CFA CFA level 3 study NotéCFA level 3 CFA level 3 CFA level 3 CFA level 3 finquiz item set answers, study session 18, reading 34

Reading 34

Overview of the Global Investment Performance Standards

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CFA Level III Item-set - Solution
Study Session 18
June 2018

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Reading 34

Overview of the Global Investment Performance Standards

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FinQuiz Level III 2018 – Item-sets Solution
Reading 34: Overview of the Global Investment Performance Standards
1. Question ID: 9117
Correct Answer: C
In order to claim compliance with the GIPS standards, a firm must be an investment management
firm, subsidiary, or division held out to clients as a distinct business entity. (I.0.A.12)
A distinct business entity is further defined as a “unit, department, office or division that is
organizationally and functionally separate from other units, departments, offices or divisions and that

retains discretion over the assets that it manages and that should have autonomy over the investmentdecision making process.”
In the case of SA, the branch is organizationally and functionally separate from the rest of the
branches. This implies that its structure enables it to claim compliance to the GIPS standards. The
trading rule does not serve as a compliance impediment to the branch.
In the case of MAATD, the fact that it is organizationally separate from the other branches does not
make it independent from the rest of the firm and thus does not enable it to qualify as a distinct
business entity eligible for compliance. This is because:
international purchase and sale decisions are sanctioned by SA’s chief investment officer making
MAATD’s investment advisor decisions and processes dependent on SA. This occurs despite the
relative independence of the domestic trading activity.
Since compliance is achieved for the entire firm, rather than for individual client accounts, MAATD’s
domestic trading does not make it eligible for claiming compliance.
In the context of GM, it is not eligible for compliance with the GIPS standards as its investment
process for pensions, endowments and foundations is heavily constrained by sponsor restrictions and
dependent on the sponsor and MAA’s chief investment officer approval. These restrictions and
approval requirements dampen the independence of the investment process.
In the context of life and non-life insurance clients, the fact that GM and MAA’s chief investment
officer are required to coordinate during the performance evaluation period, dampens the
independence of the investment process.
Due to the reasons provided, GM is not eligible for claiming compliance with the GIPS standards.
2. Question ID: 9118
Correct Answer: A
In order to claim compliance with the GIPS standards, a firm must be an investment management
firm, subsidiary, or division held out to clients as a distinct business entity. (I.0.A.12)
A distinct business entity is further defined as a “unit, department, office or division that is
organizationally and functionally separate from other units, departments, offices or divisions and that

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Reading 34

Overview of the Global Investment Performance Standards

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retains discretion over the assets that it manages and that should have autonomy over the investmentdecision making process.”
In the case of SA, the branch is organizationally and functionally separate from the rest of the
branches. This implies that its structure enables it to claim compliance to the GIPS standards. The
trading rule does not serve as a compliance impediment to the branch.
In the case of MAATD, the fact that it is organizationally separate from the other branches does not
make it independent from the rest of the firm and thus does not enable it to qualify as a distinct
business entity eligible for compliance. This is because:
international purchase and sale decisions are sanctioned by SA’s chief investment officer making
MAATD’s investment advisor decisions and processes dependent on SA. This occurs despite the
relative independence of the domestic trading activity.
Since compliance is achieved for the entire firm, rather than for individual client accounts, MAATD’s
domestic trading does not make it eligible for claiming compliance.
In the context of GM, it is not eligible for compliance with the GIPS standards as its investment
process for pensions, endowments and foundations is heavily constrained by sponsor restrictions and
dependent on the sponsor and MAA’s chief investment officer approval. These restrictions and
approval requirements dampen the independence of the investment process.
In the context of life and non-life insurance clients, the fact that GM and MAA’s chief investment
officer are required to coordinate during the performance evaluation period, dampens the
independence of the investment process.
Due to the reasons provided, GM is not eligible for claiming compliance with the GIPS standards.
3. Question ID: 9119
Correct Answer: C
Based on MAA’s compliance policies, the correct version of each policy is highlighted below.
Policy 1:

A firm that has been defined for the purpose of GIPS may undergo subsequent changes in
its corporate structure or organizational design. However the change may not be reflected
as an alteration of historical composite results. In other words, the change must be
applied prospectively. (I.0.A.15)

Policy 2:

Firms are encouraged to undertake verification. (I.0.B.2)

Policy 3:

All data and information which is necessary to support the performance presentation and
calculation methodologies included in a compliant presentation must be captured and
maintained. (I.1.A.1)

Policy 4:

