QUESTION: 245

Which of the following ESG screening methodologies is most likely to result in a well-diversified portfolio? Screening on:

a relative basis only
an absolute basis only
both a relative basis and an absolute basis

Answer(s): C

Explanation:

Screening on both a relative basis and an absolute basis is most likely to result in a well-diversified portfolio.

Relative Screening: This involves comparing companies within the same industry or sector to identify the top or bottom performers based on ESG criteria. It ensures that the portfolio maintains exposure to various industries.

Absolute Screening: This sets fixed thresholds for ESG criteria that companies must meet to be included in the portfolio, regardless of their industry. It ensures that the portfolio includes only companies that meet a certain standard of ESG performance.

Diversification: Combining both methods allows for a broader and more balanced approach to ESG integration, ensuring that the portfolio is diversified across sectors while maintaining high ESG standards.

CFA ESG Investing

Reference:

The CFA Institute's ESG Investing materials emphasize the benefits of using both relative and absolute screening to achieve a well-diversified portfolio that aligns with ESG objectives. This combined approach helps in capturing a wide range of high-performing ESG companies across different industries.

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QUESTION: 246

With regard to screening, exclusions that are not supported by global consensus are best described as:

universal exclusions
idiosyncratic exclusions
conduct-related exclusions

Answer(s): B

Explanation:

Screening involves excluding certain investments based on specific criteria.
When exclusions are not supported by a global consensus, they are best described as idiosyncratic exclusions.

Universal exclusions (A): These are exclusions that are widely accepted and applied globally, such as the exclusion of companies involved in controversial weapons.

Idiosyncratic exclusions (B): These exclusions are specific to particular investors or investment strategies and are not based on a global consensus. They reflect the unique values or preferences of the investor or investment mandate.

Conduct-related exclusions (C): These are based on a company's behavior or actions, such as violations of human rights or environmental regulations.
While these can be idiosyncratic, they are often based on broader accepted standards.

Reference:

CFA ESG Investing Principles

MSCI ESG Ratings Methodology (June 2022)

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QUESTION: 247

Pension funds are most likely classified as:

asset owners
fund promoters
asset managers

Answer(s): A

Explanation:

Pension funds are typically classified as asset owners.

Asset owners (A): Pension funds manage and invest assets on behalf of their beneficiaries. They have significant capital and are responsible for making investment decisions, often delegating management to external asset managers.

Fund promoters (B): Fund promoters are entities that market and promote investment funds but do not necessarily own the assets themselves.

Asset managers (C): Asset managers are entities that manage investment portfolios on behalf of asset owners.
While pension funds may have internal asset management capabilities, they are primarily asset owners.

Reference:

CFA ESG Investing Principles

Definitions of asset owners, fund promoters, and asset managers in the investment industry

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QUESTION: 248

All else equal, a higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to:

a lower estimate of intrinsic value
the same estimate of intrinsic value
a higher estimate of intrinsic value

Answer(s): A

Explanation:

A higher discount rate applied to a company's discounted cash flow (DCF) analysis will lead to a lower estimate of intrinsic value.

Higher discount rate: The discount rate is used to calculate the present value of future cash flows. A

higher discount rate reduces the present value of those cash flows.

Intrinsic value: The intrinsic value of a company is the sum of the present values of its expected future cash flows. As the discount rate increases, the present values decrease, resulting in a lower estimate of intrinsic value.

Reference:

CFA ESG Investing Principles

Standard finance and valuation textbooks explaining DCF analysis

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Free ESG-Investing Exam Braindumps (page: 62)

QUESTION: 245

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QUESTION: 246

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QUESTION: 247

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QUESTION: 248

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