Reading 49: Global Investment Performance Standards Los d~Q1-

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LOS d: State the requirements and recommendations of the GIPS standards with respect to input data, including accounting policies related to asset valuation and performance measurement.

Q1. Which of the following is an important requirement of Global Investment Performance Standards (GIPS)?

A) All of these choices are correct.

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

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

Q2. 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.

Q3. 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.

Q4. In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA). All three of these individuals have enjoyed considerable success in their careers. Freeman is highly regarded for her expertise in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of fixed-income and equity portfolios, respectively.

In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million. In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to $2 million. In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared and distributed performance presentations that reflected the results of its three primary investment styles. That is, FPA presented performance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite. The following list describes some of the actions that FPA took when preparing its performance presentations.

Action Number	Description
1	All composites included only assets under management and were not linked with simulated or model portfolio performance.
2	Accrual accounting and book values were used to compute fixed-income returns.
3	Trading expenses were deducted prior to calculating returns.
4	Fee schedules were included in the presentations.
5	All actual fee-paying discretionary accounts were included in at least one of the three composites.
6	Asset-weighted composite returns were calculated using end-of-period weightings.
7	The performance of the equity portion of the balanced accounts, excluding cash, was combined with the equity composite results.
8	The S& 500 index was used as the benchmark for all three composite performance presentations.
9	Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA’s actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)?

A) Actions 2 and 7.

B) Actions 3 and 6.

C) Actions 1 and 5.

Q5. Which of the following actions are recommended (not required) for claiming compliance with the Global Investment Performance Standards?

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

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

C) Accrual accounting should be used for dividends (as of the ex-dividend date).

Q6. LNJ Asset Management, Inc., claims compliance with the Global Investment Performance Standards (GIPS). Which of the following statements would render LNJ ineligible for this claim?

A) Portfolio valuations are on a cost basis.

B) LNJ only has four years of history.

C) Valuations are done monthly.

Q7. Since its inception on 1 January, 1994, Alpine Investment Management (AIM) has calculated its investment performance using quarterly valuation. Beginning 1 January, 2004, AIM plans to present its performance history since its inception. What must AIM do with regard to this issue if it intends to claim compliance with the Global Investment Performance Standards (GIPS)? Recalculate its performance for the years:

A) 2000 through 2003 using monthly valuation.

B) 2001 through 2003 using monthly valuation, and disclose the fact that quarterly valuation was used in the pre-2001 periods.

C) 2001 through 2003 using monthly valuation.

Q8. 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.

Q9. The Strausburg Investment Management (SIM) manages portfolios that are represented in more than 15 composites. Over the years, the exact number of portfolios under management has fluctuated between 65 and 95 due to terminations and additions. Assume that SIM is notified of the termination of a portfolio on 25 August, 2002. At the end of which of the following dates should the terminated portfolio be removed from its compositin oreder to be compliant with the Global Investment Performance Standards (GIPS)?

A) 31 July, 2002.

B) 30 August, 2002.

C) 31 December, 2001.

Q10. Under the Global Investment Performance Standards (GIPS), for periods beginning January 1, 2001, portfolio valuation must be based on:

A) market values and they must occur at least quarterly.

B) market values and must occur at least monthly.

C) cost basis and they must occur at least monthly.