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标题: Ethical and Professional Standards 【Reading 10】Sample [打印本页]
作者: bapswarrior    时间: 2012-3-26 10:29     标题: [2012 L2] Ethical and Professional Standards 【Session 2 - Reading 10】Sample

When comparing the fiduciary responsibility under the Prudent Investor Rule (PIR) with that under the Prudent Man Rule (PMR), which of the following is CORRECT? The PIR does:
A)
permit the delegation of investment responsibility to third parties; the PMR does not permit the delegation of investment responsibility to third parties.
B)
permit the delegation of investment responsibility to third parties; the PMR does permit the delegation of investment responsibility to third parties.
C)
not permit the delegation of investment responsibility to third parties; the PMR does permit the delegation of investment responsibility to third parties.


Under the PIR, delegation of investment to third parties is permitted, but this is not allowed under the PMR.
作者: bapswarrior    时间: 2012-3-26 10:30

The new Prudent Investor Rule states that the practice of diversification:
A)
is not as important as generating current income.
B)
should not be practiced because it is too costly.
C)
is expected in portfolios as a method of reducing risk.


The new Prudent Investor Rule states that diversification is expected as a method of reducing risk. This contrasts to the old Prudent Man Rule which measured each investment by its own merits and not in the context of the portfolio. Abandoning diversification because of costs is never mentioned, nor is there mention that diversification is mutually exclusive with delegating authority or generating current income.
作者: bapswarrior    时间: 2012-3-26 10:31

Which of the following statements about trustee actions is CORRECT? Trustees must consider:
A)
an investment's risk/reward profile as it relates to the portfolio.
B)
the risk of an investment without regard to its return.
C)
neither the risk nor the return of the portfolio, instead focusing on trading costs.


The new Prudent Investor Rule states that an investment's risk/reward profile must be considered as it relates to the overall risk of the portfolio. Both risk and return must be considered in tandem.
作者: bapswarrior    时间: 2012-3-26 10:32

Which of the following statements is part of the basic principles of the new Prudent Investor Rule?
A)
Excessive trading and fees should be avoided.
B)
Current income for the trust is totally disregarded in favor of growth.
C)
Trustees must consider each investment against its own merits.


Current income must be considered in tandem with the need for growth. Investments in a portfolio should be considered based on the contribution to the portfolio's risk. Diversification is expected to reduce risk.
作者: bapswarrior    时间: 2012-3-26 10:33

With regard to diversification, which of the following statements best summarizes a manager’s fiduciary responsibility under the Prudent Investor Rule (PIR)?
A)
The manager always has a duty to diversify in a way that no more than 5% of the client’s assets are in the securities of a single issuer, with the exception of sovereign debt such as U.S. government securities.
B)
The manager has a duty to diversify client assets unless it is in the client’s best interests not to diversify.
C)
The manager always has a duty to diversify in a way that no more than 5% of the client’s assets are in the securities of a single issuer.


The PIR requires the manager to diversify unless it is in the client’s interest not to diversify. For example, the client may have a small business exposure that he seeks to offset by going short in a set of securities that are concentrated in a specific industry. This would be permissible if the lack of diversification were deemed to be in the best interest of the client.
作者: bapswarrior    时间: 2012-3-26 10:34

Which of the following fiduciary standards is carried over from the old Prudent Man Rule to the new Prudent Investor Rule?
A)
Partiality.
B)
Professionalism.
C)
Loyalty.


Loyalty is the only term listed that is included. Loyalty means the absence of conflicts of interest and acting in the best interest of beneficiaries.
作者: bapswarrior    时间: 2012-3-26 10:34

Xavier Newsome, CFA, serves as trustee for the Block Corporation's trust. Newsome is 31 years old. The trust requires a certain amount of current income to support Mr. Block's widow. After her death, the trust proceeds will go to the Block grandchildren. Newsome is a member of a running club as are several of the Block grandchildren. As part of his duties as trustee, Newsome makes portfolio decisions that favor growth of the principal and puts the current income at risk. Has he violated any fiduciary standards?
A)
No, because he acted impartially.
B)
Yes, because he did not act impartially.
C)
Yes, because he did not use caution.


