土豆妮

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.

土豆妮

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 individual security in isolation—the Prudent Investor Rule takes a portfolio perspective. The Prudent Investor Rule allows for delegation of authority. In fact, delegation of authority can be viewed as required when specialized expertise is required.

土豆妮

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.

土豆妮

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.

土豆妮

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.

土豆妮

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.

---

The PMR considers risk independent of return. The PIR considers risk relative to return.

土豆妮

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.

土豆妮

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.

---

Liability is based on the care in the process of making the selections, not on the performance of the assets chosen.

土豆妮

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

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

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

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

土豆妮

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

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

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

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

---

The PMR concept originated with the 1830 court case of Harvard College vs. Amory.