Schweser QBank 2017 portfolio management and wealth planning 12 global investment performance standards

Global Investment Performance Standards

Test ID: 7427902

Question #1 of 105

Question ID: 465922

Which of the following statements best describes possible investment strategies of a firm's composites?
ᅞ A) Strategies should be as fully defined as possible so that portfolios within the
composites closely match each other.
ᅞ B) The strategies should not overlap, so as to prevent portfolios falling under multiple
composite descriptions.
ᅚ C) Strategies should avoid having too many qualifiers to prevent the manager from
having a large number of small composites.
Explanation
Strategies may overlap, and portfolios may fall under two descriptions. Strategies should have a suitable number of qualifiers
(such as sector, style, benchmark or capitalization) - having too many qualifiers results in a large number of composites each
containing too few portfolios; having too few qualifiers results in composites that are too broad.

Question #2 of 105

Question ID: 465879

PTN, Inc., is an investment consulting firm. It has used Global Investment Performance Standards (GIPS) since its inception
two years ago. PTN claims to be in compliance with GIPS. Could this statement be CORRECT?
ᅞ A) No, PTN does not have a five-year compliance track record.
ᅚ B) No, consulting firms cannot be GIPS compliant.
ᅞ C) Yes, PTN does not have a five-year track record, so since inception is sufficient.
Explanation
Only investment management firms may claim compliance with GIPS because they actually manage the assets for which

performance is reported.

Question #3 of 105

Question ID: 465910

In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA).
All three of these individuals have enjoyed considerable success in their careers. Freeman is highly regarded for her expertise
in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of fixedincome and equity portfolios, respectively.
In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million.
In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to
$2 million. In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared and
distributed performance presentations that reflected the results of its three primary investment styles. That is, FPA presented
performance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite. The


following list describes some of the actions that FPA took when preparing its performance presentations.

Action

Description

Number
All composites included only assets under management and were not linked with simulated or
1
model portfolio performance.
2

Accrual accounting and book values were used to compute fixed-income returns.

3

Trading expenses were deducted prior to calculating returns.

4

Fee schedules were included in the presentations.

5

All actual fee-paying accounts were included in at least one of the three composites.

6

Asset-weighted composite returns were calculated using end-of-period weightings.
The performance of the equity portion of the balanced accounts, excluding cash, was combined

7
with the equity composite results.
The S&P 500 index was used as the benchmark for all three composite performance
8
presentations.
9

Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA's actions indicated below is in compliance with the Global Investment Performance Standards (GIPS)?

ᅞ A) Action 6.
ᅚ B) Action 1.

ᅞ C) Action 2.
Explanation
Listed below are the actions that are not GIPS-compliant and the reason for noncompliance.

Action 2: Portfolio valuations must be based on market values (not cost basis or book values). (Standard
1.A.2)
Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using
beginning-of-period values or a method that reflects both beginning-of-period values and external
cash flows. (Standard 2.A.6)
Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as
such, are not permitted to be included in composite returns. When a single asset class is carved out of a
multiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be
allocated to the carve-out returns in a timely and consistent manner. Beginning January 1, 2010, carve-out
returns are not permitted to be included in single asset class composite returns unless the carve-out is actually
managed separately with its own cash balance. (Standard 3.A.8)

Action 8: The total return for the benchmark for each annual period. The benchmark must reflect the investment
mandate, objective, or strategy of the composite. (Standard 5.A.1.e)

Action 9: Time-weighted rates of return that adjust for cash flows must be used. Periodic returns must be


geometrically linked. (Standard 2.A.2)

Question #4 of 105

Question ID: 465960

According to the GIPS valuation principles, for periods beginning January 1, 2011, firms must:
ᅚ A) disclose the use of any subjective valuation inputs if the portfolio is a

significant portion of the composite.
ᅞ B) disclose the use of any subjective valuation inputs.
ᅞ C) use only objective valuation methods.
Explanation
For periods beginning on or after January 1, 2011, firms must disclose the use of any subjective valuation inputs if the portfolio
valued using the subjective input represents a significant portion of the composite.

Question #5 of 105

Question ID: 465939

LeReaux Investment Management has created the performance presentation shown below. LeReaux, in existence since
1993, believes its presentation complies with the Global Investment Performance Standards (GIPS).
LeReaux Investment Management, Incorporated
Equity Composite
January 1, 2001, through December 31, 2005

Total

Number

Composite

Total Assets

Percentage of

Total Firm

Return (%)

of Portfolios

Dispersion (%)

at End of Period

Firm Assets

Assets

2002

7.2

24

3.0

187

46

407

2003

4.3

33

4.4

222

56

396

2004

12.1

51

1.2

289

64

452

2005

14.5

65

2.9

355

62

572

Year

LeReaux has performed all calculations in this presentation in accordance with the Global Investment
Performance Standards (GIPS).

Which of the following is NOT an error or omission in LeReaux's presentation that renders it non-compliant with GIPS? GIPS
requires firms to:

ᅚ A) disclose whether accrual accounting was used for dividends.
ᅞ B) disclose whether performance results are calculated gross or net of fees.
ᅞ C) present five years of compliant performance.
Explanation
There is no disclosure requirement regarding the use of accrual accounting for dividends. However, Standard 1.B.3


recommends that accrual accounting must be used for dividends (as of the ex dividend date) for periods beginning January 1,
2005.

Question #6 of 105

Question ID: 412676

Jessica French is an individual investment advisor with 200 clients and claims she conforms to Global Investment Performance

Standards (GIPS). French includes all of the clients on her books. One of those clients is her father, to whom she charges no
fee. However, she manages that portfolio using the same processes as she uses for her paying clients. Another client included
in the composite is John Randolph, a wealthy entrepreneur. Randolph is the only client who does not give her discretion over
the assets and makes every decision himself, getting suggestions from French and using her to implement decisions. French:
ᅞ A) has violated GIPS because it includes her father's account, but not because it
includes Randolph's account.
ᅚ B) has violated GIPS because it includes Randolph's account, but not because it includes
her father's account.
ᅞ C) conforms to GIPS, if disclosures are made about the non-fee-paying account.
Explanation
Non-fee-paying clients can be included in the same composite as fee-paying clients as long as it is disclosed. Nondiscretionary
clients should not be included in the composite as the clients would not adhere to the investment strategy used by the
investment advisor.