Newsome was not impartial with respect to the current income beneficiary relative to the remaindermen interests. (Remaindermen refers to the group that is to receive the remainder of the trust once its term is complete. Of course, some trusts never expire so not every trust has remaindermen.) This could also be perceived as a loyalty violation in that he did not act in the best interest of all beneficiaries. Caution deals with the investment decisions of the portfolio.
作者: bapswarrior    时间: 2012-3-26 10:35

The Standard on portfolio investment recommendation and actions requires a degree of diligence and expertise that is closest to the:
A)
Prudence Man Rule.
B)
New Prudent Investor Rule.
C)
Diligent Person Rule.


The Standard requires elements of portfolio theory and expertise that are foundations of the New Prudent Investor Rule.
作者: bapswarrior    时间: 2012-3-26 10:35

When we describe fiduciary duty as being process-oriented and dynamic this means that the fiduciary responsibility will be properly discharged if the manager:
A)
implements a process that views asset risk in isolation and updates these risk estimates on a regular basis.
B)
implements a process that yields returns that are above average on a risk-return basis and updates the process over time.
C)
develops an investment policy statement that is suitable for the client and reviews the client's situation on a regular basis.


Process-oriented means that there is a focus on the investment process, and that this is embodied in an investment policy statement that considers the client’s circumstances and risk-tolerance. Dynamic means that the investment process should change over time to take into account changes in the client’s circumstances. A review of the client’s circumstances is mandated to occur no less frequently than annually–more often if there is a major change in circumstances.
作者: bapswarrior    时间: 2012-3-26 10:37

A given client has specified that her primary concern is preservation of principal. Last year the value of this client’s account has declined by 8%. Which of the following statements is CORRECT?
A)
This constitutes a violation of the manager's fiduciary responsibility only if the manager deviated from a properly constructed investment policy for this account.
B)
This does not constitute a violation of the manager's fiduciary responsibility, regardless of the nature of the investment policy statement for the account.
C)
This constitutes a violation of the manager's fiduciary responsibility regardless of whether the manager deviated from a properly constructed investment policy for this account.


The key concept is that the portfolio investment decision must be process-oriented. The nature of the process is a function of the client’s specific situation and tolerance for risk, and this is embodied in an investment policy statement. So long as the investment policy statement is properly conceived and is adhered to by the manager, there is no violation of fiduciary responsibility.
作者: bapswarrior    时间: 2012-3-26 10:38

At the time a client relationship is established, assume that an appropriate investment policy statement has been developed. Which of the following statements is CORRECT regarding the Prudent Investor Rule (PIR)? The PIR requires that the fiduciary:
A)
develop an appropriate investment policy statement when the client relationship is established and update the investment policy only as is deemed necessary by the fiduciary.
B)
periodically review the client circumstances and make appropriate changes in the investment policy as warranted.
C)
review the client circumstances and make changes when asked to do so by the client and make changes in the investment policy as warranted.


The PIR requires that an investment policy statement be developed when the relationship is established, and that such a statement be updated no less frequently than annually (more frequently if there is a major change in client circumstances).
作者: bapswarrior    时间: 2012-3-26 10:39

Erica Barnes, CFA, is a trustee for a pension fund. Which of the following is an example of Barnes' failure to follow general fiduciary standards set forth in the new Prudent Investor Rule? She recommends the fund should:
A)
hire her relative to manage a new high yield portfolio.
B)
hire an outside manager when they lack the in-house expertise to manage a small cap portfolio.
C)
consider the need for future growth while maintaining current income obligations.


Trustees must exercise care, skill, caution, loyalty, and impartiality. Recommending that the trustees approve her relative as new portfolio manager endangers Barnes' ability to avoid conflicts of interest and hence her duty of loyalty.
作者: bapswarrior    时间: 2012-3-26 10:40

Miles Turner, a CFA candidate, oversees a union pension fund. He got this job because of family connections as he is just learning the investment management business. Subsequently, he realizes that he is not ready to make the necessary decisions about the fund. He hires several portfolio managers. Under the Prudent Investor Rule, Turner is:
A)
not in compliance because he did not put in writing that funds were managed in-house prior to the hiring of outside managers.
B)
not in compliance. Delegation of authority is not allowed.
C)
in compliance. Delegation of authority is allowed.


