2010 cfa3 sample exam v1 part1

8/6/2019 2010 CFA3 Sample Exam V1 Part1

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2O1OLevel 3 Sample Exam Version 1Vision2020CaseScenarioMsion 2020 Capital Partners (V2020) has operated for the past ten years originating and brokering corporatefinance deals hrough private placements n Emerging and Frontier Markets. However, due to the global financialcrisis, nvestmentbanking deals have diminished and have been volatile and risky; i.e., recent analysis showsthat for every deal signed on, only one out often deals actually closed such that investment banks received fees.Consequently,V2020 struggles, along with its competitors, to generateenough fees o sustain ts business.

During a strategicplanning session o address he issue of financial sustainability, the Y2020 Board of Directors,made up of the industry's top financial experts, determined they needed to create a new, consistent revenuestream o cover all of their fixed costs. The Board assessed he company's strengthsand weaknessesandidentified opportunitieswhereby they could draw on their strengths o create he required ncome stream.Onesuchopportunily dentified was the developmentof an Emergingand Frontier Market BalancedFund (the Fund).The Board has had several enquiries rom clients asking for such a product. The Boaid felt this was an idealbusiness ine to meet client demand, createmonthly assetmanagement ees, as well as act as a buyer of lastresort or any of their clients'privateplacementdeals.

Recognizing hat none of the Board members or senior managers are experienced n assetmanagement, heDirectorshire a specialist the Consultant) o help the companyset up policies andprocedures or the new Fund.The Directorsalso stipulate hat all the recommendationsrom the Consultantshouldensure ompliancewith theCFA AssetManager Code of ProfessionalConduct. Severalof the Trusteesact as rustees or small conservativepensionsunds and so, basedon this experience,hey feel these unds are heir main targetmarket.

LaurenAkinyi, CFA, an independent onsultantwho works with various clients n the assetmanagement ndustryis hired by the Y2020 Board to undertakea studyon the creation and implementationof the Fund. She makes hefollowing recommendationsn a report o the Board concerningcompliancewith theAsset ManagerCode:

Recommendation: V2020 should ollow the following principlesof conduct: 1) act at all times in aprofessional anner; 2) act or the mutualbenefitof its clientsand he firm; (3) actwith independencendobjectivity.Recommendation : To take advantageof their vast experience n the finance industry, he Board of Dilectorsshould ake an active daily role in managing he Fund's assets.Board members must discloseany conflicts ofinterestarising from their businessassociationsoutside of Y2020. In addition, the Board must designateanexistingemployeeas a ComplianceOfficer.

Recommendation3: To avoid any conflicts between the investment banking and the nerv fund managementbusinesses, separate holly ownedsubsidiaryshould be created o undertake he fund management usiness.


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Recommendation: To ensure imely andefficient rades, nestockbrokern eachcounby of investnentshouldbe appointedas the solebroker for the Fund.The Board shouldalsoconsider buying an equrly stake n each ofthe appointed rokersaswell, to increase ources frevenue.After completing ts first yearof operations,he Fundreceivesa letter from the FinancialServicesRegulatoryBody.The notification mposesineson the FundManagementor poordisclosureso their clientsand mandatestle replacementof the SeniorFund Managerasa condition for the renewal of their assetmanagementicense.The Boardof Directorschallengeshe ruling,stating he Fund made he necessaryull disblosures. ot wantingto incur expensive egal feesor wasteprecious ime, however, he Board, without admitting or denying faul!settlesout of count. Subsequently,he Senior Fund Manager eaves he employment of the Fund on his ownaccordafter receivinga multimillion-dollar bonus.After thereplacement f the SeniorFund Manager, he licenseis renewedfor a further year. The Financial ServicesRegulatory Body, however, notifies the Fund that anyfurttrer elated iolationswill result n the revocation f V2020's icense.


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Questi i1 which of e following princ les of nduct k W`9 Jy volated wi respect to e Board reaso ng for se hg up an Emerging and Frontier Market Fun sebGt exactly1answer(s,iom the followin A Act f rthe beneft ofdients: B.Act wi sk 1competence,and d genGe.| C.Act in a professional and e al manner at alltimes

QuestionWouldAkinyi's first recommendation ost ikzly result n the Fund complyingwith the principlesof the AssetManager ode?Select xactly 1 answer(s)rom the ollowing:A. No.B. Yes,becauseheprinciplesarecorrectlygiven.C. Yes,becausehe Fund s run in aprofessionalmanner.

QuestionWhich of Akinyi's policies n Recommendation would not comply with the Asset ManagerCode ifimplemented?Select xactly answer(s)rom he following:A. The Directorsand SeniorManagersakingan activedaily role.B. Designating nexisting mployeeo actasa Compliance fficer.C. Disclosing nyconflicts f interest rising rom heirbusiness ssociationsutside f Y2020

QuestionWhich of the followingwould be mostefective o preventany violation of theAssetManagerCodeas reflectedin Akinyi's hird Recommendation?Select xactly answer(s)rom he ollowing:A. TheFund etains minorityshareholdingn the nvestment ankingarm.B. The Funddoesnot buy any nvestmentsrom the nvestment ankingarm.C. Disclosehe elationshipetweenhe nvestment anking rmaindheFund.

QuestionIf Recommendationwere o be mplemented,hichaspect f the AssetManagerCodewould zosl likely beviolated?Select xactly answer(s)rom he ollowing:A. Fairdealing.B. Bestexecution.C. Priorityof transactions.

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Given the Fund's one-yearhistory, which of the following will rt least likely disclose o its clients so as to be incompliancewith theAssetManagerCode?Selectexactly 1 answer(s)rom the following:A. The lossof their employee.B. Communicationrom the FinancialServicesRegulatoryBody.C. The argepaymento theSeniorManager.