For periods prior to January 1, 2001, portfolios must be valued at least quarterly. For
periods beginning on or after January 1, 2001, portfolios must be valued at least monthly.
For periods beginning on or after January 1, 2010, portfolios must be valued on the date
of all large cash flows and as of each calendar month-end or the last business day of each
month. (I.1.A.3-4)

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Reading 34

Policy 5:

Overview of the Global Investment Performance Standards

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Valuations should be obtained from qualified independent third parties. In addition,
switching from one source to another merely to improve the stated performance does not
reflect the spirits of the standards. (I.1.B.2)

Assuming each policy has been correctly defined, policies 1, 3 and 4 are requirements whereas
policies 2 and 5 are recommendations of the standards.
4. Question ID: 9120
Correct Answer: B
In the context of the correct version of the policies provided in the solution to Part 3:
Policy 1:

violates the GIPS standards should it be applied. This is because the standards require a
prospective change as opposed to a retrospective change.

Policy 2:

does not violate the GIPS standards should it be applied. This is because it is in
agreement with the recommendations.

Policy 3:

does not violate the GIPS standards should it be applied.

Policy 4:

does not violate the GIPS standards should it be applied. It is in agreement with the
requirement.

Policy 5:

violates the GIPS standards should it be applied. Switching from one source to another
merely to improve the stated valuation, as stated by the recommendation, reflects a
violation of the standards.

5. Question ID: 9121
Correct Answer: B
The requirement of GIPS pertaining to the recording of client transactions is that firms must use
trade-date accounting for the purpose of performance measurement for periods beginning January 1,
2005. Prior to this date, transactions which were recorded in accordance with settlement-date
accounting need not be restated. (I.1.A.5)
Trade-date accounting incorporates recording a transaction on the date of occurrence as opposed to
when cash is paid or received for it. Settlement-date accounting refers to recording transactions when
cash is received or paid for the transactions.
In the case of client 1, the transaction recording date reflects a violation of the standards. This is
because:
the transaction occurred on January 1, 2005 and was paid for on January 20, 2005. Thus the
transaction should have been recorded when the purchase was made (i.e. January 1, 2005) and not
in accordance with settlement-date accounting (i.e. the cash payment date).
In the case of client 2, the transaction recording date does not reflect a violation of the standards. This
is because:
although the transaction was recorded on the date cash was paid for the transaction (June 1, 2004)
and not the date of purchase (March 15, 2004), this date is prior to the January 1, 2005
requirement. Prior to January 1, 2005 firms are permitted to use settlement-date accounting.

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In case of client 3, the transaction recording date reflects a violation of the standards. This is because:
the transaction occurred on July 12, 2009 and was paid for to MAA on July 21, 2009. Thus the
transaction should have been recorded when the sale was made (i.e. July 12, 2009) and not in
accordance with settlement-date accounting (i.e. the cash receipt date).
6. Question ID: 9122
Correct Answer: C
The GIPS standards require firms to display the percentage of total firm assets represented by a
composite or the amount of total firm assets at the end of each annual period. The phrase total firm
assets refers to the aggregate fair value (irrespective of discretionary or fee-paying) of all assets for
which the firm has investment management responsibility. (I.0.A.13)
Since all the portfolios are completely managed by MAA and reflect fair values, the percentage to
include in total firm assets is 100% for each client. The break down is provided below.
In the case of client 1, 100% of the portfolio assets are included as total firm assets (70% + 25% +
5%).
In the case of client 2, 100% of the portfolio assets are included as total firm assets (35% + 40% +
25%).
In the case of client 3, 100% of the portfolio assets are included as total firm assets (15% + 85% +
0%).
7. Question ID: 9125
Correct Answer: B
One of the characteristics of the GIPS standards is that it requires firms to comply with the local law
in the event of a conflict between the standards and local laws. In the event that the firm does not

comply with the stricter local law it is in violation of the standards’ requirements.
Since the Moroccan laws require firms to undertake verification using its appointed regulatory body,
Aaros and Mitchell, should the firm not undertake verification or undertake it using a third party other
than that sanctioned, it will violate the standards. Since TA is situated in the Northern Morocco, the
state laws of the country will be applicable (and not U.S. laws).
8. Question ID: 9126
Correct Answer: A
The GIPS standards require firms to document their policies and procedures in establishing and
maintaining compliance with the standards (I.0.A.5). The policies which need to be documented
include the firm’s error correction policies and procedures. By not documenting these policies, the
firm will violate a key requirement of the standards.