Delegation of authority is allowed under the Prudent Investor Rule. There is no stipulation that Turner must try to do the job himself first.
作者: bapswarrior    时间: 2012-3-26 10:40

A trustee must adhere to the following general fiduciary standards EXCEPT:
A)
partiality.
B)
caution.
C)
skill.


Trustees must adhere to the standard of impartiality, not partiality.
作者: bapswarrior    时间: 2012-3-26 10:41

With respect to the Prudent Man Rule and the Prudent Investor Rule, which of the following statements is least accurate?
A)
An investment that is not appropriate under the Prudent Man Rule may be appropriate under the Prudent Investor Rule.
B)
The Prudent Investor Rule imposes an ordinary standard of care.
C)
Both impose discretion in choosing investments.


The Prudent Investor Rule imposes a “professional” standard of care. The Prudent Investor Rule may allow an investment in an asset, based upon diversification benefits, when the Prudent Man Rule would not allow investing in that asset. Both rules impose discretion in choosing investments.
作者: bapswarrior    时间: 2012-3-26 10:41

Which of the following statements represent the most important aspect of the Prudent Man Rule?
A)
The fiduciary is generally forbidden from delegating their investment authority.
B)
Using caution and being conservative in the selection of investments.
C)
Each investment is considered on its own merits, not in regard to the rest of the portfolio.


In general the Prudent Man Rule has been construed as a directive to preserve capital and avoid risk.
作者: bapswarrior    时间: 2012-3-26 10:42

Which of the following statements regarding the Prudent Investor Rule (PIR) and the Prudent Man Rule (PMR) is most accurate?
A)
The PIR is primarily results-oriented while the PMR is process-oriented.
B)
Under the PIR restrictions on investment in categories of securities have been codified.
C)
Under the PIR no particular investment is either prudent or imprudent.


Under the PIR no particular investment is either prudent or imprudent. The decision is made based upon return vs. risk, where risk is measured by the asset’s impact on the portfolio.
作者: bapswarrior    时间: 2012-3-26 10:42

Mary Rutherford, CFA, is considering the purchase of Greenbelt Paper's stock in an upcoming initial public offering (IPO) for a portfolio that she serves as trustee. She has performed the necessary research and believes that the stock satisfies the fund's risk/reward requirements. Under the Prudent Man Rule, Rutherford would:
A)
not be allowed to buy the IPO, because the transaction is considered too risky.
B)
be allowed to buy the IPO as well as any options on the stock.
C)
be allowed to buy the IPO.


Under the Prudent Man Rule, entire classes of securities (options, futures, IPOs, etc.) were deemed imprudent. Hence, Rutherford would not be able to buy IPOs or options on stocks.
作者: bapswarrior    时间: 2012-3-26 10:43

Mary Rutherford, CFA, is considering the purchase of Greenbelt Paper's stock in an upcoming initial public offering (IPO) for a portfolio that she serves as trustee. She has performed the necessary research, and believes that the stock satisfies the fund's risk/reward requirements. Under the Prudent Investor Rule, Rutherford would:
A)
not be allowed to buy the IPO because the transaction is considered too risky.
B)
be allowed to buy the IPO.
C)
not be allowed to buy the IPO but could instead purchase a large position in the secondary market.


The new Prudent Investor Rule does not rule out entire classes of securities as does the old rule. However, the trustee must avoid speculation and undue risk. A large position of any stock would not be considered prudent, not to mention an untested stock. The higher fees could be construed as excessive fees and prohibited under the Prudent Investor Rule.
作者: bapswarrior    时间: 2012-3-26 10:43

Lorenzo Edwards, CFA, is a member of the board of trustees for the Waldrop Enterprise pension fund. He was instrumental in the hiring of Dora Ray, CFA, as lead manager of the fund 5 years ago. During her tenure, Ray's long-term performance has been solid. The record shows that the fund has outperformed the relevant composite benchmark by 62 basis points, on average, during the period. Last quarter, she purchased shares of Baseco which proceed to fall sharply in value and brought down the overall performance of the fund. The board is now asking Edwards what has gone wrong. Which of the following is most correct with regard to the situation at Waldrop pension fund?
A)
Edwards should tell the board that under the Prudent Man Rule, the investment risk for Baseco must be evaluated in a portfolio context, and not on a standalone basis.
B)
As a CFA Charterholder, Edwards’ delegation of investment authority to Rey is in violation of the Code and Standards.
C)
Edwards should tell the board that even though the Baseco investment did not perform as expected, there is no evidence that the Prudent Investor Rule has been violated.


