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Free CFA-Level-III Exam Braindumps (page: 45)

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PDF with 472 Questions

Arthur Campbell, CFA, is the founder of Campbell Capital Management (CCM), a money management firm focused solely on high net worth individuals. Campbell started CCM two years ago after a 25-year career with a large bank trust department. CCM provides portfolios tailored to match the unique situation of each individual client. All of CCM's clientele have balanced portfolios. CCM does not use derivatives or exotic instruments to manage any of its portfolios. CCM's equity style is defined as growth at a reasonable price (GARP). Most of CCM's portfolios are managed under one of the following three approaches:
• Aggressive (10 accounts): 70% stocks and 30% bonds.
• Moderate (4 accounts): 50% stocks and 50% bonds.
• Conservative (25 accounts): 30% stocks and 70% bonds. CCM has recently added the following two clients:
1. Harold Moss, a long-time acquaintance of Campbell. Campbell and Moss agreed to an investment policy statement in which Moss' portfolio will be managed under CCM's Aggressive approach but will have significantly greater exposure to technology stocks than a typical CCM aggressive portfolio.
2. Richard Bateman is a successful businessman with a $5 million portfolio. Bateman wants his portfolio managed using a conservative approach, and he specifically states that no options or futures are to be used.
A current client, Stan North, has decided to retire. North would like to reduce his risk exposure from aggressive to conservative. CCM moves North's account, including its historical performance, to the conservative composite.
At the end of 2008, CCM reports the moderate portfolio composite performance but does not include the associated number of accounts.
CCM reported the 2008 returns on its conservative composite as shown in Figure 1: Figure 1: CCM Conservative Composite Returns: Year Ending December 31, 2007


The data shown in Figure 2 relates to Moss portfolio transactions from the 2nd quarter of 2008. Figure 2: CCM Equity Returns for the Second Quarter of 2008

Which of the following statements concerning CCM's performance presentation is most accurate1! According to GIPS standards:

  1. external verification of CCM's performance measurement policies is not required.
  2. CCM must report the number of accounts in the moderate portfolio composite for 2008.
  3. the cash balance in the CCM conservative composite must be excluded from any return calculations.

Answer(s): A

Explanation:

Currently, GIPS verification is not required. This may change in the future. The verification process is central to the reliability of the GIPS. Normally, CCM must include the number of accounts in each composite. However, if the composite has five or fewer accounts, CCM is not required to disclose the number of accounts. The cash balance should be allocated across the other asset classes in reporting returns. (Study Session 18,LOS 49.t)



Arthur Campbell, CFA, is the founder of Campbell Capital Management (CCM), a money management firm focused solely on high net worth individuals. Campbell started CCM two years ago after a 25-year career with a large bank trust department. CCM provides portfolios tailored to match the unique situation of each individual client. All of CCM's clientele have balanced portfolios. CCM does not use derivatives or exotic instruments to manage any of its portfolios. CCM's equity style is defined as growth at a reasonable price (GARP). Most of CCM's portfolios are managed under one of the following three approaches:
• Aggressive (10 accounts): 70% stocks and 30% bonds.
• Moderate (4 accounts): 50% stocks and 50% bonds.
• Conservative (25 accounts): 30% stocks and 70% bonds. CCM has recently added the following two clients:
1. Harold Moss, a long-time acquaintance of Campbell. Campbell and Moss agreed to an investment policy statement in which Moss' portfolio will be managed under CCM's Aggressive approach but will have significantly greater exposure to technology stocks than a typical CCM aggressive portfolio.
2. Richard Bateman is a successful businessman with a $5 million portfolio. Bateman wants his portfolio managed using a conservative approach, and he specifically states that no options or futures are to be used.
A current client, Stan North, has decided to retire. North would like to reduce his risk exposure from aggressive to conservative. CCM moves North's account, including its historical performance, to the conservative composite.
At the end of 2008, CCM reports the moderate portfolio composite performance but does not include the associated number of accounts.
CCM reported the 2008 returns on its conservative composite as shown in Figure 1: Figure 1: CCM Conservative Composite Returns: Year Ending December 31, 2007


The data shown in Figure 2 relates to Moss portfolio transactions from the 2nd quarter of 2008. Figure 2: CCM Equity Returns for the Second Quarter of 2008

Based on Figure 1 and using the strategic asset allocation method, the annual return of the bond category for the conservative composite is closest to:

  1. 4.5%.
  2. 4.7%.
  3. 4.8%.