Question #7 of 105

Question ID: 412717

Which of the following best describes the underlying principles upon which the Global Investment Performance Standards
(GIPS) are based?
ᅞ A) Uniformity and consistent application of standards for the global regulation of
the securities industry.
ᅞ B) Fair and consistent application of a global set of regulatory requirements.
ᅚ C) Full disclosure and fair representation of performance results.
Explanation
The GIPS standards are a set of voluntary standards based on the fundamental principles of full disclosure and fair
representation of performance results.

Question #8 of 105

Question ID: 465973

In the presentation of a private equity fund, a firm reports an annualized since-inception (SI) internal rate of return (IRR) netof-fees but not gross-of-fees. The net-of-fees returns are not net of carried interest. With respect to GIPS, the firm has:
ᅚ A) made an error by not reporting returns gross-of-fees and by not netting out
carried interest.


ᅞ B) made an error by not reporting returns gross-of-fees but netting out carried interest is
not required so that is not an error.
ᅞ C) made an error by not netting out carried interest but not by omitting returns calculated
gross-of-fees.
Explanation
Standard 7.A.21: The GIPS provision for private equity presentation and reporting require firms to present both the net-of-fees
and the gross-of-fees annualized SI-IRR of the composite for each year since inception. Standard 7.A.46: The net-of-fees
must be net of carried interest, representing the percentage of profits on the fund's investments that general partners receive,
as well as investment management fees and transaction expenses.

Question #9 of 105

Question ID: 465911

Which of the following statements about the Global Investment Performance Standards (GIPS) is least accurate?

ᅞ A) Performance must be calculated after deducting trading costs.
ᅚ B) Composites must be asset weighted using end-of-period weightings.
ᅞ C) When returns are calculated net of taxes, only those taxes that are not later reclaimed should
be included.

Explanation
Composites must be asset weighted using beginning-of-period weightings or another method that reflects both beginning market value and

cash flows.

Question #10 of 105

Question ID: 465944

Mesa Asset Management has claimed compliance with the Global Investment Performance Standards (GIPS®) for many years
and it is now January 1, 2011. Robert Flay, managing director for Mesa wants to go beyond merely complying with the
standards and wants to incorporate all of the GIPS recommendations, particularly those dealing with presentation and
reporting. Flay asks two of his performance analysts, Catherine Cora and Luigi Batali for suggestions as to how Mesa can
incorporate the recommendations.
Cora:

"Mesa is permitted to link our noncompliant annual performance data from 1996-1999 to our GIPS compliant data, as
long as we meet the disclosure requirements. GIPS reporting recommendations suggest that we eliminate all noncompliant data after presenting the required 5 years of compliant historical performance."

Batali: "Including a measure of the standard deviation of composite returns is extra information that will provide prospective
clients with information regarding the fluctuation of composite returns over time."
After listening to their statements, Flay should:

ᅚ A) disagree with both Cora and Batali.
ᅞ B) agree with Cora, but disagree with Batali.
ᅞ C) disagree with Cora, but agree with Batali.


Explanation
Flay should disagree with both Cora and Batali. According to Standard 5.A.2. For periods beginning on or after January 1,
2011, firms must present for each annual period:
a. Three-year annualized ex-post standard deviation using monthly returns for the composite and benchmark.
b. An additional 3-year ex-post risk measure if management feels standard deviation is inappropriate. The firm must match

the periodicity of calculated returns used for the composite and benchmark.
Note that this standard deviation measure would be different from the internal dispersion measure that measures the standard
deviation within the composite (relative to the average composite return). Recommendations for presenting relevant
composite-level risk measures include: Standard 5.B.5. For each year that annualized composite and benchmark returns are
reported, the corresponding annualized standard deviation of monthly returns for the composite and benchmark. Standard
5.B.6. Additional ex-post composite risk measures.
Although the recommendations do not suggest eliminating non-compliant data according to Standard 5.B.8, Firms should
comply with the GIPS for all historical periods, this indicates firms should bring non-compliant data that is linked with compliant
data into compliance.

Question #11 of 105

Question ID: 465871

All of the following are reasons why the Global Investment Performance Standards (GIPS) are necessary EXCEPT enhancing:
ᅚ A) market efficiency.
ᅞ B) competition in global markets.
ᅞ C) investor confidence.
Explanation
The GIPS are necessary for the following reasons:
Enhancing consistency in performance presentation for inter-country holdings. The financial markets are becoming
increasingly more global in nature. Because of extensive inter-country holdings, standardization of presentation is vital for
meaningful and consistent performance presentations to occur.
Enhancing consistency in the use of standards: Return calculation and performance presentation guidelines, if present,
vary greatly among countries. Even when guidelines exist in a county, they may not be extensively followed.
Enhancing competition in global markets: The establishment of global standards places managers from all countries on an
equal footing in soliciting clients. Managers from countries that previously had inferior standards will be taken more
seriously when presenting their performance, while managers from countries with stronger standards will not be penalized
when competing in markets where inferior standards prevail.
Enhancing investor confidence: Global standards increase the confidence that prospective and existing clients have in the

industry and allow them to make more meaningful comparisons.

Question #12 of 105

Question ID: 465926

Which of the following is NOT a composite construction requirement under the Global Investment Performance Standards
(GIPS)?
ᅚ A) Firms must disclose the use of simulated or model portfolio results.


ᅞ B) Carve-out returns excluding cash cannot be used to create a stand-alone composite.
ᅞ C) Firm composites must be defined according to similar investment objectives and/or
strategies.
Explanation
Under GIPS standard 3.A.2, composites must include only assets under management and under Standard 3.A.3 firms may not
link simulated or model portfolios with actual performance. Simulated, back-tested, or model portfolio results do not represent
the returns of actual assets under management and, thus, may not be included in composites performance results.

Question #13 of 105

Question ID: 465949

A firm calculates income return, capital return and total return for their real estate composite using the GIPS provisions for real
estate. Is it necessary for the sum of income return plus capital return to equal total return in each quarter, and the sum of the
four quarterly income returns to equal the income return for the year?

Quarterly Sum Annual Sum
ᅚ A) Yes

No

ᅞ B) No

Yes

ᅞ C) Yes

Yes

Explanation
For each period, the total return must equal income return plus capital return. However, for the year, each component of
return (i.e. income and capital) may be calculated using chain-linked time-weighted rates of return. Hence the annual return
will slightly exceed the sum of the quarterly returns.

