Reading 49: Global Investment ....mance Standards－LOS d standards, accounting, Investment

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 18: Global Investment Performance Standards
Reading 49: Global Investment Performance Standards
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.

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

A) Benchmarks and composites should be created on an ex post basis.

B) All of these choices are correct.

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

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

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Answer and Explanation

Benchmarks and composites should be created on an ex ante basis. Time-weighted rates of return that adjust for daily-weighted cash flows must be used beginning January 1, 2005.

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

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

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

C) total return, including realized and unrealized gains plus income, must be used.

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

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Answer and Explanation

GIPS require that firms 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.

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

A) market values and must occur at least monthly.

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

C) book values and they must occur at least monthly.

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

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Answer and Explanation

GIPS require portfolio valuation to be based on market values and valuation must occur at least monthly for periods beginning January 1, 2001. For periods beginning January 1, 2010, firms must value portfolios on the date of all large external cash flows.

GIPS require portfolio valuation to be based on market values and valuation must occur at least monthly for periods beginning January 1, 2001. For periods beginning January 1, 2010, firms must value portfolios on the date of all large external cash flows.

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

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

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

C) Returns from cash and cash equivalents held in portfolios must be included in total return calculations.

D) 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.

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Answer and Explanation

This is a recommended action step while the remainder are required.

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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) Begin using trade-date accounting.

C) Nothing, there is no change in requirements.

D) Disclose the use of settlement-date accounting.

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Answer and Explanation

Standard 1.A.4 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.

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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) Valuations are done monthly.

B) Portfolio valuations are on a cost basis.

C) LNJ only has four years of history.

D) Cash and cash equivalent returns are included in calculations.

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Answer and Explanation

Portfolios are to be valued on a market value basis. All other statements are consistent with GIPS.

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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.

C) 1994 through 2003 using monthly valuation.

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

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Answer and Explanation

GIPS Standard 1.A.3 requires firms to use monthly valuation for periods beginning 1 January, 2001. There is no need to recalculate performance for periods prior to 1 January, 2001, in order to claim compliance with GIPS. Thus, assuming AIM is GIPS-compliant in all other areas, it can show its performance history based on quarterly valuation for the years 1994 through 2000. AIM must, however, recalculate its performance results using monthly valuation for 2001, 2002, and 2003 in order to be in compliance with the GIPS standards.

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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) 30 August, 2002.

B) 31 July, 2002.

C) 30 June, 2002.

D) 31 December, 2001.

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Answer and Explanation

GIPS Standard 3.A.4 requires terminated portfolios to be included in the historical record of the appropriate composite(s) through the last full measurement period that the portfolio was under management. Standard 1.A.3 requires that for periods beginning January 1, 2001, portfolios must be valued at least monthly. Thus, SIM should remove the portfolio from its composite at the end of the month preceding its termination, i.e., 31 July, 2002.

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

A) Portfolios must be valued at least monthly for periods beginning January 1, 2001.

B) All of these choices are correct.

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

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

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Answer and Explanation

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