bapswarrior

Mary Rutherford, CFA, is considering the purchase of Greenbelt Paper's stock in an upcoming initial public offering (IPO) for a portfolio that she serves as trustee. She has performed the necessary research, and believes that the stock satisfies the fund's risk/reward requirements. Under the Prudent Investor Rule, Rutherford would:

A) not be allowed to buy the IPO because the transaction is considered too risky.

B) be allowed to buy the IPO.

C) not be allowed to buy the IPO but could instead purchase a large position in the secondary market.

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The new Prudent Investor Rule does not rule out entire classes of securities as does the old rule. However, the trustee must avoid speculation and undue risk. A large position of any stock would not be considered prudent, not to mention an untested stock. The higher fees could be construed as excessive fees and prohibited under the Prudent Investor Rule.

bapswarrior

Mary Rutherford, CFA, is considering the purchase of Greenbelt Paper's stock in an upcoming initial public offering (IPO) for a portfolio that she serves as trustee. She has performed the necessary research and believes that the stock satisfies the fund's risk/reward requirements. Under the Prudent Man Rule, Rutherford would:

A) not be allowed to buy the IPO, because the transaction is considered too risky.

B) be allowed to buy the IPO as well as any options on the stock.

C) be allowed to buy the IPO.

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Under the Prudent Man Rule, entire classes of securities (options, futures, IPOs, etc.) were deemed imprudent. Hence, Rutherford would not be able to buy IPOs or options on stocks.

bapswarrior

Which of the following statements regarding the Prudent Investor Rule (PIR) and the Prudent Man Rule (PMR) is most accurate?

A) The PIR is primarily results-oriented while the PMR is process-oriented.

B) Under the PIR restrictions on investment in categories of securities have been codified.

C) Under the PIR no particular investment is either prudent or imprudent.

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Under the PIR no particular investment is either prudent or imprudent. The decision is made based upon return vs. risk, where risk is measured by the asset’s impact on the portfolio.

bapswarrior

Which of the following statements represent the most important aspect of the Prudent Man Rule?

A) The fiduciary is generally forbidden from delegating their investment authority.

B) Using caution and being conservative in the selection of investments.

C) Each investment is considered on its own merits, not in regard to the rest of the portfolio.

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In general the Prudent Man Rule has been construed as a directive to preserve capital and avoid risk.

bapswarrior

With respect to the Prudent Man Rule and the Prudent Investor Rule, which of the following statements is least accurate?

A) An investment that is not appropriate under the Prudent Man Rule may be appropriate under the Prudent Investor Rule.

B) The Prudent Investor Rule imposes an ordinary standard of care.

C) Both impose discretion in choosing investments.

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The Prudent Investor Rule imposes a “professional” standard of care. The Prudent Investor Rule may allow an investment in an asset, based upon diversification benefits, when the Prudent Man Rule would not allow investing in that asset. Both rules impose discretion in choosing investments.

bapswarrior

A trustee must adhere to the following general fiduciary standards EXCEPT:

A) partiality.

B) caution.

C) skill.

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Trustees must adhere to the standard of impartiality, not partiality.

bapswarrior

Miles Turner, a CFA candidate, oversees a union pension fund. He got this job because of family connections as he is just learning the investment management business. Subsequently, he realizes that he is not ready to make the necessary decisions about the fund. He hires several portfolio managers. Under the Prudent Investor Rule, Turner is:

A) not in compliance because he did not put in writing that funds were managed in-house prior to the hiring of outside managers.

B) not in compliance. Delegation of authority is not allowed.

C) in compliance. Delegation of authority is allowed.

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Delegation of authority is allowed under the Prudent Investor Rule. There is no stipulation that Turner must try to do the job himself first.

bapswarrior

Erica Barnes, CFA, is a trustee for a pension fund. Which of the following is an example of Barnes' failure to follow general fiduciary standards set forth in the new Prudent Investor Rule? She recommends the fund should:

A) hire her relative to manage a new high yield portfolio.

B) hire an outside manager when they lack the in-house expertise to manage a small cap portfolio.

C) consider the need for future growth while maintaining current income obligations.

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Trustees must exercise care, skill, caution, loyalty, and impartiality. Recommending that the trustees approve her relative as new portfolio manager endangers Barnes' ability to avoid conflicts of interest and hence her duty of loyalty.

bapswarrior

At the time a client relationship is established, assume that an appropriate investment policy statement has been developed. Which of the following statements is CORRECT regarding the Prudent Investor Rule (PIR)? The PIR requires that the fiduciary:

A) develop an appropriate investment policy statement when the client relationship is established and update the investment policy only as is deemed necessary by the fiduciary.

B) periodically review the client circumstances and make appropriate changes in the investment policy as warranted.

C) review the client circumstances and make changes when asked to do so by the client and make changes in the investment policy as warranted.

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The PIR requires that an investment policy statement be developed when the relationship is established, and that such a statement be updated no less frequently than annually (more frequently if there is a major change in client circumstances).

bapswarrior

A given client has specified that her primary concern is preservation of principal. Last year the value of this client’s account has declined by 8%. Which of the following statements is CORRECT?

A) This constitutes a violation of the manager's fiduciary responsibility only if the manager deviated from a properly constructed investment policy for this account.

B) This does not constitute a violation of the manager's fiduciary responsibility, regardless of the nature of the investment policy statement for the account.

C) This constitutes a violation of the manager's fiduciary responsibility regardless of whether the manager deviated from a properly constructed investment policy for this account.

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The key concept is that the portfolio investment decision must be process-oriented. The nature of the process is a function of the client’s specific situation and tolerance for risk, and this is embodied in an investment policy statement. So long as the investment policy statement is properly conceived and is adhered to by the manager, there is no violation of fiduciary responsibility.