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9. Question ID: 9127
Correct Answer: B
Policy I:
The GIPS standards require firms to adopt composite specific policies pertaining to the treatment of
external cash flows and follow those policies consistently. Furthermore, the policy should describe
the firm’s methodology for computing time-weighted returns and the firm’s assumptions about the
timing of capital inflows and outflows. (I.2.A.2)
Although the firm policy defines a large external cash flow as required by the standards, it is applied
to the aggregate of the clients’ individual portfolios. On the other hand, the standard requires the firm

to define its cash flows based on a composite level as opposed to aggregate client portfolios which are
managed using a variety of investment styles.
Policy II:
For periods prior to January 1, 2005 the GIPS standards permit the use of the Original Dietz method
where cash flows are assumed to occur in the middle of the month (I.2.A.2). TA’s policy complies
with standards’ requirements.
Policy III:
For periods beginning on or after January 1, 2005 the standards require firms must approximate rates
of returns that adjust for daily weighted external cash flows. For periods beginning January 1, 2010
firms must value portfolios on the date of all large external cash flows. Furthermore, the standards
require that for periods falling after January 1, 2001 firms must calculate monthly returns. Prior to
that, quarterly returns may be calculated. (I.2.A.2)
By not following the above GIPS requirements and calculating returns adjusted for weighted external
cash flows for periods on or after January 1, 2010, TA has violated the requirements of the standards.
10. Question ID: 9128
Correct Answer: B
Policy I:
In the case of portfolio valuations, the GIPS standards contain the following requirements:
For periods prior to January 1, 2001 portfolios must be valued at least quarterly;
For periods beginning on or after January 1, 2001 portfolios must be valued at least monthly;
For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all
large external cash flows and as of each calendar month-end or the last business day of the month.
(I.1.A.3-4)
Large cash flows occur more frequently than a monthly or quarterly basis. Thus by valuing portfolios
on the date of external cash flows (since its compliance year: 1999), the firm has not violated the
requirements and recommendations of the standards.
Policies II and III:
For periods beginning January 1, 2006 the standards require that the firm’s composites and the
portfolios within the composite have consistent beginning and ending annual valuation dates. Unless
the composite is reported on a non-calendar fiscal year, the beginning and ending valuation dates

must be the last date of the calendar year or corporate accounting year (I.1.A.7).

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Reading 34

Overview of the Global Investment Performance Standards

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Although the composites that contain the indexed; semi-active and active portfolios are valued on an
annual basis, the two composites are valued on different dates, December 31st and June 30th,
respectively. This requirement applies to all of the firms’ composites and by not adhering completely
to the requirement, policies II and III constitute a violation of the standards.
11. Question ID: 9129
Correct Answer: C
Policy I:
GIPS standards require firms to include the returns from cash and cash equivalents in total return
calculations (I.2.A.3). By not doing so, TA has violated the best practice requirements.
Policy II:
GIPS standards require firms to calculate returns after the deduction of actual and not estimated
trading expenses (I.2.A.4).
In the event the trading expenses cannot be broken from the bundled fees, the gross return must be
reduced by the entire amount of the bundle fee or the portion of the bundle fee which includes direct
trading expenses. (I.2.A.5.a)
When calculating net of fees returns, the entire bundled fee or the portion of the bundled fee that
includes investment management fees and trading expenses must be deducted. (I.2.1.5.b)
TA violates this standard as it should deduct the entire bundled fee or the portion including direct
trading expenses as opposed to investment management expenses.

Policy III:
Provision I.2.B.1 recommends that returns should be calculated net of non-reclaimable withholding
taxes on interest, dividends and capital gains. Withholding taxes subject to reclamation should be
accrued until recovery takes place. Withholding taxes that cannot be recovered should be treated as
transaction costs and deducted from the portfolio before the returns are calculated.
TA has incorrectly treated reclaimable and non-reclaimable withholding taxes and thus is not in
compliance with this recommendation.
12. Question ID: 9130
Correct Answer: B
The formula to calculate returns under the Modified Dietz method is:
௏ ି௏బ ି஼ி
R Dietz = ௏ ା(∑భ೙ (஼ி

௑௪ )
బ

R Dietz =

೔సభ

೔

೔

$ଶ଼,ସହ଴,଴଴଴ିଶହ,ହହ଴,଴଴଴ିଵ,ଶହ଴,଴଴଴ି଼଴଴,଴଴଴

యభషఱ
యభషమమ
×$ଵ,ଶହ଴,଴଴଴ቁାቀ
×$଼଴଴,଴଴଴ቁቃ

యభ
యభ

$ଶହ,ହହ଴,଴଴଴ାቂቀ

R Dietz = 3.168019% ≈ 3.17%.
13. Question ID: 9143
Correct Answer: C
In order to claim compliance with the GIPS standards, firms are recommended to undertake
verification. This verification can only be done using an independent third party. Amongst the sources
listed by Gerard, only source 2 can be used for verification.