Question #14 of 105

Question ID: 465962

A firm does not disclose the valuation hierarchy that they are employing to value an asset, but the firm is properly following
GIPS valuation principles. If the valuation of the asset cannot be determined through objective and observable pricing for
similar investments in active markets, which of the following should be the "next source" of a valuation estimate, in accordance
with CFA Institute GIPS recommendations?
ᅞ A) Subjective, unobservable inputs.
ᅞ B) Market-based input other than quoted pricing that is observable for the asset.
ᅚ C) Quoted pricing for similar and/or identical assets in markets that are not active.
Explanation
If the firm does not disclose the valuation hierarchy that they are employing and is following the GIPS valuation principles, then
the firm is using the recommended GIPS valuation hierarchy. The GIPS valuation hierarchy is as follows:
1. Quoted prices from an active market for the same or similar security.

2. Quoted prices from an inactive market for the same or similar security.


3. Observable market-based inputs other than quoted prices.
4. Subjective, unobservable inputs.
Based on this hierarchy, if observed market prices from an active market are not available, the next best valuation basis is to
use quoted prices from an inactive market.

Question #15 of 105

Question ID: 465873

The Global Investment Performance Standards (GIPS) are necessary for all of the following reasons EXCEPT to:
ᅞ A) enhance competition in global markets by creating a universal set of standards
that places managers from all countries on an equal footing in soliciting
clients.
ᅞ B) enhance investor confidence and allow investors to make more meaningful
comparisons.
ᅚ C) broaden the application and acceptance of the performance presentation guidelines of
foreign and domestic regulatory entities.
Explanation
GIPS are necessary for the following reasons:
Enhancing consistency in performance presentation for inter-country holdings. The financial markets are becoming
increasingly more global in nature. Because of extensive inter-country holdings, standardization of presentation is vital for
meaningful and consistent performance presentations to occur.
Enhancing consistency in the use of standards: Return calculation and performance presentation guidelines, if present,
vary greatly among countries. Even when guidelines exist in a county, they may not be extensively followed.
Enhancing competition in global markets: The establishment of global standards places managers from all countries on an
equal footing in soliciting clients. Managers from countries that previously had inferior standards will be taken more
seriously when presenting their performance, while managers from countries with stronger standards will not be penalized

when competing in markets where inferior standards prevail.
Enhancing investor confidence: Global standards increase the confidence that prospective and existing clients have in the
industry and allow them to make more meaningful comparisons.

Question #16 of 105

Question ID: 465874

The Global Investment Performance Standards (GIPS) apply to investment management firms. They are NOT intended to
serve which of the following?
ᅞ A) Consultants that advise investors.
ᅚ B) Securities market regulators.
ᅞ C) Prospective clients of investment firms.
Explanation
The GIPS are intended to serve potential and existing clients and consultants that advise these investors.


Question #17 of 105

Question ID: 465923

Which of the following descriptions are appropriate qualifiers for a composite?
"Small Cap"
ᅞ A)

Appropriate

"High Duration" "Above ​10 million"
Not
appropriate

Appropriate

ᅞ B) Appropriate

Appropriate

Not appropriate

ᅚ C) Appropriate

Appropriate

Appropriate

Explanation
All three qualifiers are appropriate for a composite. Note that each composite should have sufficient qualifiers to make it
meaningful, but not too many so as to avoid fragmentation of portfolios.

Question #18 of 105

Question ID: 465958

Which of the following is least likely a GIPS valuation requirement?
ᅚ A) If local laws or regulations related to valuation conflict with GIPS, firms are
required to follow the more strict of the law or standard.
ᅞ B) Firms must disclose if their valuation hierarchy differs from the GIPS recommended
hierarchy.
ᅞ C) Firms must disclose their portfolio valuation policies and hierarchy.
Explanation

If local laws or regulations related to valuation conflict with GIPS, firms are required to follow the local laws or regulations and
disclose the conflict. The other two answer choices are both GIPS valuation requirements.

Question #19 of 105

Question ID: 465882

If DeLecrette Investment Management wishes to claim compliance with the Global Investment Performance Standards
(GIPS®) for their annual financial report, the report must include which of the following statements?
ᅚ A) DeLecrette Investment Management claims compliance with the Global
Investment Performance Standards (GIPS®) and has prepared and presented
this report in compliance with the GIPS standards. DeLecrette Investment
Management has not been independently verified.
ᅞ B) DeLecrette Investment Management has prepared and presented this report in
compliance with the Global Investment Performance Standards of the CFA Institute
(CFA Institute-GIPS®). The CFA Institute Global Investment Performance Standards
Committee has not been involved with the preparation or review of this report.
ᅞ C) DeLecrette Investment Management has prepared and presented this report in
compliance with the Global Investment Performance Standards (GIPS®).


Explanation
To claim compliance, a firm must meet all required composite, calculation, disclosure, and presentation Standards. The firm is
also encouraged to comply with all recommended Standards and must comply with local laws and regulations. Firms that claim
compliance to the GIPS may attach the following statement to performance presentations:
"[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and
presented this report in compliance with the GIPS standards. [Insert name of firm] has not been indpendently verified."
Note that no statement about CFA Institute's involvement with the preparation or review of the report is included.

Question #20 of 105

Question ID: 465919

Which of the following portfolios is least likely to be included in a composite described as "U.S. Equity composite"? A portfolio:
ᅞ A) consisting mostly of U.S. equities that is already included in the same
manager's "Global Equity composite".
ᅞ B) of U.S. equities that must hold at least 20% in cash.
ᅚ C) of U.S. equities that may not diverge from the S&P 500 index performance by more
than 100 basis points per year.
Explanation
A very limited tracking error is likely to remove the discretion from a portfolio, preventing it from being included in a composite.
A portfolio may be in two composites provided it falls under both composite descriptions.

