Reading 10: Prudence in Perspective LOSc -Q 1～5

答案和详解如下：

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

A)   the 1896 legislation known as the Robinson-Patman Act.

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

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

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

The correct answer was B)

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

2、Which of the following statements about the Prudent Investor Rule is least accurate?

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

B)   The delegation of investment authority is permitted.

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

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

The correct answer was C)

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

3、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)   independent of return; the PIR considers risk relative to return.

B)   relative to return; the PIR considers risk independent of return.

C)   independent of return; the PIR considers risk independent of return.

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

The correct answer was A)

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

4、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)   did not hold the fiduciary sufficiently responsible for the loss of principal in trust accounts.

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

The correct answer was A)

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.

5、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 each investment in considered on its own merit.

B)   No, because the total portfolio outperformed.

C)   No, because he delegated investment authority.

D)   Yes, because he delegated investment authority.

The correct answer was B)

The new Prudent Investor Rule takes into consideration total portfolio performance and not each individual security by itself. One loss in a portfolio that otherwise outperformed does require accountability for that one loss. Also, the New Rule allows for delegation of authority. Although authority is delegated, Edwards is still the fiduciary for the fund.