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Source 1:

The reason why Horace Shaw may not be used is because of his past involvement with
the firm. The consultant may still have relationships with company employees and/or
executives which may undermine the objectivity of the process.

Source 3:

The reason why H.M & S may not be an appropriate candidate is because the firm is

involved in providing external auditing as well as other services to the firm which may
present a conflict of interest (for example, reviewing their own work) should the auditors
undertake a verification of the firm.

14. Question ID: 9144
Correct Answer: A
The GIPS standards require firms to define composites based on similar investment strategies/ and/or
objectives. Composites must include all portfolios that meet the composites definition (I.3.A.4).
The hiring of the new manager who specializes in derivative securities requires the creation of a new
composite within which all the portfolios containing derivative securities must be included.
15. Question ID: 9145
Correct Answer: B
Policy 1:
GIPS require firms to calculate composite returns by asset weighting individual portfolio returns
using beginning of the period values or a method that reflects both beginning of the period values and
external cash flows (I.2.A.6).
Furthermore, the standards require that for periods beginning from January 1, 2010, composite return
should be calculated by asset weighting individual portfolio returns at least monthly (I.2.A.7).
Policy 1 complies with these requirements.
Policy 3:
The standards prohibit firms from linking the performance of simulated or model portfolios with
actual performance. Composites should not include simulated, backtested or model portfolios that do
not have genuine holdings (I.3.A.3).
By simulating historical emerging market returns to represent actual returns and including the
performance of those portfolios in the Emerging Market composite the firm has violated the
standards’ requirements with respect to policy 3.
16. Question ID: 9146
Correct Answer: A
GIPS standards require all actual-fee paying discretionary portfolios to be included in at least one
composite. The firm may include non-fee paying portfolios with appropriate disclosure. Nondiscretionary portfolios are not permitted to be included in any composite (I.3.A.1).

With respect to the terminated portfolios, GIPS require firms to include the portfolio in the historical
performance of the composite up to the last full measurement period that the portfolio was under
management (I.3.A.6).

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The breach of the tolerance limit requires the portfolio to be removed from the composite as it is no
longer considered discretionary as defined by the limit. The portfolio will need to be removed at the
start of the next performance measurement period accordingly.
17. Question ID: 9147
Correct Answer: C
The GIPS standards require firms to define composites based on similar investment strategies/ and or
objectives. Composites must include all portfolios that meet the composites definition (I.3.A.4).
In the case of Manager A, low dividend yield stocks (growth stocks) and low price-to-book stocks
(value stocks) represent two different investment categories that require two different composites.
In the case of Manager B, a passive investment in large-cap blended index funds is a style completely
different (from managers A and C) which requires a different composite.
In the case of Manager C, investing in distressed companies represents an asset category which
differs from those handled by Managers A and B and thus requires its own composite.
Thus the firm requires 4 different composites for the three investment managerial styles (2+ 1+1
composite(s) for managers A, B and C, respectively).
18. Question ID: 9148
Correct Answer: C

The formula for calculating the return for a portfolio under the beginning of period value and
weighted cash flows (rC) is as follows:
n

RC =



∑  r
i =1



pi

×

V pi 

V
∑ pi 

In order to calculate the return, the true time-weighted return (under the modified Dietz method needs
to be calculated.
$ଵଶ଼.ହଷ–ଵଷସ.଺଴ିହ.଴଴ାଵଶ.ହ଴

R Modified Dietz: Portfolio A = $ଵଷସ.଺଴ାሺହ.଴଴×଴.ଽ଻ሻାሺିଵଶ.ହ଴×଴.ସହሻ = 1.068560%
$ଵଵଽ.ଶଵିଽଽ.ଶଷିଵ଴.଴଴ିଶ.ହହିଵସ.ସସା଼.ହ଴

R Modified Dietz: Portfolio B = $ଽଽ.ଶଷାሺଵ଴.଴଴×଴.ଽ଻ሻାሺଶ.ହହ×଴.଻଻ሻାሺଵସ.ସସ×଴.଺ଵሻାሺି଼.ହ଴×଴.ଵଷሻ = 1.256357%

$଼଼.଴଴–ଵଵଷ.ଶଶାଵଽ.ସହା଺.ହଷ

R Modified Dietz: Portfolio C = $ଵଵଷ.ଶଶାሺିଵଽ.ସହ×଴.ସହሻାሺି଺.ହଷ×଴.ଶଽሻ = 0.740930%
$ଵଵ଺.ଶହିଵଵ଴.ଵ଴ିଵଶ.ହ଴ାଽ.ଽ଴ାସ.ହ଴ାଵ.ସହି଼.଼଴

