CFA CFA level 3 CFA level 3 CFA level 3 CFA level 3 finquiz item set questions, study session 13, reading 26

The plan’s investment portfolio is currently dominated by traditional investments.. The manufacturer’s chief executive explains to the board the need to employ an active manager to manag

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CFA Level III Item-set - Question

Study Session 13

June 2018

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FinQuiz Item-set ID: 13008

Questions 1(13009) through 6(13014) relate to Reading 26

Jiah Noyce Inc Case Scenario

Jiah Noyce Inc is an emergency services equipment manufacturer which provides a defined benefit plan to its employees The plan is managed by the manufacturer, which acts as the plan’s sponsor The plan’s investment portfolio is currently dominated by traditional investments The portfolio has never invested in alternative investments but the sponsor would now like to explore the possibility of doing so

The manufacturer’s chief executive explains to the board the need to employ an active manager

to manage the plan’s portfolio The chief executive identifies two desirable properties which the hired active manager should possess

Property 1: “We need a manager who can really go out there and catch the big market fish

whenever the situation permits Our manager needs to be well grounded and should have substantial experience in the market within which the manager operates.”

Property 2: “We expect the hired manager to conduct his investment activities swiftly,

tactfully, and with minimal error In short, we’re looking for the best manager in the market.”

Upon considerable research, Jiah Noyce Inc has appointed Elijah Asset Management (EAM) to manage its investment portfolio The fund manager at EAM has recommended the manufacturer initially to make an investment of $25 million in Propertex, a real estate operating company managing real estate properties across three U.S cities The pension plan intends to fund 60% of the investment by issuing bonds and 40% by issuing its common shares in the stock market Propertex is evaluating three benchmarks in order to determine the most suitable performance benchmark for the plan’s investment (exhibit 1) The firm has compiled risk and return expected data for three real estate benchmarks

Exhibit 1 Potential Real Estate Benchmarks for EAM’s $25 million investment

In addition to the real estate operating company, the fund manager has identified a venture

capital fund which supports the development of various highly risky and newly established ventures One of the fund’s investments includes a pharmaceutical company endeavor, Respiro

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Respiro is relatively newly established and had received its practicing license from its resident state’s medical association two months ago The company staffs a two member research team in addition to forty-five non-research employees Respiro is currently in the process of developing its first drug Respiro had completed the research phase and received approval for the drug’s development prior to the establishment of the company Upon the initial completion of the drug’s development phase, which is projected in one year’s time, Respiro will need to test its product Respiro is seeking $35 million to fund the drug’s development and testing phase

To optimally utilize the pension fund’s investing funds, the plan’s fund manager recommends to consider commodities as a potential asset class He proposes the following investments:

Investment A: Felopia Inc is an iron extractor The fund manager has recommended the

pension fund to invest $1.5 million in Felopia Inc.’s stock

Investment B: Invest $2.0 million in a commodity ETF that invests in the commodities,

gasoline, gold, and corn

FinQuiz Question ID: 13009

1 Which of the following active manager selection criterion is represented by ‘property 1’?

C investment process

2 The active manager selection criterion represented by ‘property 2’ most likely is:

A terms and structure

C investment process

3 Which of the following issues will the manufacturer be least likely concerned with when

hiring their active manager?

A The suitability of an investment to the pension fund’s investment portfolio

B The quality of the organizations providing professional consultancy services to EAM

C An unsatisfactory audit review of EAM’s internal controls

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4 In context of the benchmark data provided in exhibit 1, which of the following benchmarks

will most likely to be appropriate when evaluating the performance of an investment made in

Propertex?

5 Which of the following options accurately classifies the type of venture capital issuer

Respiro is and the stage of financing it falls within?

6 Which of the following statements accurately characterize the commodity investment

alternatives proposed, ‘A’ and ‘B’?

A A represents an indirect commodity investment whereas B represents a direct commodity investment

B Both A and B represent indirect commodity investments

C Both A and B represent direct commodity investments

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