Questions #21-22 of 105
Judy Picoo, CFA, a portfolio manager for the JP Fund, needed to compute her portfolio performance results for the 2003 first
calendar quarter in compliance to GIPS. The following monthly results and information were available:

January 2003: +2.3%
February 2003: -1.0%
March 2003: The market value of her portfolio was $50 million on February 28, 2003, and $51.5 million on
March 31, 2003. The portfolio did experience a redemption of $500,000 on March 15, 2003

Question #21 of 105
Calculate the return for the month of March 2003 using the modified Dietz method.
ᅞ A) 2.01%.
ᅞ B) 3.02%.
ᅚ C) 4.02%.
Explanation

Question ID: 465908

GIPS permitted time-weighted rates of return until January 1, 2005, at which time, GIPS required time-weighted rates of return
adjusted for daily-weighted cash flows (modified Dietz method). In order to compute the monthly return for the month of March
2003, use the following formula for the modified Dietz method:

R = [51,500,000 − 50,000,000 − (-500,000)] ÷ [50,000,000 + (-500,000 × 0.51613)] = 4.02%
W = (31 − 15) ÷ 31 = 0.51613

Question #22 of 105

Question ID: 465909

Calculate the quarterly return for the first quarter of 2003.
ᅚ A) 5.35%.
ᅞ B) 1.10%.
ᅞ C) 4.47%.
Explanation
GIPS require that periodic returns must be geometrically linked. The following formula shall apply:
RQ = [(1 + R1) × (1 + R2) × (1 + R3)] - 1

where:
RQ = quarterly return
R1 = return for month 1
R2 = return for month 2
R3 = return for month 3
RQ = [(1 + 0.023) × (1 + (-0.01)) × (1 + 0.0402)] − 1 = 5.35% for the first quarter of 2003

Question #23 of 105

Question ID: 412718

Which of the following statements most accurately describes why the Global Investment Performance Standards (GIPS) were
created? To:
ᅚ A) meet the need for a single globally accepted set of investment performance
presentation standards.
ᅞ B) provide comparability of performance results among nations for which no presentation
guidelines currently exist.
ᅞ C) meet the need for a single globally accepted set of regulatory guidelines among
developed securities markets.


Explanation
Recognizing the need for one globally accepted set of investment performance presentation standards, CFA Institute
sponsored and funded the Global Investment Performance Standards Committee to develop and publish a single global
standard by which all firms in all countries calculate and present performance to clients and prospective clients.

Question #24 of 105

Question ID: 465970

A portfolio manager whose firm follows GIPS is concerned about the effect on his reported investment performance of a large
client-directed withdrawal and the resulting liquidation of certain securities. What would be the best method for adjusting
results for client-directed withdrawals in discretionary portfolios, in accordance with GIPS?
ᅞ A) In this situation, the portfolio should be labeled non-discretionary, and all
current and historical returns should be removed from the composite results.
ᅚ B) GIPS recommend that the manager assumes a proportionate amount of each security
is sold, in determining a fair tax adjustment to "add back."
ᅞ C) The manager is not permitted to add back the non-discretionary taxes in order to
improve the reported composite returns.

Explanation
This proportional adjustment method should be used in order to properly comply with GIPS. This method is preferred, in order
to avoid the temptation to assume the security with the greatest embedded capital gain was sold, in order to improve the
adjustment, and resulting reported returns.

Question #25 of 105

Question ID: 465896

LNJ Asset Management, Inc., would like to claim compliance with the Global Investment Performance Standards (GIPS). Which of the
following statements would render LNJ ineligible for this claim?

ᅞ A) Prior to 2010, LNJ portfolios were not revalued on the date of large cash flows.
ᅚ B) Portfolio valuations are on a cost basis.
ᅞ C) LNJ has only been in existence for four years.
Explanation
Portfolios are to be valued on a market value basis. Both remaining statements are consistent with GIPS.

Question #26 of 105

Question ID: 465906

Achieving comparability among investment management firms' performance presentations requires uniformity in methods
used to calculate returns. Which of the following statements concerning Global Investment Performance Standards (GIPS)
calculation methodology is least accurate?
ᅚ A) Performance must be calculated prior to the deduction of all trading expenses.


ᅞ B) If a firm sets a minimum asset level for portfolios to be included in a composite, no
portfolios below that initial asset level can be included in that composite.

ᅞ C) In both the numerator and the denominator, the market values of fixed-income
securities must include accrued income.
Explanation
Performance must be calculated after the deduction of all trading expenses (GIPS Standard 2.A.4). It's possible due to market
volatility that portfolio values may temporarily fall below the minimum allowable asset level to be included in a composite.
Those portfolios are not automatically excluded from the composite.

Question #27 of 105

Question ID: 465969

GIPS guidance for reporting after-tax returns for periods beginning on or after January 1, 2011 is most likely contained in the:
ᅚ A) country-specific guidance released by the country sponsors.
ᅞ B) GIPS standards in the section regarding GIPS valuation principles.
ᅞ C) GIPS standards in the provision regarding calculation methodology.
Explanation
Since after-tax issues are highly dependent on the taxing authority for the country in which the funds are being managed, the
specific guidance on the presentation of after-tax returns was removed from the GIPS standards. The responsibility now falls
to the country sponsors and the guidance is to be addressed in the country-specific guidance.

Question #28 of 105

Question ID: 412727

McGregor Investment Management promotes itself as a fixed-income investment management firm. The vast majority of the
portfolios it manages are fixed-income portfolios. McGregor does, however, manage a few portfolios, utilizing a growth equity
investment strategy, but the firm has no intention of ever promoting this strategy. Under the Global Investment Performance
Standards (GIPS), must these portfolios be included in a composite?
ᅚ A) Yes, because the portfolios are discretionary and fee paying.
ᅞ B) No, because the firm does not normally manage portfolios to a growth equity strategy

and is not planning to promote it.
ᅞ C) Yes, because the portfolios are managed to a widely recognized investment strategy.
Explanation
The GIPS Standards require that all actual fee-paying discretionary portfolios are included in at least one composite. It does
not matter if the firm ever plans to promote the particular strategy to which a portfolio is being managed, if the portfolio is feepaying and discretionary, it must be included in at least one composite. Thus, McGregor must include the growth equity
portfolios in at least one of its composites.

Question #29 of 105

Question ID: 465952


The GIPS provisions for private equity require the vintage year to be presented. Which of the following best describes the
vintage year? The vintage year is the year in which:
ᅚ A) capital is first drawn down from investors.
ᅞ B) the composite was created.
ᅞ C) the first material investment was made.
Explanation
By definition, the vintage year is the year in which capital is first called from or drawn down from investors.

Questions #30-33 of 105
Jessica Yee, a portfolio manager for the National Investing Alliance (NIA), wants to create a high yield composite portfolio for marketing
purposes from several other portfolios. The portfolios to be drawn from include a high yield bond portfolio, a convertible debt portfolio, and
a large cap equity growth portfolio. In the composite she did not wish to include any historical results from terminated portfolios, nor did
she feel it was important to include the cash associated with these portfolios (since the cash was managed by another department of
NIA). Yee believed that hedging was a very important element of her investment philosophy in these volatile markets, so she delegated
this responsibility to another department within NIA, but she did not wish to include their hedging results with her composite results. Yee
wants to be able to claim compliance under Global Investment Performance Standards (GIPS®).