R Modified Dietz: Portfolio D = $ଵଵ଴.ଵ଴ାሺଵଶ.ହ଴×଴.ଽ଻ሻାሺିଽ.ଽ଴×଴.଻଻ሻାሺିସ.ହ଴×଴.଺ଵሻାሺିଵ.ସହ×଴.ସହሻାሺ଼.଼଴×଴.ଶଽሻ
= 0.615349%

The numerator of the formula for calculating composite returns, se below, (beginning of period value
and weighted external cash flows) is calculated for each individual portfolio:
V pi: Portfolio A = $134.60 + ሺ5.00 × 0.97ሻ + ሺ−12.50 × 0.45ሻ = $133.8250
V pi: Portfolio B = $99.23 + ሺ10.00 × 0.97ሻ + ሺ2.55 × 0.77ሻ + ሺ14.44 × 0.61 + 8.50 ì 0.13

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= $118.5969
V pi: Portfolio C = $113.22 + ሺ−19.45 × 0.45ሻ + ሺ−6.53 × 0.29ሻ = $102.5738
V pi: Portfolio D = $110.10 + ሺ12.50 × 0.97ሻ + ሺ−9.90 × 0.77ሻ + ሺ−4.50 × 0.61ሻ + ሺ−1.45 ×
0.45ሻ + ሺ8.80 × 0.29ሻ
= $113.7565
The sum of the four values provides a total of $468.7522 ($133.8250 + 118.5969 + 102.5738 +
113.7565)
Using the returns calculated under the Modified Dietz method as well as the numerator values (see

below) for each portfolio, the returns under the required method for each portfolio are calculated as
follows:
$ଵଷଷ.଼ଶହ଴

R Composite: Portfolio A = 0.01068560 × $ସ଺଼.଻ହଶଶ × 100%
$ଵଵ଼.ହଽ଺ଽ

R Composite: Portfolio B = 0.01256357 × $ସ଺଼.଻ହଶଶ × 100%
$ଵ଴ଶ.ହ଻ଷ଼

R Composite: Portfolio C = 0.00740930 × $ସ଺଼.଻ହଶଶ × 100%
$ଵଵଷ.଻ହ଺ହ

R Composite: Portfolio D =0.00615349 × $ସ଺଼.଻ହଶଶ × 100%

0.305065%
0.317865%
0.162133%
0.149333%

The total composite return is 0.934396% ≈ 0.93%
19. Question ID: 9183
Correct Answer: C
GIPS standards requires firms to show investment performance for a minimum of five years, or since
the inception of the firm or composite if either has existed for less than five years. After presenting
five years of GIPS compliant history, the firm must add annual performance each subsequent year
building a minimum of 10 years.
The firm has satisfied this requirement as it has presented a performance track record of more than
five years. Thus by solely considering this requirement, the firm is eligible to claim compliance with
the standards.

20. Question ID: 9184
Correct Answer: B
The GIPS standards have laid down the precise wording of the claim of compliance in provision
I.4.A.1. The wording will differ depending on whether the firm has been verified or not.
In the case where a firm has fully complied with the GIPS standards’ requirements and has been
verified, the firm needs to issue the following two paragraph statement with the first focusing on the
compliance claim and being:

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“[Insert name of the 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 the firm] has been independently verified for the periods [insert dates]. The verification
report is/are available upon request.”
Vieira Investment Limited has complied with the standards’ requirements with respect to its
compliance claim.
The second paragraph of the compliance statement, which is the verification statement, is:
“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 processes 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.”
The firm has not complied with the standards’ requirements as it has 1) omitted what the verification
process assesses and 2) incorrectly addresses the statement, “Verification does not ensure the

accuracy of any specific composite presentation.”
21. Question ID: 9185
Correct Answer: A
Provision I.5.A.1.e requires firms to present total benchmark returns for each annual period.
Furthermore firms must disclose the description of the benchmark and if a custom benchmark or a
combination of benchmarks are used, the firm must disclose the benchmark components, weights and
rebalancing process (I.4.A.31).
By not presenting annual benchmark returns or providing a description of the benchmark used
(whether standard or custom) the firm has violated these two standards.
The standards permit firms to link non-compliant performance to GIPS compliant performance as
long as the firm presents compliant performance after January 1, 2000 and discloses the period of
non-compliance (I.4.A.15 and I.5.A.3).
Since the firm has not presented non-complaint performance, this standard ceases to apply.
GIPS standards require firm to either present the percentage of total firm assets represented by the
composite or the amount of total firm assets at the end of each period (I.5.A.1.c).
The firm has reported the total firm assets at the end of each period and thus has not violated the
standards with respect to this requirement.
22. Question ID: 9186
Correct Answer: C
Note 3:
The GIPS standards require firms to disclose the composite creation date (I.4.A.10). The firm has
complied with this requirement as reflected in note 3.
GIPS standards prohibit firms from annualizing partial year returns to represent a full year’s returns.
Annualizing returns is equivalent to simulating returns and is not allowed under the standards

