The CFA tip of the week e-mail:
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These questions will help you assess your progress in preparing
for the 1999 CFA exam.
All of the questions come from our TestBank Software for all
three CFA levels.
- 5 questions & answers for Level I
(approximately 6,400 Questions are in our Level I Software)
- 1 question & answer for Level II
(approximately 1,630 Questions are in our Level II Software)
- 1 question & answer for Level III
(approximately 1,600 Questions are in our Level III Software)
*** Level I
Question 1: Standard V (A), Prohibition Against Use of Material
Nonpublic Information, states that the test for determining if a
tipper is breaching a fiduciary duty
a) none of these answers.
b) is whether the tipee benefits directly or indirectly from the
disclosure.
c) is whether the insider benefits directly from the disclosure.
d) is whether the tipper benefits directly or indirectly from the
disclosure.
e) is whether the tipper benefits directly from the disclosure.
Question 2: Which of the following are not required disclosures
under the Performance Presentation Standards?
a) The inclusion of any non-fee paying portfolios in composites.
b) Whether balanced portfolio segments are included in
single-asset composites.
c) The existence of a minimum asset size for the inclusion in
composites.
d) Portfolio size range and percentage of total assets in the
same class.
Question 3: Which of the following is not true regarding the
difference between a forward and futures contract?
a) None of these answers.
b) Futures markets are regulated by an identifiable government
agency.
c) All futures contracts require that traders post margin in
order to trade.
d) Performance on futures contracts is guaranteed by a
clearinghouse.
e) Futures contracts always trade on an organized exchange.
f) Forward contracts are always highly standardized with a
specified quantity of a good and with a specified delivery date
and delivery mechanism.
Question 4: Beta is
a) a standardized measure of systematic risk.
b) a standardized measure of risk-adjusted return.
c) a standardized measure of return.
d) a standardized measure of unsystematic risk.
e) a standardized measure of risk.
Question 5: Key steps in the dynamic process of portfolio
management are:
I. Specification of investor objectives, constraints and
preferences.
II. Asset allocation, portfolio optimization, security selection,
implementation and execution.
III. Determination of capital market expectations.
IV. Measurement of portfolio performance.
The order of these steps in the process is:
a) II I, I, IV, II.
b) I, III, II, IV.
c) I, IV, III, II.
d) I, II, III, IV.
Answer 1: d
Rationale & Reference:
Standard V (A), Prohibition Against Use of Material Nonpublic
Information, states that the test for determining if a tipper is
breaching a fiduciary duty is whether the tipper benefits
directly or indirectly from the disclosure.
The three types of personal benefits are:
1. pecuniary benefit,
2. a quid pro quo between the insider and recipient and
3. a gift of confidential information to a relative.
An insider who deals selectively discloses material nonpublic
information without a legitimate business purpose may be found to
have breached a fiduciary duty.
Standards Handbook, p. 142
Answer 2: d
Rationale & Reference:
The existence of a minimum asset size below which portfolios are
excluded from a composite must be disclosed. Whether balanced
portfolio segments are included in single-asset composites and an
explanation of how cash has been allocated among segments must be
disclosed. The inclusion of any non-fee-paying portfolios in
composites and included in the definition of total firm assets
must be disclosed. Only the number of portfolios, their
description, the amount of assets in a composite, the percentage
of the firm's total assets the composite represents need be
disclosed. The portfolio size range or percentage of total assets
in the same class are only recommended, not required disclosures.
Performance Presentation Standards, pp. 16-17, 23
Answer 3: f
Rationale & Reference:
Futures contracts always trade on an organized exchange. Futures
contracts [not forward contracts] are always highly standardized
with a specified quantity of a good and with a specified delivery
date and delivery mechanism. Performance on futures contracts is
guaranteed by a clearinghouse. All futures contracts require that
traders post margin in order to trade. Futures markets are
regulated by an identifiable government agency.
Kolb, p. 3
Answer 4: a
Rationale & Reference:
Beta relates the covariance of an asset to the variance of the
market portfolio. If beta is higher than one, the asset has a
higher systematic risk than the market. If beta is lower than
one, the asset has a lower systematic risk than the market.
Reilly & Brown, p. 289
Answer 5: b
Rationale & Reference:
The process of portfolio management can be divided into four
steps: construction of a policy statement which specifies the
investor's preferences, studying present financial conditions to
forecast future trends, constructing the portfolio and finally
monitoring the portfolio's performance, market conditions and the
investor's needs.
Reilly & Brown, p. 41
1994 CFA Exam, #135, p.m.
*** Level II
Question: Learning Outcome Statement:
List three reasons for the line relating average returns and beta
being flatter than the CAPM would predict.
Answer:
1. Mismeasuring the market portfolio (like using the domestic
market when we should be using the world market) tends naturally
to give stocks with low measured betas high alphas. Imagine, for
example, an extreme case where all stocks in our universe have
true betas of 1.0 and have positive but varying amounts of a
"noise factor" that's independent of the true market.
In this case, the true line is flat. A stock's alpha is
proportional to the difference between 1.0 and its beta.
Moreover, it pays for an investor to emphasize low-beta stocks
from this universe, because that gives him less of the unpriced
"noise factor". And it pays for a corporation to use high
leverage and emphasize low-beta assets, if it is restricted to
assets in the same universe.
2. Margin requirements, borrowing rates that are higher than
lending rates, and limited deductibility of interest costs all
tend to make the line flatter. Those who can't borrow at good
rates bid up the prices of high-beta stocks instead.
3. Yet another reason for a flatter line is investor psychology,
in particular "reluctance to borrow" even when the rules allow it
and the rates are good. Many people seem to dislike the idea of
borrowing or the trading needed to adjust borrowing amounts to
the values of their securities portfolios.
Black, p. 38
*** Level III
Question: Learning Outcome Statement:
Discuss specific steps to create and apply an effective
compliance policy in anticipation of potential scrutiny.
Answer:
The steps are:
1. Understand the Rules. Know what the securities laws mean and
what to watch for.
2. Enforce the Rules. Usually, rules are not enforced because of
a failure to supervise. Red flags that show a predisposition of
misconduct include: a) a history of misconduct, b) failure to
adhere to firm practices and c) failure of someone or some entity
to take advantage of all compliance tools that exist.
3. Designate a Compliance Officer. Every organization should have
an internal "lightning rod" for compliance concerns.
4. Resolve Compliance Concerns Promptly. Simply identifying the
problem is not enough.
5. Keep Compliance Records. Document that the proper compliance
steps were implemented.
6. Avoid Questionable Personal Trades. Don't skim off good
opportunities that should be going to your clients.
7. Keep Current on Enforcement Trends. Be sure to watch emerging
trends. The SEC, like a legislative body, is a
stimulus-and-response organization.
Groskaufmanis, pp. 56-59
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RT |