The Prudent Investor Rule requires that the evaluation of an investment must be done with consideration to how it affects portfolio performance, and not in isolation. Thus, even though the addition of Baseco has had a negative impact on fund performance, there is no evidence that the Prudent Investor Rule has been violated. The Prudent Man Rule, which the Prudent Investor Rule has supplanted in most jurisdictions, evaluates each indivi
作者: bapswarrior    时间: 2012-3-26 10:44

The basic rationale for switching from the Prudent Man Rule (PMR) to the Prudent Investor Rule (PIR) is that the PMR:
A)
views the decision to invest in each asset in isolation, while the PIR recognizes the major tenets of modern portfolio theory and views the decision to invest in a given asset relative to its impact on the portfolio as a whole.
B)
was permitting fiduciaries to take risks that were deemed unacceptable when reviewed in court.
C)
is process-oriented while the PIR is a results-oriented framework.


The main difference between the PMR and the PIR is that the PMR looks at assets in isolation while the PIR incorporates modern portfolio theory. In other words, the PIR looks at an asset’s risk relative to return, and the risk is a function of how the inclusion of the asset affects overall portfolio returns.
作者: bapswarrior    时间: 2012-3-26 10:46

The basic rationale for switching from the Prudent Man Rule (PMR) to the Prudent Investor Rule (PIR) is that the PMR:
A)
views the decision to invest in each asset in isolation, while the PIR recognizes the major tenets of modern portfolio theory and views the decision to invest in a given asset relative to its impact on the portfolio as a whole.
B)
was permitting fiduciaries to take risks that were deemed unacceptable when reviewed in court.
C)
is process-oriented while the PIR is a results-oriented framework.


The main difference between the PMR and the PIR is that the PMR looks at assets in isolation while the PIR incorporates modern portfolio theory. In other words, the PIR looks at an asset’s risk relative to return, and the risk is a function of how the inclusion of the asset affects overall portfolio returns.
作者: bapswarrior    时间: 2012-3-26 10:47

Which of the following statements best summarizes the fundamental concepts underlying the Prudent Man Rule (PMR) and the Prudent Investor Rule (PIR)? The PMR considers risk:
A)
relative to return; the PIR considers risk independent of return.
B)
relative to return; the PIR considers risk relative to return.
C)
independent of return; the PIR considers risk relative to return.


The PMR considers risk independent of return. The PIR considers risk relative to return.
作者: bapswarrior    时间: 2012-3-26 10:48

Which of the following statements about the Prudent Investor Rule is least accurate?
A)
The fiduciary has a duty to diversify unless there is a valid reason not to.
B)
Prudence is determined by looking at the portfolio rather than on specific investments.
C)
Liability is based on the performance of the assets not on the process of making the selections.


Liability is based on the care in the process of making the selections, not on the performance of the assets chosen.
作者: bapswarrior    时间: 2012-3-26 10:48

The Prudent Man Rule (PMR) traces its origins back to:
A)
the 1933 legislation known as the Glass-Steagall Act.
B)
changes in banking practices that resulted from the collapse in financial markets during the Great Depression in the 1930s.
C)
the 1830 court case of Harvard College vs. Amory.


The PMR concept originated with the 1830 court case of Harvard College vs. Amory.
作者: bapswarrior    时间: 2012-3-26 10:49

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 not consider the addition of any investment that would add incremental risk to the portfolio.
B)
Ball should evaluate any potential investment with regard to how it will contribute to the risk and return of the overall portfolio.
C)
Ball should not recommend an investment whose performance could be negatively impacted by fraud or negligence on the part of management.

Click for Answer and Explanation
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.
作者: invic    时间: 2012-3-26 10:52

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)
the Foundation’s irregular needs for liquidity when undertaking construction projects.
C)
avoiding strategies that interfere with legal list statutes, or fail to preserve the purchasing power of Foundation assets.


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.
作者: invic    时间: 2012-3-26 10:52

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 effects of inflation and deflation.
C)
The beneficiary’s knowledge of financial concepts.


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



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