The portfolio size has grown above £5 million and is more suitable to the "UK Equities

above £5 million" composite than the "UK Equities below £5 million" composite

The firm has redefined the composite, and the portfolio no longer falls under the new

definition

Explanation

All of the suggestions could be valid reasons for moving a portfolio into or out from a composite However, if a portfolio fallsbelow a specified minimum and the drop is not likely to be permanent, then the portfolio may remain in that composite in theshort-term

Which of the following ratios is least likely to be shown in a performance presentation under the GIPS provisions for privateequity?

Paid-in capital to committed capital

Total value to residual value

Cumulative distribution to paid-in capital

Explanation

The required ratios for presentation are: total value to paid-in capital, cumulative distributions to paid-in capital, paid-in capital

to committed capital, and residual value to paid-in capital

As part of the verification process of a firm claiming GIPS compliance, the third party doing the verification asks for a list anddescription of the firm's composites and a list of all portfolios under the firm's management Which of these requests is (are)actually part of the preparation process?

A list of all portfolios under management but not a list and description of

composites

A list and description of composites but not a list of all portfolios under management

Both asking for a list and description of composites and a list of all portfolios under

fixed-In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million.

In early 2010, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to

$2 million In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared anddistributed performance presentations that reflected the results of its three primary investment styles That is, FPA presentedperformance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite Thefollowing list describes some of the actions that FPA took when preparing its performance presentations

2 Accrual accounting and book values were used to compute fixed-income returns.

3 Trading expenses were deducted prior to calculating returns.

4 Fee schedules were included in the presentations.

5 All actual fee-paying accounts were included in at least one of the three composites.

6 Asset-weighted composite returns were calculated using end-of-period weightings.

7 The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results.

8 The S&P 500 index was used as the benchmark for all three composite performance

presentations.

9 Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA's actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)?

Actions 2, 3, and 4

Actions 6, 8, and 9

Actions 1, 6, and 8

Explanation

Listed below are the actions that are not GIPS-compliant and the reason for noncompliance

Action 2: Portfolio valuations must be based on fair value (not cost basis or book values) (Standard 1.A.2) Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using

beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows (Standard 2.A.3)

Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as

such, are not permitted to be included in composite returns When a single asset class is carved out of amultiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be

Question #39 of 105 Question ID: 465893

ᅞ A)

allocated to the carve-out returns in a timely and consistent manner Beginning January 1, 2010, carve-outreturns are not permitted to be included in single asset class composite returns unless the carve-out is actuallymanaged separately with its own cash balance (Standard 3.A.7)

Action 8: The total return for the benchmark (or benchmarks) that reflects the investment strategy or mandate

represented by the composite must be presented for each annual period If no benchmark is presented, thepresentation must explain why no benchmark is disclosed (Standard 5.A.6)

Action 9: Time-weighted rates of return that adjust for cash flows must be used Periodic returns must be

geometrically linked (Standard 2.A.2)

In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA).All three of these individuals have enjoyed considerable success in their careers Freeman is highly regarded for her expertise

in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of income and equity portfolios, respectively

fixed-In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million

In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to

$2 million In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared anddistributed performance presentations that reflected the results of its three primary investment styles That is, FPA presentedperformance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite Thefollowing list describes some of the actions that FPA took when preparing its performance presentations

2 Accrual accounting and book values were used to compute fixed-income returns.

3 Trading expenses were deducted prior to calculating returns.

4 Fee schedules were included in the presentations.

5 All actual fee-paying discretionary accounts were included in at least one of the three composites.

6 Asset-weighted composite returns were calculated using end-of-period weightings.

7 The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results.

8 The S&P 500 index was used as the benchmark for all three composite performance

presentations.

9 Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA's actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)?

Actions 1 and 5

Listed below are the actions that are not GIPS-compliant and the reason for noncompliance.

Action 2: Portfolio valuations must be based on fair value (not cost basis or book values) (Standard 1.A.2) Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using

beginning-of-period values or a method that reflects both beginning-of-period values and external cash flows (Standard 2.A.3)

Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as

such, are not permitted to be included in composite returns When a single asset class is carved out of amultiple asset class portfolio and the returns are presented as part of a single asset composite, cash must beallocated to the carve-out returns in a timely and consistent manner Beginning January 1, 2010, carve-outreturns are not permitted to be included in single asset class composite returns unless the carve-out is actuallymanaged separately with its own cash balance (Standard 3.A.7)

Action 8: The total return for the benchmark (or benchmarks) that reflects the investment strategy or mandate

represented by the composite must be presented for each annual period If no benchmark is presented, thepresentation must explain why no benchmark is disclosed (Standard 5.A.6)

Action 9: Time-weighted rates of return that adjust for cash flows must be used Periodic returns must be

geometrically linked (Standard 2.A.2)

The Strausburg Investment Management (SIM) manages portfolios that are represented in more than 15 composites Overthe years, the exact number of portfolios under management has fluctuated between 65 and 95 due to terminations andadditions Assume that SIM is notified of the termination of a portfolio on 25 August, 2012 At the end of which of the followingdates should the terminated portfolio be removed from its composite order to be compliant with the Global Investment

Performance Standards (GIPS)?