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(I.5.A.4). The firm has violated the standards with respect to this requirement by annualizing the 2005
returns.
The standards require firms to disclose the availability upon request of the firm’s list of composite
descriptions (I.4.A.11). The firm has complied with the standard with respect to this requirement.
Overall, note 3 represents a violation due to the annualizing of partial year returns.
Note 4:
The GIPS standards require firms to disclose the currency used to express performance (I.4.A.7). The
firm has complied with this requirement as reflected in note 4.
Note 5:
When presenting gross-of-fees returns firms must disclose if they are deducting any other returns in
addition to the actual trading expenses (I.4.A.5). When presenting net-of-fees returns, firms must
disclose if any other fees are deducted in addition to the actual trading expenses and investment
management fees (I.4.A.6). Firms must disclose if returns are net of performance based fees.
The firm has complied with both these standards by disclosing the performance based fee deducted.
Note 8:
The GIPS standards require firms to use trade data accounting for performance measurement for
periods beginning January 1, 2005 (I.1.A.5).
However by using settlement-date accounting for the period of 2005 constitutes a violation.
23. Question ID: 9187
Correct Answer: C
Note 6:
Firms are required to report for each annual period a measure of internal dispersion of returns earned
by individual portfolios in the composite (I.5.A.1.i). The GIPS glossary defines acceptable methods
for internal dispersion. These include:
the high/low method;
the equally-weighted or asset-weighted standard deviation of portfolio returns;

interquartile range
Using downside deviation is not an acceptable method.
Note 7:
Provision I.5.A.2.a states that for periods beginning January 1, 2011 firms must present the three year
annualized ex post standard deviation (using monthly returns) for the composite and the benchmark.
The periodicity of the returns for the benchmark and the composite must be identical (I.5.A.2.b).
By presenting monthly annualized returns for the composite and quarterly annualized returns for the
benchmark, the firm has violated the standard’s requirements.
24. Question ID: 9188
Correct Answer: C
In the case of portfolio valuations, the GIPS standards contain the following requirements:

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For periods prior to January 1, 2001 portfolios must be valued at least quarterly;
For periods beginning on or after January 1, 2001 portfolios must be valued at least monthly;
For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all
large external cash flows and as of each calendar month-end or the last business day of the month.
(I.1.A.3-4)
However by presenting quarterly returns for years 2002 to 2009 as well for the periods 2010 to 2011,
the firm has violated the standards.
The standards recommend that valuations should be obtained from a qualified independent party
(I.1.B.2). By obtaining valuations from a qualified third party, the firm has complied with this

recommendation.
25. Question ID: 9220
Correct Answer: A
The following securities fall outside the scope of the GIPS real estate provisions and are not classified
as real estate investments:
publically traded real estate securities, such as real estate investment trusts traded on the NYSE or
AMEX;
commercial mortgage-backed securities;
private debt investments, including commercial and residential loans whose expected return is
linked to the contractual interest rates without any participation in the economic performance of
the underlying real estate.
On the other hand, insurance company separate accounts and a private interest in a property where
some portion of the return to the investor at the time of investment is related to the performance of the
underlying real estate are considered as real estate and are addressed by the provisions.
Zia has incorrectly identified I (insurance company separate accounts) and II (an interest in a property
with a portion of returns related to the performance of the underlying property) as not being addressed
by the standards.
26. Question ID: 9221
Correct Answer: C
Private equity provisions pertain to private equity investments made by fixed life, fixed commitment
vehicles including:
primary fund vehicles making direct investments as opposed to investing in other fund vehicles;
funds of Funds investing in closed end funds.
Closed end funds are defined by the GIPS glossary as a type of investment vehicle where the number
of investors, total committed capital, and life are fixed and is not open to subscriptions or
redemptions.
The private equity provisions do not address open-end or ever-green funds (these investment vehicles
are addressed by the main GIPS standards).

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Zia has incorrectly identified I (Fixed term private equity funds which place restrictions on
subscriptions and redemptions) and III (Fund vehicles which make direct investments as opposed to
investing in other fund vehicles) as not being addressed by the standards.