Question #30 of 105

Question ID: 465913

Which of the following statements describes how Yee should approach the formation of the composite?

ᅞ A) The high yield bond portfolio and convertible debt portfolio should be in different
composites since they represent different investment objectives.

ᅚ B) The large cap equity growth portfolio must not be included in the composite.
ᅞ C) Since the large cap equity growth portfolio is part of the overall portfolios managed by NIA it
can be included in the same composite with the high yield bond and convertible debt
portfolios.

Explanation
Given the investment style of the composite, the only portfolios that could appropriately be included in her composite are the high yield
bond portfolio and the convertible debt portfolio. Thus, the large cap equity growth portfolio must not be included in the composite.
However, the large cap equity growth portfolio may be included in its own separate composite. According to GIPS, firm composites must
be defined according to similar investment objectives and/or strategies. Composites should be defined such that clients are able to
compare the performance of one firm to another. Composites must be representative of the firm's products and be consistent with the
firm's marketing strategy. Firms are not permitted to include portfolios with different investment strategies or objectives in the same
composite. Portfolios may not be moved into and out of composites except in the case of valid, documented, client-driven changes in
investment objectives or guidelines or in the case of the redefinition of the composite.

Question #31 of 105
With respect to the exclusion of terminated portfolios, is her approach correct?

ᅚ A) Yee should include the results of terminated portfolios.

Question ID: 465914

ᅞ B) Terminated portfolios are allowed to be dropped from composites when the portfolio is no
longer actively managed.

ᅞ C) Yee should include the results of terminated portfolios through the date the portfolio was last
managed.

Explanation
Terminated portfolios must be included in the historical record of the appropriate composite(s) through the last full measurement period
that the portfolio was under management. This requirement prevents the inclusion of the performance of a terminated portfolio for partial
periods in a composite's return. Also, retaining the performance of a terminated portfolio while it was still being managed to a composite's
strategy prevents survivorship bias.

Question #32 of 105

Question ID: 465915

Which of the following best describes the cash portfolio results with respect to the overall portfolio results?

ᅚ A) The returns from the cash component of Yee's portfolio must be included in the overall
portfolio results.

ᅞ B) If a third party entity manages the cash component of the portfolio it is not necessary to
include the cash returns in the overall portfolio results.

ᅞ C) Since the cash component of the portfolio is managed by another department it is not
necessary to include it in the overall portfolio results.

Explanation
The returns from the cash component of her portfolio must be included in her portfolio results, even though it may be managed by another

department of the firm (for GIPS compliance, the Firm must claim compliance). Cash returns must be included in portfolio total-return
calculations as long as the portfolio manager has control over the amount of the portfolio that is allocated to cash. This requirement
stands even if the manager does not actually control the investment of the cash, as the case is when excess cash is held in a money
market account. Keep in mind that the inclusion of cash is likely to reduce portfolios experiencing positive gains.

Question #33 of 105

Question ID: 465916

Is Yee correct in excluding the hedging activity results with her portfolio results?

ᅞ A) Yes, since Yee is not actually managing the hedging activities she should not include
these results into the overall portfolio results.

ᅚ B) No, given Yee's investment philosophy, the hedging results should be included in her portfolio
results.

ᅞ C) Yes, since the use of hedging is negligible the hedging results need not be included in the
overall portfolio results.

Explanation
Since hedging is an important part of her investment activity, the hedging results must also be included in her portfolio results in order to
be GIPS compliant. Such results are considered to be carve-out returns and may not be included in a separate composite. According to
GIPS, carve-out returns excluding cash cannot be used to create a stand-alone composite. When a single asset class is carved out of a
multiple-asset portfolio and the returns are presented as part of a single-asset composite, cash must be allocated to the carve-out returns
and the allocation method must be disclosed. Beginning January 1, 2010, carve-out returns must not be included in single asset class


composite returns unless the carve-outs are actually managed separately with their own cash allocations.

Question #34 of 105

Question ID: 465877

Which of the following compliance statements is most acceptable under the Global Investment Performance Standards
(GIPS)?
ᅞ A) [Insert name of firm] has prepared and presented this report in compliance with
the Global Investment Performance Standards (GIPS®).
ᅞ B) [Insert name of firm] has prepared and presented this report in compliance with the
Global Investment Performance Standards (GIPS®) and the CFA Institute.
ᅚ C) [Insert name of firm] claims compliance with the Global Investment Performance
Standards (GIPS®) and has prepared and presented this report in compliance with the
GIPS standards. [Insert name of firm] has not been independently verified.
Explanation
GIPS mandates that firms use the following compliance statement when claiming compliance with the Standards and when the
firm has not been verified: [Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®)
and has prepared and presented this report in compliance with the GIPS standards. [Insert name of firm] has not been
independently verified.
For firms that are verified:
[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and
presented this report in compliance with the GIPS standards. [Insert name of firm] has been independently verified for the
periods [insert dates]. The verification report(s) is/are available upon request. Verification assesses whether (1) the firm has
complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's
policies and procedures are designed to calculate and present performance in compliance with the GIPS standards.
Verification does not ensure the accuracy of any specific composite presentation.
For composites of a verified firm that have also had a performance examination:
[Insert name of firm] claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and
presented this report in compliance with the GIPS standards. [Insert name of firm] has been independently verified for the
periods [insert dates]. Verification assesses whether (1) the firm has complied with all the composite construction requirements
of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present

performance in compliance with the GIPS standards. The [insert name of composite] composite has been examined for the
periods [insert dates]. The verification and performance examination reports are available upon request.
Note the registered trademark symbol (®). There is no such thing as partial compliance and CFA Institute should not be
referenced.

Question #35 of 105

Question ID: 465924

Which of the following reasons is least likely to explain why a portfolio has been moved from one composite to another?
ᅚ A) The portfolio size has recently fallen below the minimum threshold specified
for the "Japanese Value Equities above ¥500 million" composite.


ᅞ B) The portfolio size has grown above £5 million and is more suitable to the "UK Equities
above £5 million" composite than the "UK Equities below £5 million" composite.
ᅞ C) The firm has redefined the composite, and the portfolio no longer falls under the new
definition.
Explanation
All of the suggestions could be valid reasons for moving a portfolio into or out from a composite. However, if a portfolio falls
below a specified minimum and the drop is not likely to be permanent, then the portfolio may remain in that composite in the
short-term.

Question #36 of 105

Question ID: 465953

Which of the following ratios is least likely to be shown in a performance presentation under the GIPS provisions for private
equity?
ᅞ A) Paid-in capital to committed capital.