The purpose of third-party verification:

is required by CFA Institute but not the SEC

may give a GIPS compliant firm a competitive advantage by making the claim to GIPS

compliance more credible

is required by CFA Institute and the Securities and Exchange Commission (SEC)

Explanation

As of now, the only purpose of verification is to give the GIPS compliant firm a competitive edge Prospective clients will havemore confidence in the claim of GIPS compliance

Which of the following regarding the GIPS real estate valuation principles is most accurate?

The GIPS require the reporting of a single appraisal value

The GIPS recommend that real estate investments be valued externally by outside

Which of the following is NOT a composite construction requirement of the Global Investment Performance Standards (GIPS)?

Terminated portfolios must be removed from the historical record of the

appropriate composites for all years for which they were included in the

composites

Composites must include new portfolios on a timely and consistent basis after each

portfolio comes under management

All actual fee-paying discretionary portfolios must be included in at least one

composite

Explanation

Standard 3.A.46 states that terminated portfolios must be included in the historical record of the appropriate composites up tothe last full measurement period that each portfolio was under management The inclusion of terminated portfolios in historicalperformance prevents survivorship bias

According to GIPS, when presenting performance to a prospective wrap fee sponsor, an investment manager must:

disclose the names of the wrap fee sponsors when presenting

In standard 8.A.4, sponsor-specific composite results are presented to an existing wrap fee sponsor, not a potential sponsor

According to standard 8.A.7, firms may link compliant performance with compliant performance as long as the compliant performance pertains to periods before 1 January 2006 and only compliant data is presented for periods after 1January 2006

non-Eric Jicu, a highly successful portfolio manager of the EJ Fund, wishes to define the EJ Fund as a firm under the GlobalInvestment Performance Standards (GIPS ) standards Jicu is employed by National Investing Alliance (NIA), a small regionalbrokerage firm Although he has disclosed this information to his superiors at NIA, he would like to disclose his compliance formarketing purposes by using his past actual performance results of five years, which included two years of simulated results.Jicu also managed several non-fee-paying portfolios that were non-discretionary under a different investment style Since theresults of these non-discretionary portfolios were highly successful, he wanted to include them into his EJ Fund composites forcompliance In his statement of compliance, Jicu wrote: "The EJ Fund claims compliance with the Global Investment

Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards The EJFund has not been independently verified."

In defining a firm, does the EJ Fund qualify as a firm under GIPS?

No, since to claim compliance NIA must be included

Yes, since the EJ Fund is a separate entity it does qualify under GIPS

No, since there is no mention that Jicu is incorporated he cannot qualify as a firm

Question #46 of 105 Question ID: 465885

In constructing the historical results of the EJ Fund, is Jicu correct in his approach?

Yes, because he included five years of actual performance data

No, because simulated results cannot be included with actual performance results

No, because GIPS requires a minimum of ten years of performance before claiming

In constructing the composites, is Jicu correct in his approach?

Yes, since fee-paying and non-fee-paying portfolios can be included in the

same composite as long as they have the same investment objectives

No, since fee-paying and non-fee-paying portfolios cannot be included in the same

portfolio

No, since the fee-paying discretionary portfolios are managed under a different

investment style as the non-fee-paying non-discretionary portfolios

Explanation

Jicu is not correct in the construction of composites Non-discretionary portfolios cannot be included in a composite paying discretionary portfolios may be included in the firm's composites, but if they are, firms are required to disclose thepercentage of composite assets represented by non-fee-paying discretionary portfolios If the firm includes non-fee-payingportfolios in its composites, they are subject to the same rules as fee-paying portfolios If a portfolio's status changes fromdiscretionary to non-discretionary, the portfolio may not be removed from a composite retroactively However, the portfoliomust be removed going forward Composites must include all actual fee-paying discretionary portfolios All actual fee-payingdiscretionary portfolios must be included in at least one composite By including all fee-paying discretionary portfolios in atleast one composite, firms cannot cherry-pick their best performing portfolios to present to prospective clients Firms arepermitted to include a portfolio in more than one composite, provided it satisfies the definition of each composite

Non-fee-Firm composites must be defined according to similar investment objectives and/or strategies Composites should be definedsuch that clients are able to compare the performance of one firm to another Composites must be representative of the firm'sproducts and be consistent with the firm's marketing strategy Firms are not permitted to include portfolios with differentinvestment strategies or objectives in the same composite Portfolios may not be moved into and out of composites except inthe case of valid, documented, client-driven changes in investment objectives or guidelines or in the case of the redefinition ofthe composite

In the compliance statement, is Jicu correct is claiming compliance?