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LOS d: Explain the key factors that a trustee should consider when investing and managing trust assets.

Joan Ball, CFA, is trustee for the portfolios of several high net worth individuals. She is considering the purchase of equity shares in ARGO Corp., a company that is currently facing allegations of financial mismanagement. Ball believes that the scandal will be forgiven by the market and that shares in ARGO will perform well in the long term. Which of the following statements is in accordance with the new Prudent Investor Rule?

A)	Ball should evaluate any potential investment with regard to how it will contribute to the risk and return of the overall portfolio.

B)	Ball should not consider the addition of any investment that would add incremental risk to the portfolio.

C)	Ball should not recommend an investment whose performance could be negatively impacted by fraud or negligence on the part of management.

Although a security may be risky as an individual investment, under the new Prudent Investor Rule, each security must be evaluated in the context of the risk and return of the overall portfolio.

Robert Jones, CFA, is the trustee for The Homestead Foundation, a charitable organization whose mission is to provide funding to construct affordable housing in economically disadvantaged neighborhoods across the U.S. In accordance with the new Prudent Investor Rule, a key factor that Jones should consider when making investment decisions for the portfolio is:

A)	to eliminate the Foundation’s assets’ exposure to investment risk through appropriate investment decisions.

B)	avoiding strategies that interfere with legal list statutes, or fail to preserve the purchasing power of Foundation assets.

C)	the Foundation’s irregular needs for liquidity when undertaking construction projects.

The Foundation, like every beneficiary of a trust, has its own unique liquidity needs. Jones, as trustee, must consider the Foundation’s cash flow requirements when managing trust assets.

When investing and managing trust assets in accordance with the new Prudent Investor Rule, a trust manager should most likely consider which of the following key factors?

A)	The trust’s performance relative to the benchmark.

B)	The beneficiary’s knowledge of financial concepts.

C)	The effects of inflation and deflation.

A trust manager should consider the effects of anticipated inflation or deflation on the overall performance of the portfolio and make investment decisions accordingly.