Reading 10: Prudence in Perspective - LOS b ~ Q1-5

statements, fiduciary, following, manager, regard

Q1. 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 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.

C) The manager has a duty to diversify client assets unless it is in the client’s best interests not to diversify.

Q2. 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.

Q3. 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 use caution.

C) Yes, because he did not act impartially.

Q4. 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.

Q5. 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) develops an investment policy statement that is suitable for the client and reviews the client's situation on a regular basis.

C) implements a process that yields returns that are above average on a risk-return basis and updates the process over time.