Answer(s): C

Explanation:

The 70% allocation to bonds represents the percentage of the $277,875,000 ($95,875,000 stocks +
$182,000,000 bonds) that is invested in bonds. It does not consider the $47,125,000 in cash or the total portfolio value of $325,000,000. To determine the strategic return on the bonds, we must allocate cash to the bond category by using the actual allocation to bonds in the portfolio, assuming cash is part of the portfolio: allocation to bonds = total portfolio value x [strategic allocation - actual allocation

= $325,000,000 x (0.70 - (182 / 325)) = $45,500,000

The bond return calculation muse include the appropriate amount of cash. To determine the appropriate amount, the actual percentage amount is subtracted from the strategic percentage amount in bonds. This difference is multiplied by the total dollar amount of the portfolio. The cash dollar amount is used to calculate the weighted average return of cash and bonds. 7 he performance calculation represents the actual return for the bond portion of the portfolio. (Study Session 18, LOS 49.j)



Arthur Campbell, CFA, is the founder of Campbell Capital Management (CCM), a money management firm focused solely on high net worth individuals. Campbell started CCM two years ago after a 25-year career with a large bank trust department. CCM provides portfolios tailored to match the unique situation of each individual client. All of CCM's clientele have balanced portfolios. CCM does not use derivatives or exotic instruments to manage any of its portfolios. CCM's equity style is defined as growth at a reasonable price (GARP). Most of CCM's portfolios are managed under one of the following three approaches:
• Aggressive (10 accounts): 70% stocks and 30% bonds.
• Moderate (4 accounts): 50% stocks and 50% bonds.
• Conservative (25 accounts): 30% stocks and 70% bonds. CCM has recently added the following two clients:
1. Harold Moss, a long-time acquaintance of Campbell. Campbell and Moss agreed to an investment policy statement in which Moss' portfolio will be managed under CCM's Aggressive approach but will have significantly greater exposure to technology stocks than a typical CCM aggressive portfolio.
2. Richard Bateman is a successful businessman with a $5 million portfolio. Bateman wants his portfolio managed using a conservative approach, and he specifically states that no options or futures are to be used.
A current client, Stan North, has decided to retire. North would like to reduce his risk exposure from aggressive to conservative. CCM moves North's account, including its historical performance, to the conservative composite.
At the end of 2008, CCM reports the moderate portfolio composite performance but does not include the associated number of accounts.
CCM reported the 2008 returns on its conservative composite as shown in Figure 1: Figure 1: CCM Conservative Composite Returns: Year Ending December 31, 2007


The data shown in Figure 2 relates to Moss portfolio transactions from the 2nd quarter of 2008. Figure 2: CCM Equity Returns for the Second Quarter of 2008

Based on Figure 2 and using the modified Dietz method, calculate the equity performance of the Moss portfolio for the second quarter of 2008.

  1. 10.5%.
  2. 10.7%.
  3. 11.1%.

Answer(s): C

Explanation:

GIPS now requires daily weighted cash flows in time-weighted total return calculations. The calculation for the modified Dietz method is as follows:
Moss portfolio: inflows for 61 days of the total 91 day?
(Study Session 18. LOS 49.0)



Paul Dennon is senior manager at Apple Markets Associates, an investment advisory firm. Dennon has been examining portfolio risk using traditional methods such as the portfolio variance and beta. He has ranked portfolios from least risky to most risky using traditional methods.
Recently, Dennon has become more interested in employing value at risk (VAR) to determine the amount of money clients could potentially lose under various scenarios. To examine VAR, Paul selects a fund run solely for Apple's largest client, the Jude Fund. The client has $100 million invested in the portfolio. Using the variance-covariance method, the mean return on the portfolio is expected to be 10% and the standard deviation is expected to be 10%. Over the past 100 days, daily losses to the Jude Fund on its 10 worst days were (in millions): 20, 18, 16, 15, 12, 11, 10, 9, 6, and 5. Dennon also ran a Monte Carlo simulation (over 10,000 scenarios). The following table provides the results of the simulation:

Figure 1: Monte Carlo Simulation Data

The top row (Percentile) of the table reports the percentage of simulations that had returns below those reported in the second row (Return). For example, 95% of the simulations provided a return of 15% or less, and 97.5% of the simulations provided a return of 20% or less.
Dennon's supervisor, Peggy Lane, has become concerned that Dennon's use of VAR in his portfolio management practice is inappropriate and has called for a meeting with him. Lane begins by asking Dennon to justify his use of VAR methodology and explain why the estimated VAR varies depending on the method used to calculate it. Dennon presents Lane with the following table detailing VAR estimates for another Apple client, the York Pension Plan.

To round out the analytical process. Lane suggests that Dennon also incorporate a system for evaluating portfolio performance. Dennon agrees to the suggestion and computes several performance ratios on the York Pension Plan portfolio to discuss with Lane. The performance figures are included in the following table. Note that the minimum acceptable return is the risk-free rate.
Figure 3: Performance Ratios for the York Pension Plan


Using the variance/covariance method, the value at risk in the Jude Fund with 97.5% probability will be closest to:

  1. $10 million.
  2. $20 million.
  3. $90 million.

Answer(s): A

Explanation:

The variance/covariance method relies on the assumption of a normal distribution. With a 97.5% probability, the lower bound on the distribution is the mean less two standard deviations which equals 10% - 2(10%) = -10%.
On a $100 million investment, therefore, the VAR using the variance/covariance method is $100 million times 10% or $10 million. (Study Session 14, LOS 40.e,f)
Professor's Note: Remember that for a 97.5% (2.5%) VAR you use the z-score for a 95% confidence interval (- 2.00), because 2.5% of the distribution falls in each tail. For a 95% (5%) VAR, you use the z-score for a 90% confidence interval, because 5% of the distribution falls in each tail. The VAR significance, in this case either 2.5% or 5%, is the proportion of the distribution in the lower tail. In computing VAR, we ignore the upper tail.






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