Reading 10: Prudence in Perspective - LOS c ~ Q6-10

black, style, record, manage, trustee

Q6. Lorenzo Edwards, CFA, is a trustee to Waldrop Enterprise's pension. He hires Dora Ray to manage the fund. Ray's long-term performance record for the fund is solid. Last quarter, she purchased a security that brought down the overall performance of the fund, although she was still able to outperform the benchmark. Under the Prudent Investor Rule, should Edwards be held accountable for the losses?

A) Yes, because he delegated investment authority.

B) No, because the total portfolio outperformed.

C) No, because he delegated investment authority.

Q7. The basic rationale for switching from the Prudent Man Rule (PMR) to the Prudent Investor Rule (PIR) is that the PMR:

A) was permitting fiduciaries to take risks that were deemed unacceptable when reviewed in court.

B) is process-oriented while the PIR is a results-oriented framework.

C) 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.

Q8. Which of the following statements correctly 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) independent of return; the PIR considers risk relative to return.

C) relative to return; the PIR considers risk relative to return.

Q9. Which of the following statements about the Prudent Investor Rule is least accurate?

A) Liability is based on the performance of the assets not on the process of making the selections.

B) The fiduciary has a duty to diversify unless there is a valid reason not to.

C) Prudence is determined by looking at the portfolio rather than on specific investments.

Q10. The Prudent Man Rule (PMR) traces its origins back to:

A) the 1933 legislation known as the Glass-Steagall Act.

B) the 1830 court case of Harvard College vs. Amory.

C) changes in banking practices that resulted from the collapse in financial markets during the Great Depression in the 1930s.