ᅚ B) Total value to residual value.
ᅞ C) Cumulative distribution to paid-in capital.
Explanation
The required ratios for presentation are: total value to paid-in capital, cumulative distributions to paid-in capital, paid-in capital
to committed capital, and residual value to paid-in capital.

Question #37 of 105

Question ID: 465966

As part of the verification process of a firm claiming GIPS compliance, the third party doing the verification asks for a list and
description of the firm's composites and a list of all portfolios under the firm's management. Which of these requests is (are)
actually part of the preparation process?
ᅞ A) A list of all portfolios under management but not a list and description of
composites.
ᅞ B) A list and description of composites but not a list of all portfolios under management.
ᅚ C) Both asking for a list and description of composites and a list of all portfolios under
management.
Explanation
The verification includes both of these requests as well as many others such as a sample of performance presentations and
marketing materials and all investment management agreements or contracts.

Question #38 of 105

Question ID: 465904

In October of 2008, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA).
All three of these individuals have enjoyed considerable success in their careers. Freeman is highly regarded for her expertise

in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of fixedincome and equity portfolios, respectively.
In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million.
In early 2010, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to
$2 million. In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared and
distributed performance presentations that reflected the results of its three primary investment styles. That is, FPA presented
performance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite. The
following list describes some of the actions that FPA took when preparing its performance presentations.

Action

Description

Number
All composites included only assets under management and were not linked with simulated or
1
model portfolio performance.
2

Accrual accounting and book values were used to compute fixed-income returns.

3

Trading expenses were deducted prior to calculating returns.

4

Fee schedules were included in the presentations.

5

All actual fee-paying accounts were included in at least one of the three composites.

6

Asset-weighted composite returns were calculated using end-of-period weightings.
The performance of the equity portion of the balanced accounts, excluding cash, was combined

7
with the equity composite results.
The S&P 500 index was used as the benchmark for all three composite performance
8
presentations.
9

Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA's actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)?

ᅞ A) Actions 2, 3, and 4.
ᅚ B) Actions 6, 8, and 9.
ᅞ C) Actions 1, 6, and 8.
Explanation
Listed below are the actions that are not GIPS-compliant and the reason for noncompliance.

Action 2: Portfolio valuations must be based on fair value (not cost basis or book values). (Standard 1.A.2)
Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using
beginning-of-period values or a method that reflects both beginning-of-period values and external
cash flows. (Standard 2.A.3)
Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as
such, are not permitted to be included in composite returns. When a single asset class is carved out of a

multiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be


allocated to the carve-out returns in a timely and consistent manner. Beginning January 1, 2010, carve-out
returns are not permitted to be included in single asset class composite returns unless the carve-out is actually
managed separately with its own cash balance. (Standard 3.A.7)

Action 8: The total return for the benchmark (or benchmarks) that reflects the investment strategy or mandate
represented by the composite must be presented for each annual period. If no benchmark is presented, the
presentation must explain why no benchmark is disclosed. (Standard 5.A.6)

Action 9: Time-weighted rates of return that adjust for cash flows must be used. Periodic returns must be
geometrically linked. (Standard 2.A.2)

Question #39 of 105

Question ID: 465893

In October of 1998, Alice Freeman, Georgeanne Pallence, and Mark Antonasanti formed FPA Investment Management (FPA).
All three of these individuals have enjoyed considerable success in their careers. Freeman is highly regarded for her expertise
in the area of security analysis, while Pallence and Antonasanti are well known for their exemplary management of fixedincome and equity portfolios, respectively.
In the initial period after its inception, FPA only accepted high net worth clients, requiring a minimum investment of $5 million.
In early 2000, however, FPA made the decision to expand its client base by lowering its minimum investment requirement to
$2 million. In the effort to attract new clients and improve the information it provided for its current clients, FPA prepared and
distributed performance presentations that reflected the results of its three primary investment styles. That is, FPA presented
performance results for an intermediate fixed-income composite, a broad equity composite, and a balanced composite. The
following list describes some of the actions that FPA took when preparing its performance presentations.

Action

Description

Number
All composites included only assets under management and were not linked with simulated or
1
model portfolio performance.
2

Accrual accounting and book values were used to compute fixed-income returns.

3

Trading expenses were deducted prior to calculating returns.

4

Fee schedules were included in the presentations.

5

All actual fee-paying discretionary accounts were included in at least one of the three composites.

6

Asset-weighted composite returns were calculated using end-of-period weightings.
The performance of the equity portion of the balanced accounts, excluding cash, was combined

7
with the equity composite results.
The S&P 500 index was used as the benchmark for all three composite performance

8
presentations.
9

Equal-weighted rates of return that adjust for cash flows were used.

Which of FPA's actions indicated below are NOT in compliance with the Global Investment Performance Standards (GIPS)?

ᅞ A) Actions 1 and 5.


ᅞ B) Actions 3 and 6.
ᅚ C) Actions 2 and 7.
Explanation
Listed below are the actions that are not GIPS-compliant and the reason for noncompliance.

Action 2: Portfolio valuations must be based on fair value (not cost basis or book values). (Standard 1.A.2)
Action 6: Composite returns must be calculated by asset weighting the individual portfolio returns using
beginning-of-period values or a method that reflects both beginning-of-period values and external
cash flows. (Standard 2.A.3)
Action 7: Carve-out segments excluding cash are not permitted to be used to represent a discretionary portfolio and, as
such, are not permitted to be included in composite returns. When a single asset class is carved out of a
multiple asset class portfolio and the returns are presented as part of a single asset composite, cash must be
allocated to the carve-out returns in a timely and consistent manner. Beginning January 1, 2010, carve-out
returns are not permitted to be included in single asset class composite returns unless the carve-out is actually
managed separately with its own cash balance. (Standard 3.A.7)

Action 8: The total return for the benchmark (or benchmarks) that reflects the investment strategy or mandate
represented by the composite must be presented for each annual period. If no benchmark is presented, the
presentation must explain why no benchmark is disclosed. (Standard 5.A.6)

Action 9: Time-weighted rates of return that adjust for cash flows must be used. Periodic returns must be
geometrically linked. (Standard 2.A.2)

Question #40 of 105

Question ID: 465889

The Strausburg Investment Management (SIM) manages portfolios that are represented in more than 15 composites. Over
the years, the exact number of portfolios under management has fluctuated between 65 and 95 due to terminations and
additions. Assume that SIM is notified of the termination of a portfolio on 25 August, 2012. At the end of which of the following
dates should the terminated portfolio be removed from its composite order to be compliant with the Global Investment
Performance Standards (GIPS)?
ᅚ A) 31 July, 2012.
ᅞ B) 30 August, 2012.
ᅞ C) 31 December, 2011.
Explanation
GIPS Standard 3.A.6 requires terminated portfolios to be included in the historical record of the appropriate composite(s)
through the last full measurement period that the portfolio was under management. Standard 1.A.3 requires that portfolios
must be valued at least monthly. Thus, SIM should remove the portfolio from its composite at the end of the month preceding
its termination (i.e., 31 July, 2012).

