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To: HeyRainier who wrote (26)	12/2/1998 4:27:00 AM
From: HeyRainier	Read Replies (1) \| Respond to of 70

* Level I Question 1: 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 2: Under adaptive expectations, the change in decision makers' expectations as a result of an increase or decrease in inflation will a) be determined by factors other than observed inflation. b) always precede the increase or decrease in inflation. c) parallel the increase or decrease in inflation. d) consistently lag behind actual increases or decreases in inflation. Question 3: The Eurobond market is: a) a joint float system of currency exchange between major European countries. b) a traditional bond market whereby a syndicate of underwriters is assembled and in a few weeks floats a bond for a specific company. c) none of these answers. d) a market for short-term borrowing and lending and is an off-shore market. e) an interbank market closely linked to the foreign exchange market. Question 4: Event studies test a) market reaction to private information. b) the semistrong-form EMH. c) long-term market trends. d) the strong-form EMH. e) the weak-form EMH. Answer 1: 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 2: d Rationale & Reference: Adaptive expectations implies that economic agents base their future expectations on actual outcomes observed during recent periods. Thus high inflation last period will create an expectation of high inflation next period. The lag between reality and expectations will persist since individuals "adapt" their expectations only after observing the previous period. Gwartney & Stroup, pp. 360-361 Answer 3: b Rationale & Reference: The Eurobond market should be carefully distinguished from the Eurocurrency market which is a market for short-term borrowing and lending and is an off-shore market. In contrast, the Eurobond market is a traditional bond market whereby a syndicate of underwriters is assembled and in a few weeks floats a bond for a specific company. Solnik, p. 17 Answer 4: b Rationale & Reference: Event studies test the effects on securities prices of the announcement of public information concerning important events. The weak-form EMH only assumes that security-market information is reflected in prices. Most of the events studied instead provide nonmarket public information, so event studies are more suited for testing the semistrong-form EMH, which does assume that nonmarket public information is reflected in prices. The strong-form EMH, while also assuming that this type of information is reflected in prices, also assumes that private information is reflected in prices as well, so tests of the effects of private information on returns are better suited to testing the strong-form EMH. Reilly & Brown, p. 229 * Level II Question: What are the Procedures for Compliance for Standard IV (A1): Reasonable Basis and Representations? Answer: The procedures are: 1. Members should analyze basic characteristics. Before recommending a specific investment or investment discipline to a broad client group, a member should investigate the investment's basic characteristics. 2. Analyze portfolio needs. A member has the obligation to analyze clients' investment needs as well as the basic characteristics of investments. 3. At the outset of the relationship, the portfolio manager and client should develop a statement of investment objectives and they should review this statement periodically. 4. Maintain files. A member should maintain files to support investment recommendations. Standards Handbook (7th ed.), p. 66 *** Level III Question: Learning Outcome Statement: Describe various stock market anomalies (return regularities) and demonstrate an understanding of how the interrelationships of anomaly-based models can be "disentangled" to produce a "pure return effect". Answer: 1. Value Anomalies Low price/book ratios, Low price/sales, Low price/CF, Low P/E and dividend yield. Low P/E stocks tend to outperform the average. Dividend yield has a U-shaped payoff such that both high-yielding and zero-yielding stocks have the largest payoffs. This effect is tax driven because taxable investors require a higher return to compensate for increased tax liability. 2. Earnings Expectations-Based Anomalies Neglected-Firm effect - measured by the number of security analysts following a stock. Trend-in-Analyst'-estimates effect - stocks whose earnings have been recently upgraded tend to outperform the average. This may be caused by the herd instinct of Wall Street analysts. Earnings-Surprise effect - the tendency for stocks to outperform following a positive earnings surprise. Earnings-Torpedo effect - represents the bias of analysts to be overly optimistic for successful companies and overly pessimistic for unsuccessful ones. Surprise' for high-expectation companies tend to be negative (torpedo) and positive for low-expectation companies. 3. Price-Based Anomalies Price-Per-Share effect - low priced stocks tend to outperform high priced stocks. Market Capitalization - small cap stocks have stronger performance. Residual Reversal effect - the tendency for recent performance to reverse over the short run. If GM and Chrysler are up, buy Ford and it may catch-up. Reversion to the mean. 4. Calendar-Based Anomalies Day-of-the-Week effect - tendency for prices to close the week strong and open weak (Blue Monday effect). Week-of-the-Month effect - first two weeks of the month tend to experience positive returns while the last two average flat. Earnings announcements during the first two weeks are generally positive and latter in the month less so. January effect - half of the size effect seems to occur in January. The entire U-shaped yield effect occurs in the month of January. Disentangling Returns - In much the same way as a doctor evaluates variables such as marital status, age, education, diet, exercise and income to determine a person's blood pressure; the anomalies must be "taken together" to determine the overall performance. By regression analysis we can determine the coefficient for each anomaly and determine how much it contributes to the overall return or pure return. Jacobs & Levy, pp. 36-39