LiquidAssets10

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

A) LNJ has only been in existence for four years.

B) Portfolio valuations are on a cost basis.

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

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

LiquidAssets10

Which of the following is an important requirement of Global Investment Performance Standards (GIPS)?

A) Dividends from equities must be accrued as of the ex-dividend date.

B) Firms need to comply with the local laws of regulation, which supersede GIPS.

C) Time-weighted rates of return that adjust for daily-weighted cash flows must be used beginning January 1, 2003.

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Time-weighted rates of return that adjust for daily-weighted cash flows must be used beginning January 1, 2005. Dividends from equities should be accrued as of the ex-dividend date is a recommendation and not a requirement.

LiquidAssets10

Firm X currently claims compliance with the Global Investment Performance Standards (GIPS) but uses settlement-date accounting. Beginning January 1, 2005, what must Firm X do to remain compliant?

A) Begin using trade-date accounting and recalculate historical performance of its composites.

B) Nothing, there is no change in requirements.

C) Begin using trade-date accounting.

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Standard 1.A.45 requires that firms use trade-date accounting for periods beginning January 1, 2005. These firms, however, will not be required to recalculate performance results that were presented in accordance with the Standards for periods prior to January 1, 2005.

LiquidAssets10

All of the following are requirements of the Global Investment Performance Standards (GIPS) EXCEPT:

A) returns from cash and cash equivalents held in portfolios must be included in total-return calculations.

B) a firm is required to present, at minimum, ten years of annual investment performance that is compliant with GIPS.

C) portfolios must be valued at least monthly for periods beginning January 1, 2001.

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GIPS require that firm’s present, at minimum, five years (not ten) of annual investment performance that is compliant with GIPS. After a firm presents 5 years of compliant history, it must annually add each subsequent year up to a total of 10 years. Note that GIPS also require monthly valuation after January 1, 2001.

LiquidAssets10

Which of the following is a correct representation of requirements needed to meet the Global Investment Performance Standards (GIPS)?

A) Total return, including realized and unrealized gains plus income must be used.

B) All of these choices are correct.

C) Firms must use trade-date accounting for periods beginning January 1, 2005.

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All of the above requirements must be met to claim compliance with GIPS.

LiquidAssets10

Consider the total quarterly returns for the growth and income composite of Zest Investment Management (ZIM): Q1 = 3.20%, Q2 = 4.25%, Q3 = 3.95%, Q4 = 3.35%. What is the appropriate total annual return under the calculation methodology under the Global Investment Performance Standards (GIPS)?

A) 14.480%.

B) 14.75%.

C) 15.58%.

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GIPS Standard 2.A.2 requires periodic returns to be geometrically linked. Thus, the annual return is computed as:
RAnnual = [(1 + RQ1) × (1 + RQ2) × (1 + RQ3) × (1 + RQ4)] – 1
= (1.032)(1.0425)(1.0395)(1.0335) – 1 = 15.58%

LiquidAssets10

The Alexo Investment Management Group manages the investments for 30 retail clients. Alexo has full discretion over the investments of these clients’ assets. At the close of each day, the excess cash in the clients’ portfolios is swept into a money market fund. Alexo does not manage the money market fund, so it does not include the cash portion of the portfolio in its total return performance calculations. Alexo discloses its treatment of cash and cash equivalents in its performance presentation.
Which of the following statements regarding Alexo’s compliance with the Global Investment Performance Standards (GIPS) is CORRECT? Alexo is:

A) in compliance with the GIPS standards. The Standards do not require excess cash to be included in total return performance calculations unless the composite consists primarily of cash or cash equivalents.

B) in compliance with the GIPS standards. The Standards do not require cash or cash equivalents to be included in total return performance calculations unless the portfolio manager has control over the management of the cash or cash equivalents.

C) not in compliance with the GIPS standards. The Standards require cash to be included in total returns calculations if the portfolio manager has control over the amount of the portfolio that is allocated to cash.

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GIPS Standard 2.A.4 requires the returns from cash and cash equivalents held in portfolios to be included in total-return calculations as long as the portfolio manager has control over the amount of the portfolio that is allocated to cash. This requirement stands even if the manager does not actually control the investment of the cash, as is the case when it is held in a money market sweep account.

LiquidAssets10

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

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

B) In both the numerator and the denominator, the market values of fixed-income securities must include accrued income.

C) If a firm sets a minimum asset level for portfolios to be included in a composite, no portfolios below that asset level can be included in that composite.

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Performance must be calculated after the deduction of all trading expenses. (GIPS Standard 2.A.4)

LiquidAssets10

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

A) When returns are calculated net of taxes, only those taxes that are not later reclaimed should be included.

B) Composites must be asset weighted using end-of-period weightings.

C) Performance must be calculated after deducting trading costs.

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Composites must be asset weighted using beginning-of-period weightings or another method that reflects both beginning market value and cash flows.

LiquidAssets10

Jessica Yee, a portfolio manager for the National Investing Alliance (NIA), wants to create a high yield composite portfolio for marketing purposes 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 did she feel it was important to include the cash associated with these portfolios (since the cash was managed by another department of NIA). Yee believed that hedging was a very important element of her investment philosophy in these volatile markets, so she delegated this responsibility to another department within NIA, but she did not wish to include their hedging results with her composite results. Yee wants 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?

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

B) 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.

C) The high yield bond portfolio and convertible debt portfolio should be in different composites since they represent different investment objectives.

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Given the investment style of the composite, the only portfolios that could appropriately be included in her composite are the high yield bond 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 to compare the performance of one firm to another. Composites must be representative of the firm’s products and be consistent with the firm’s marketing strategy. Firms are not permitted to include portfolios with different investment strategies or objectives in the same composite. Portfolios may not be moved into and out of composites except in the case of valid, documented, client-driven changes in investment objectives or guidelines or in the case of the redefinition of the composite.

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

A) Terminated portfolios are allowed to be dropped from composites when the portfolio is no longer actively managed.

B) Yee should include the results of terminated portfolios.

C) Yee should include the results of terminated portfolios through the date the portfolio was last managed.

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Terminated portfolios must be included in the historical record of the appropriate composite(s) through the last full measurement period that the portfolio was under management. This requirement prevents the inclusion of the performance of a terminated portfolio for partial periods in a composite’s return. Also, retaining the performance of a terminated portfolio while it was still being managed to a composite’s strategy prevents survivorship bias.

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

A) 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.

B) The returns from the cash component of Yee’s portfolio must be included in the overall portfolio results.

C) Since the cash component of the portfolio is managed by another department it is not necessary to include it in the overall portfolio results.

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

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

A) Yes, since the use of hedging is negligible the hedging results need not be included in the overall portfolio results.

B) Yes, since Yee is not actually managing the hedging activities she should not include these results into the overall portfolio results.

C) No, given Yee’s investment philosophy, the hedging results should be included in her portfolio results.

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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 to GIPS, carve-out returns excluding cash cannot be used to create a stand-alone composite. When a single asset class is carved out of a multiple-asset portfolio and the returns are presented as part of a single-asset composite, cash must be allocated to the carve-out returns and the allocation method must be disclosed. Beginning January 1, 2010, carve-out returns must not be included in single asset class composite returns unless the carve-outs are actually managed separately with their own cash allocations.