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27. Question ID: 9222
Correct Answer: C
For periods beginning on or after January 1, 2011 firms must value real estate investments at fair
value and in accordance with the GIPS Valuation Principles; for earlier periods firms must value real
estate investments at market value (I.6.A.1).
For periods beginning on or after January 1, 2008 real estate investments must be valued at least
quarterly and for periods beginning on or after January 1, 2010 they must be valued as of each quarter
end or the last business day of each quarter. For earlier periods real estate investments must be valued
at least once every 12 months (I.6.A.2-3).

Since the firm’s policy does not require a shift in the frequency of valuations for periods commencing
January 1, 2008, in the case of real estate, the firm’s policy does not comply with the provisions. This
is because the policy states, “For all the performance periods presented…”, which does not imply a
change in policy to comply with the post 2008 requirements.
For periods ending on or after January 1, 2011, private equity investments must be valued in
accordance with the definition of fair value and in accordance with GIPS Valuation Principles and
they must be valued at least annually (I.7.A.1-2). The firm’s policy complies with this private equity
valuation provision.
Provision I.6.A.4 states that for periods prior to January 1, 2012 firms must conduct real estate
external valuations at least once every 36 months. For periods beginning on or after January 1, 2012,
firms must conduct external valuations at least once every 12 months subject to client agreement.
The firm’s external valuation policy does comply with this requirement by requiring more frequent
valuations prior to January 1, 2010 (which falls within the first time slot: prior to January 1, 2012) as
well as after January 1, 2010 (which include periods from both time slots: prior to and after January 1,
2012).
28. Question ID: 9223
Correct Answer: A
Policy I: In the case of real estate investments, the provisions require firms to calculate annualized SIIRR using quarterly cash flows at a minimum (I.6.A.17-18) as well as present the composite’s net-offees SI-IRR through the end of each annual period. For periods beginning on or after January 1, 2011,
when the initial period is less than a full year, firms must present the net-of-fees SI-IRR through the
end of the initial annual period without annualizing the partial year returns (I.6.A.23).
Policy I complies with both these requirements.
Policy II: For periods ending on or after January 1, 2011, firms must calculate annualized SI-IRR
using daily cash flows and for earlier periods using either daily or monthly cash flows (I.7.A.3).
Firms must present and clearly identify gross and net-of fees SI-IRR of the composite through the end
of each annual period. For periods beginning January 1, 2011 when the initial period is shorter than a
full year, firms must present the initial non-annualized gross and net of-fees SI-IRR through the end
of the initial annual period (I.7.A.21).
The firm’s policy has not complied with the former requirement as it does not require presenting netof-fees SIRR.

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29. Question ID: 9224
Correct Answer: C
A: Firms are required to disclose the frequency of independent external valuations by credentialed
property appraisers or valuers (I.6.A.10.e). The firm’s disclosure requirement complies with the
provision.
B: For any performance presented prior to January 1, 2006 which does not comply with the GIPS
standards, firms must disclose the periods of non-compliance (I.6.A.11). The firm’s policy does
not comply with this provision because it does not address the 2006/7 non-compliance presented
periods as required by the standards.
C: For periods beginning January 1, 2011 firms must disclose material changes to valuation policies
and/or methodologies (I.6.A.10.c). The firm’s policy does not comply fully with the standards’
requirements as only material changes are required to be disclosed.
D: Firms are recommended to disclose the accounting basis for the portfolios included in the
composite (I.6.B.3). This is not required by the provisions.
30. Question ID: 9225
Correct Answer: B
A: Firms must disclose the calculation methodology used for the benchmark (I.7.A.16). This has
been correctly addressed by the disclosure policy and is a requirement which will be satisfied if
followed.
B: For periods beginning January 1, 2011 firms must disclose material changes to valuation policies
and/or methodologies (I.7.A.14). The firm’s policy does not comply fully with the standards’
requirements as only material changes are required to be disclosed. This has been incorrectly

addressed by the disclosure policy and is a requirement which will be not be completely satisfied
if followed.
C: Firms must disclose the vintage year of the composite (I.7.A.11). This has been correctly
addressed by the disclosure policy and is a requirement which will be satisfied if followed.
31. Question ID: 9227
Correct Answer: A
Firms must calculate portfolio returns after the deduction of actual trading expenses (I.2.A.4). By not
stating whether the composite returns are calculated gross or net of fees, the firm has violated this
standard.
The standards require firms to present the amount of assets for each composite (I.5.A.1.d). By not
doing so the firm has violated the standards.
The GIPS standards recommend firms to present cumulative returns for all periods (I.5.B.2.a). By not
doing so, the firm has not violated the standards.
The standards require firms to report a measure of internal dispersion of the returns earned by
individual portfolios in the composite (I.5.A.1.i) provided they are more than six portfolios. By not
presenting the internal dispersion measures for the years 2007 and 2008, the firm has not violated the
standards as the composite contained less than 6 portfolios for those years.
Provision 1.5.2.A.a states that for periods ending on or after January 1, 2011, firms must present, as
of each annual period end, the three-year annualized ex post standard deviation (using monthly
returns) for the composite and the benchmark (I.5.2.A.a). However the inclusion of the measure for
the year 2010 does not reflect a violation of the standard.

