LOS d: Identify and explain potential data quality issues as they relate to calculating rates of return.

Q1. Frank Belanger would like to calculate the rate of return for an illiquid asset. He states that he will use matrix pricing to obtain a substitute for the security’s current price. Which of the following most accurately describes matrix pricing? In matrix pricing, the analyst uses:

A)   the price from the last trade for the same security.

B)   dealer quotes for similar securities.

C)   an average of recent prices.

Q2. Which of the following would NOT be regarded to be a problem relating to the quality of data used in calculating rates of return?

A)   Matrix pricing is used for some fixed income securities.

B)   Account valuations include trade date accounting.

C)   When accounts contain illiquid assets, estimates or guesses are used in the calculation.

Q3. Accounts that contain illiquid assets present additional problems of accurately measuring return. Which of the following statements would NOT be regarded as a problem associated directly with illiquid assets?

A)   Matrix pricing is used.

B)   Account valuations use trade date accounting as opposed to settlement accounting.

C)   Assets are carried at the price of the last trade.

LOS d: Identify and explain potential data quality issues as they relate to calculating rates of return. fficeffice" />

Q1. Frank Belanger would like to calculate the rate of return for an illiquid asset. He states that he will use matrix pricing to obtain a substitute for the security’s current price. Which of the following most accurately describes matrix pricing? In matrix pricing, the analyst uses:

A)   the price from the last trade for the same security.

B)   dealer quotes for similar securities.

C)   an average of recent prices.

Correct answer is B)

Matrix pricing is used when the asset is illiquid and a security price is not readily available. In matrix pricing, the analyst uses dealer quoted prices for similar securities.

Q2. Which of the following would NOT be regarded to be a problem relating to the quality of data used in calculating rates of return?

A)   Matrix pricing is used for some fixed income securities.

B)   Account valuations include trade date accounting.

C)   When accounts contain illiquid assets, estimates or guesses are used in the calculation.

Correct answer is B)

The use of trade date accounting would be regarded as a positive attribute of the account in the context of measuring returns. Trade date accounting is preferred to settlement date and the inclusion of accrued interest and dividends would be ideal. Matrix pricing is the use of estimated prices taken from quoted prices on securities with similar characteristics; this could clearly introduce inaccuracies in the measurement of returns.

Q3. Accounts that contain illiquid assets present additional problems of accurately measuring return. Which of the following statements would NOT be regarded as a problem associated directly with illiquid assets?

A)   Matrix pricing is used.

B)   Account valuations use trade date accounting as opposed to settlement accounting.

C)   Assets are carried at the price of the last trade.

Correct answer is B)

The use of trade date accounting is regarded to be a key feature of a good return measurement process. The other options are examples of the problems caused when illiquid assets are included in the account. Matrix pricing is using the quoted price of a similar asset as a proxy for the market value of thinly traded fixed income securities.

Thanks.

zan