Question #41 of 105

Question ID: 465967


The purpose of third-party verification:
ᅞ A) is required by CFA Institute but not the SEC.
ᅚ B) may give a GIPS compliant firm a competitive advantage by making the claim to GIPS

compliance more credible.
ᅞ C) is required by CFA Institute and the Securities and Exchange Commission (SEC).
Explanation
As of now, the only purpose of verification is to give the GIPS compliant firm a competitive edge. Prospective clients will have
more confidence in the claim of GIPS compliance.

Question #42 of 105

Question ID: 465959

Which of the following regarding the GIPS real estate valuation principles is most accurate?
ᅞ A) The GIPS require the reporting of a single appraisal value.
ᅞ B) The GIPS recommend that real estate investments be valued externally by outside
sources.
ᅚ C) Fees paid to external valuators must not be based on resulting value.
Explanation
The amount of the external valuator's fee must not be based on the resulting value. The GIPS require(not recommend) that
real estate investments be valued externally by outside sources. Although appraisal standards allow reporting values in
ranges, the GIPS recommend (not require) the reporting of a single value.

Question #43 of 105

Question ID: 465927

Which of the following is NOT a composite construction requirement of the Global Investment Performance Standards (GIPS)?
ᅚ A) Terminated portfolios must be removed from the historical record of the
appropriate composites for all years for which they were included in the
composites.
ᅞ B) Composites must include new portfolios on a timely and consistent basis after each
portfolio comes under management.

ᅞ C) All actual fee-paying discretionary portfolios must be included in at least one
composite.
Explanation
Standard 3.A.46 states that terminated portfolios must be included in the historical record of the appropriate composites up to
the last full measurement period that each portfolio was under management. The inclusion of terminated portfolios in historical
performance prevents survivorship bias.

Question #44 of 105


Question ID: 465957

According to GIPS, when presenting performance to a prospective wrap fee sponsor, an investment manager must:
ᅞ A) disclose the names of the wrap fee sponsors when presenting sponsorspecific composites.
ᅞ B) not link non-compliant performance that occurs before 1 January 2006 with compliant
performance.
ᅚ C) present performance of all wrap fee accounts in the composite being presented.
Explanation
According to standard 8.A.5, when soliciting business from potential SMA/wrap fee clients, firms must provide presentations
that include all SMA/wrap fee accounts managed to the stated objective or strategy.
In standard 8.A.4, sponsor-specific composite results are presented to an existing wrap fee sponsor, not a potential sponsor.
According to standard 8.A.7, firms may link non-compliant performance with compliant performance as long as the noncompliant performance pertains to periods before 1 January 2006 and only compliant data is presented for periods after 1
January 2006.

Questions #45-48 of 105
Eric Jicu, a highly successful portfolio manager of the EJ Fund, wishes to define the EJ Fund as a firm under the Global
Investment Performance Standards (GIPS®) standards. Jicu is employed by National Investing Alliance (NIA), a small regional
brokerage firm. Although he has disclosed this information to his superiors at NIA, he would like to disclose his compliance for
marketing purposes by using his past actual performance results of five years, which included two years of simulated results.
Jicu also managed several non-fee-paying portfolios that were non-discretionary under a different investment style. Since the

results of these non-discretionary portfolios were highly successful, he wanted to include them into his EJ Fund composites for
compliance. In his statement of compliance, Jicu wrote: "The EJ Fund claims compliance with the Global Investment
Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. The EJ
Fund has not been independently verified."

Question #45 of 105

Question ID: 465884

In defining a firm, does the EJ Fund qualify as a firm under GIPS?
ᅚ A) No, since to claim compliance NIA must be included.
ᅞ B) Yes, since the EJ Fund is a separate entity it does qualify under GIPS.
ᅞ C) No, since there is no mention that Jicu is incorporated he cannot qualify as a firm.
Explanation
No, the EJ Fund does not qualify as a firm for GIPS compliance. In order to claim compliance, NIA must be included. In order
for an investment firm to claim GIPS compliance, the GIPS must be applied on a firmwide basis. The key here is the definition
of the firm, because it establishes the boundaries for what constitutes firm assets, and the set of portfolios that must be
included in at least one composite. According to the GIPS, firms must be defined as:

"An investment firm, subsidiary, or division held out to clients or prospective clients as a distinct business
entity."


Question #46 of 105

Question ID: 465885

In constructing the historical results of the EJ Fund, is Jicu correct in his approach?
ᅞ A) Yes, because he included five years of actual performance data.
ᅚ B) No, because simulated results cannot be included with actual performance results.

ᅞ C) No, because GIPS requires a minimum of ten years of performance before claiming
compliance.
Explanation
Jicu is not correct because simulated results must not be included with actual performance results. Under GIPS, composites
must include only assets under management and may not link simulated or model portfolios with actual performance.
Simulated, back-tested, or model portfolios results do not represent the returns of actual assets under management and may
not be included in composite performance results.

Question #47 of 105

Question ID: 465886

In constructing the composites, is Jicu correct in his approach?
ᅞ A) Yes, since fee-paying and non-fee-paying portfolios can be included in the
same composite as long as they have the same investment objectives.
ᅞ B) No, since fee-paying and non-fee-paying portfolios cannot be included in the same
portfolio.
ᅚ C) No, since the fee-paying discretionary portfolios are managed under a different
investment style as the non-fee-paying non-discretionary portfolios.
Explanation
Jicu is not correct in the construction of composites. Non-discretionary portfolios cannot be included in a composite. Non-feepaying discretionary portfolios may be included in the firm's composites, but if they are, firms are required to disclose the
percentage of composite assets represented by non-fee-paying discretionary portfolios. If the firm includes non-fee-paying
portfolios in its composites, they are subject to the same rules as fee-paying portfolios. If a portfolio's status changes from
discretionary to non-discretionary, the portfolio may not be removed from a composite retroactively. However, the portfolio
must be removed going forward. Composites must include all actual fee-paying discretionary portfolios. All actual fee-paying
discretionary portfolios must be included in at least one composite. By including all fee-paying discretionary portfolios in at
least one composite, firms cannot cherry-pick their best performing portfolios to present to prospective clients. Firms are
permitted to include a portfolio in more than one composite, provided it satisfies the definition of each composite.
Firm composites must be defined according to similar investment objectives and/or strategies. Composites should be defined
such that clients are able to compare the performance of one firm to another. Composites must be representative of the firm's

products and be consistent with the firm's marketing strategy. Firms are not permitted to include portfolios with different
investment strategies or objectives in the same composite. Portfolios may not be moved into and out of composites except in
the case of valid, documented, client-driven changes in investment objectives or guidelines or in the case of the redefinition of
the composite.

