bapswarrior

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.

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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.

bapswarrior

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.

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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.

bapswarrior

Which of the following statements best 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) relative to return; the PIR considers risk relative to return.

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

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

bapswarrior

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

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

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

bapswarrior

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

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

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

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

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

bapswarrior

Joan Ball, CFA, is trustee for the portfolios of several high net worth individuals. She is considering the purchase of equity shares in ARGO Corp., a company that is currently facing allegations of financial mismanagement. Ball believes that the scandal will be forgiven by the market and that shares in ARGO will perform well in the long term. Which of the following statements is in accordance with the new Prudent Investor Rule?

A) Ball should not consider the addition of any investment that would add incremental risk to the portfolio.

B) Ball should evaluate any potential investment with regard to how it will contribute to the risk and return of the overall portfolio.

C) Ball should not recommend an investment whose performance could be negatively impacted by fraud or negligence on the part of management.

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Click for Answer and Explanation
Although a security may be risky as an individual investment, under the new Prudent Investor Rule, each security must be evaluated in the context of the risk and return of the overall portfolio.

invic

Robert Jones, CFA, is the trustee for The Homestead Foundation, a charitable organization whose mission is to provide funding to construct affordable housing in economically disadvantaged neighborhoods across the U.S. In accordance with the new Prudent Investor Rule, a key factor that Jones should consider when making investment decisions for the portfolio is:

A) to eliminate the Foundation’s assets’ exposure to investment risk through appropriate investment decisions.

B) the Foundation’s irregular needs for liquidity when undertaking construction projects.

C) avoiding strategies that interfere with legal list statutes, or fail to preserve the purchasing power of Foundation assets.

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The Foundation, like every beneficiary of a trust, has its own unique liquidity needs. Jones, as trustee, must consider the Foundation’s cash flow requirements when managing trust assets.

invic

When investing and managing trust assets in accordance with the new Prudent Investor Rule, a trust manager should most likely consider which of the following key factors?

A) The trust’s performance relative to the benchmark.

B) The effects of inflation and deflation.

C) The beneficiary’s knowledge of financial concepts.

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A trust manager should consider the effects of anticipated inflation or deflation on the overall performance of the portfolio and make investment decisions accordingly.