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32. Question ID: 9228
Correct Answer: A
A firm may only claim compliance on a firm-wide basis and may not claim compliance for individual
composites (I.0.A.4). Thus Joyce Advisory Limited cannot claim compliance for its equity composite
only.
Whether the compliance claim has been accurately presented in note 1 is not relevant in this context
as a compliance statement pertaining to individual composites is neither addressed nor permitted
under the standards.
33. Question ID: 9229
Correct Answer: B
Policy I: The standards require firms to capture and maintain all data and information necessary to
support all information in a compliant presentation. Thus the policy complies with this requirement.
Policy II: Firms must disclose that the polices used for valuing portfolios, calculating returns and
preparing compliant presentations are available upon request (I.4.A.12). The firm’s policy does not
comply with this disclosure requirement as the firm does not provide these policies immediately upon
request.
34. Question ID: 9230
Correct Answer: C
Note 3:
The GIPS standards require firms to use trade-date accounting for the purpose of performance
measurement for periods beginning January 1, 2005 (I.1.A.5). This requirement is considered to be
satisfied if the firm recognizes assets and liabilities within three days of entering into the transaction.
By recognizing the assets and liabilities on a fortnight basis, the firm’s policy does not comply with
the standards’ requirement.
Note 4:
In the case of portfolio valuations, the GIPS standards contain the following requirements:
For periods prior to January 1, 2001 portfolios must be valued at least quarterly;
For periods beginning on or after January 1, 2001 portfolios must be valued at least monthly;
For periods beginning on or after January 1, 2010, portfolios must be valued on the date of all

large external cash flows and as of each calendar month-end or the last business day of the month.
(I.1.A.3-4)
In order to comply with the standards’ requirements, the firm needs to value portfolio at least on a
monthly basis for the years 2007-2009 and value the portfolios on the date of large cash flows from
2010 onwards. Thus the firm has not complied with these requirements for the periods presented prior
to 2010.
For periods beginning on or after January 1, 2011 firms must value portfolios in accordance with the
definition of fair value (I.1.A.2). Fair values supersede market values. However valuing portfolios
using market values for periods falling prior to the 2011 deadline does not violate the standards’
requirements.

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Note 4 violates the standards’ requirements with respect to frequency of portfolio valuations.
Note 5:
Provision I.2.A.2 specifies the use of time-weighted rates of return that adjust for external cash flows.
For periods beginning on or after January 1, 2005 firms must use approximate rates of return that
adjust for daily weighted external cash flows. For periods beginning on or after January 1, 2010 firms
must value portfolios on the date of all large external cash flows. Periodic returns must be
geometrically linked. The firm’s policy complies with this requirement.
Provision I.2.A.2 also requires that for periods beginning on or after January 1, 2001, firms must
calculate portfolio returns at least monthly and for earlier periods may calculate quarterly. By
presenting quarterly returns for 2007, the firm has violated this requirement.

Note 5 violates the provision’s requirements with respect to the frequency of return calculations.
35. Question ID: 9231
Correct Answer: B
Note 6:
For periods beginning on or after January 1, 2010 composite returns must be calculated by asset
weighting the individual portfolio returns at least monthly (I.2.A.7) using beginning of period values
or beginning of period values and weighted cash flows. The formula for calculating composite returns
using the former method incorporates the portfolio’s periodic return which may be calculated using
the Modified Dietz method or time-weighted rate of return method.
The firm’s policy complies with this requirement.
Note 7:
Provision I.3.A.1 permits firms to include non-fee paying discretionary portfolios in its composites.
However, the firm must make appropriate disclosures. Provision I.5.A.6 stipulates that firms must
disclose the percentage of composite assets represented by non-fee paying portfolios as of each
annual period.
Although the firm has complied with the Provision I.3.A.1, it has failed to comply with the latter
provision as it has not disclosed the relevant percentage.
36. Question ID: 9232
Correct Answer: B
If the firm changes its benchmark, the firm must describe the change, disclose the date it became
effective, and explain the reason for the change (I.4.A.30).
Although the firm has explained the reason for the change and described the change it has not
disclosed the date of change. The firm is not required to disclose a description of the new benchmark
under this disclosure requirement.

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