Question #48 of 105
In the compliance statement, is Jicu correct is claiming compliance?

Question ID: 465887


ᅚ A) No, since Jicu is not in full compliance with GIPS.
ᅞ B) No, since Jicu's GIPS compliance statement is not written correctly.
ᅞ C) Yes, since Jicu is in compliance with GIPS.
Explanation
No, Jicu may not claim compliance for the EJ Fund for all of the above reasons. A firm must be in full compliance with the
GIPS in order to claim GIPS compliance. There is no such thing as partial GIPS compliance!
If the performance presentation does not meet all of the requirements of the GIPS, firms cannot claim compliance with any
exceptions.

Questions #49-54 of 105
Graham and Crickenburg Associates is a large money-management company. The firm has been in existence for four years,
and Graham and Crickenburg Associates has two divisions which are separate legal entities. One division in the company
handles all the individual client accounts and one division handles all the corporate accounts. The co-owners and chief
executive officers, Charles Graham and Kevin Crickenburg, are considering the advantages of conforming to the Global
Investment Standards, GIPS®. Graham thinks that it may be more cost effective to only make the individual client division GIPS
compliant. Graham thinks this is acceptable to only make one part of the firm GIPS compliant if they sign a letter of intent that
they will make the entire company GIPS compliant within a year. Crickenburg says that it is not possible, because the entire
company must become GIPS compliant or not at all. They resolve to investigate the issue later, and Graham and Crickenburg
move on to examining the requirements for input data and calculations.

Graham and Crickenburg note that they have records concerning the returns of portfolios in both divisions going back since
the firm began. The returns were calculated monthly, used accrual accounting for fixed-income assets, used accrual
accounting for dividend-paying stocks, and used settlement-date prices. They have all the final returns for the portfolios in
hard copy form. Most of the raw data pertaining to the returns of the assets in the portfolios and calculation methods have
been lost. This was because Graham and Crickenburg threw away the hard copy of the raw data. A computer virus destroyed
many of the raw data files. Graham and Crickenburg discuss the adequacy of the data for GIPS compliance. Graham says that
only having the returns data is sufficient since the company had an external CPA go over the books each year. Crickenberg
says that having records going back four years is sufficient.
Graham and Crickenburg Associates has a wide variety of individual clients. Some of the clients are very conservative, and
some are very aggressive. Two separate clients are so conservative that, four years ago, they stipulated that their entire
portfolio simply be invested equally across US Treasury strips with two, four, six and eight years to maturity. As each group
matures, as the first set did two years ago, it would be rolled over into the eight years to maturity strips again. These clients
put their money with Graham and Crickenburg Associates so that the company would take care of the rollover, the paperwork,
and computing the tax liability. The clients pay a fee for this service.
The portfolios of the more aggressive clients were managed by Jill Laporte, CFA, for the first two years of the existence of
Graham and Crickenburg Associates. The portfolios she managed had higher returns and lower standard deviations than their
respective indexes for those first two years. After two years, Laporte left the firm and took a small number of the clients with
her. After she left, the aggressive portfolios that had been under her management and remained with Graham and
Crickenburg Associates underperformed their respective indexes.
Graham and Crickenburg Associates is an American based firm with most of its clients living or doing business in the United
States. Some of the clients are foreign, however, and have the majority of their holdings in foreign assets. Graham and
Crickenburg have been computing the returns of these portfolios in their respective domestic currencies. The portfolios


denominated in foreign assets use foreign benchmarks, naturally, and some of the indexes used as benchmarks report
returns net of taxes. Graham and Crickenburg discuss the extent of the details they must report with respect to these facts.
Graham says that they must disclose the currency used to express the performance of each portfolio. Crickenburg says they
do not have to disclose details concerning indexes reporting returns net of taxes.

Question #49 of 105

Question ID: 465930

In Graham's and Crickenburg's discussion concerning whether to make only a portion of the company GIPS compliant, they
each gave an opinion concerning the possibility of making only one division GIPS compliant and a reason supporting that
opinion. With respect to both the opinion and reason:
ᅞ A) both are correct.
ᅞ B) only one is correct.
ᅚ C) both are incorrect.
Explanation
Because the subdivisions are distinct business entities, the company can define each of its divisions as a separate firm for the
sake of GIPS compliance. Thus, one division can be GIPS compliant while the other is not. There need not be an intent to
make all divisions GIPS compliant in such an instance. (Study Session 18, LOS 35.c)

Question #50 of 105

Question ID: 465931

With respect to the historical input data, which of the following are impediments to Graham and Crickenburg associates
becoming GIPS compliant? The returns:
ᅞ A) are calculated monthly and on the date of all large cash flows.
ᅚ B) are calculated using settlement-day prices.
ᅞ C) of the dividend-paying stocks are calculated using accrual accounting.
Explanation
As of January 2005, trade-date prices must be used (Standard 1.A.5). Monthly calculations and accrual accounting for fixedincome assets is required. Accrual accounting for dividend-paying stocks is recommended. (Study Session 18, LOS 35.c)

Question #51 of 105

Question ID: 465932

With respect to the historical input data, the existence of only the portfolio returns data, and the fact that data only goes back
four years: Graham and Crickenberg both state the data is sufficient. Graham says only having the portfolio returns is
sufficient, and Crickenberg says only having four years is sufficient. With respect to these statements:
ᅞ A) both are incorrect.
ᅞ B) only Crickenberg is incorrect.
ᅚ C) only Graham is incorrect.
Explanation
Graham was incorrect because the supporting data must be maintained (Standard 1.A.1). Crickenberg was correct in that the
firm has only been existence for four years, so four years of data is adequate. (Study Session 18, LOS 35.c)