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Exhib 2Market Factor se sitivities aResidual usk

sensitivitiesResidua11 sklobal Equity GobaI Bonds

arket1Market2Market3

1.200.900

00

o95

12.0o/o7.0%1.8o/o

Finally, he board asksabout orecasting xpectedeturns or major marketsgiven hat priceeamings atiosarenot constantover time and hat many companies re repurchasing hares nsteadof increasing ash dividends.O'Reilly responds hat the Grinold-Kronermodel accounts or thosefactors and then makes he followingforecastsor theEuropean quitymarket:. Dividend ieldwil l be 1.95%o.' Shares utstanding ill decline .00%.' Long-term nflation ratewill be l.75Yoper year.. An expansionate or PIEmultiplesof 0.15Yo eryeaf.. Long-termcorporateeal earnings rowth at3.5o/o eryear.

Exhibit IFactor CovarianceMatrix

GlobalEquity GIoba Bo dsGlobal EouityGlobal Bonds

o.02250,0022

o,00220.0025

6 '


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Question $ JlT t

u Wsr k e

: :in

Iect,because survivorsh uas results in a downward bias to repoed retums.

c h ect,because survivorshV uas results in an overly pessimist ew ofexpeGted returns

Question8 1th respect to hk explanaton ofappraisal bias,0 Re ly r`` is; select exactly1answer(s) om e following A correct.

: h ect,beCause the ue varian ofthe assetis uased upward.

c.in ect,because calCuhted Fel on w o er asse end to be uased downward in absolute value.

QuestionWithrespecto his answer o Brown'squestion,O'Reilly most ikely is:Select xactly answer(s)rom the ollowing:A. correct.B. incorrect, ecauseigh-frequencyata re ess ensitiveo asynchronism.C. incorrect, ecauseigh-frequencyata end o produceowercorrelation stimates.

Question0Is O'Reilly'sexplanation f the anchoringrap most ikelycorrect?Select xactly answer(s)rom the ollowing:A. Yes.B. No, becausehe anchoringrap is the tendency or the mind to give a disproportionate eight to the first

informationt receives n a topic.C. No, becausehe anchoringrap s the endencyo temper orecasts o hat hey donot appear xtreme.

Question11Given the data in Exhibits1and2,d1e co ariance between Market1and M ket2is closest to

select exactly1answerls)from tlle followhgA. 0.0017B. 0 0225C. 0.0243


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:fr the Europ m , m em ng tlhe d

select exactl,/l answerl9from the following

A.6.35o/ .B.7.35%.C,8,35%.


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Alan SevernCaseScenarioAlan Severn,a portfolio managerat Morgan Capital, a British institutional assetmanager, s meeting theinvestmentommitteeor Cotswoldndustries' ension lan.Cotswold,based n the UnitedKingdom andaclient of Morgan,has raditionallybeenconservative,nd the pensionplan's portfolio is currently nvested nU.K. stocks ndbonds nly.Cotswold ould ike o evaluatehe addition f a diversified .K. stock ndex o theexisting ortfolio.In order o help he nvestment ommitteewith theirevaluation,Morganhasprovided hedata n Exhibit 1.

Exhibit1Returns,Standard eviations, ndCorrelation

ExpectedReturnCurrentPortfolio S. 11.5o/oStandard eviation f RetumsCurrent ortfolio S) 13.5o/oExpected eturn f U.S. ndex $) 14.5%StandardDeviation of Retumsof U.S. Index ($) 16.0o/oCorrelation f U.S. ndexReturnsf, ) andCunentPortfolioReturns & ) 0.65ExpectedPercentageChange n ExchangeRate( Si$) 6.7%StandardDeviation of ExchangeRateChange 9/$) 8.s%Correlationof U.S.Index Returns $) and Percentage xchangeRate Change f,,/$) 0.45

Severnstates: In general,changing he assetallocation o include developedand emerging market internationalsecuritieso the currentportfolio will result n a new,efficient frontier of portfolio where eachnew porlfolio willoffer higher levels of return but at higher levels of risk, provided the international securities have lowcorrelationswith the currentportfolio."

JamesBruch, a committeemember, esponds: I think that we should not expandour investmentso internationalmarkets."He elaborates ith the followins statements:

Statement1: "Currenciescan luctuatewildly and investing n U.S. stocks exposesus to currency isk that couldnegatively ntpact eturns; or this reason'we houldnot invest n overseasmarkets."Statement2: "Becausemost U.K. companieshave an internationalpresence,we should focus on diversifliingacrossdifferent ndustries n the U.K. andnot worry about diversi$,'ingglobally acrossdifferent countries."Statement : "Emerging marketsarevolatile and exposeus o political risks. They areprone o suffering requentfinancial crises,and offer no risk diversificationbenefitsdurine these imes because orrelationswith developedmarketssuch as he U.K. increase."

Severn espondso Bruch:


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"Curency risk should not preventus from investingglobally. Currency risk can be eliminated by hedgingwithcurrenoy orwards or by diversifying acrossmultiple currencies.Furthermore, he correlationsbetweenequityandcurrencymarketsareso ow that overallcurency risk is minimal.""It is true that emergingmarketsare subject o periodiccrises,but most of the time the crisis doesnot spreadbeyond he local region anddevelopedmarkets emain ow. Emergingmarketsare more likely to eqioy superioreconomicgrowth and over the yearshavebecomemore ntegratedwith developed conomies. his increasedintegrationwith developedmarketswill result n attractive quitymarket eturns."

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2010 cfa3 sample exam v1 part1

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