Udemy CFA Study

Udemy CFA Study

Which of the following is not one of the 9 major sections of GIPS?

A. Derivatives

B. Private Equity

C. Real Estate

Answer: A

The nine sections of GIPS are the following:

0. Fundamentals of Compliance

1. Input Data

2. Calculation Methodology

3. Composite Construction

4. Disclosure

5. Presentation and Reporting

6. Real Estate

7. Private Equity 8. Wrap Fee/ Separately Managed Account (SMA) Portfolios

Is the following compliance statement correct?

ABC Inc. claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. ABC Inc. has been independently verified for the periods January - December of the current year. 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."

A. Yes

B. No, because of the incorrect description of what is assessed by the verification process

C. No, because verification must ensure the accuracy of the presented composites

Answer: A

This is an example of a correct statement by a GIPS-compliant firm that has chosen to verify its compliance. The verification process is focused on processes and procedures in the firm. It does not ensure the accuracy of any specific composite performance.

Which of the following statements is most likely correct in regard to composites construction?

A. Composites usually "suffer" from a survivorship bias

B. Composites must be defined on an ex-post basis

C. A composite's return is calculated as the asset-weighted average return of all portfolios included in that composite

Answer: C

As per GIPS, a composite's return is defined as the asset-weighted average of the performance results(return) of all portfolios included in the particular composite.

Answer A is incorrect because when presenting a composite's return, we should take into account the return of all portfolios that are part of the particular composite, including portfolios of current and past customers. Thus, the survivorship bias is basically eliminated, and composites' return is presented in a fair and accurate manner.

Answer B is incorrect because composites are defined in advance, on an ex-ante basis.

The Fundamentals of Compliance section of GIPS least likely:

A. requires that portfolios are valued at fair value.

B. prohibits partial compliance claims.

C. requires that firms establish and document adequate policies and procedures for GIPS compliance.

Answer: A

All statements given in the answers are true with respect to GIPS. However, the requirement that portfolios are valued at fair value is given in Section 1: Input Data, not in Section 0: Fundamentals of Compliance.

Which of the following distinct business entities can claim compliance with the Global Investment Performance Standards (GIPS)?

A. A multinational financial services holding company

B. A local subsidiary of a multinational commercial bank

C. A subsidiary undertaking investment management services

Answer: C

The standards define a "firm" as an investment management firm, subsidiary, or division "held out to clients or prospective clients as a distinct business entity". This means that its operations should be held independently and autonomously.

A multinational financial services holding company is unlikely to be operating solely as an investment firm. Moreover, the scope of its business could make it very difficult to claim compliance on a firm wide basis. Therefore, A is an incorrect answer.

A commercial bank subsidiary does not provide investment management services, so answer B is incorrect, too. A subsidiary undertaking investment management services meets all the criteria for a firm definition stipulated in the standards.

Which of the following statements is not true for interpretation of interest rates?

A. Interest rates are also called opportunity costs because they measure the value investors forgo

when choosing a particular course of action.

B. Interest rates are used when discounting or compounding cash flows and express the time value

of money.

C. Interest rates can be interpreted as required rates of return set by central banks.

Answer: C

Interest rates can be interpreted as discount rates, opportunity costs, and required rates of return. Both A and B correct. However, only the first part of answer C is correct, the second is wrong. Required rates of return are usually determined by investors. They aren't set unilaterally by governmental agencies.

Which of the following statements is most likely to be true about the nominal risk-free interest rate?

A. Nominal risk-free rate is expressed as the sum of the real-risk free rate and the inflation premium.

B. The interest rate on a corporate bond is considered to be an example of a nominal risk-free rate.

C. Nominal risk-free rate is the rate for a completely risk-free security in a zero-inflation environment.

Answer: A

The sum of the real risk-free interest rate and the inflation premium is called the nominal risk-free interest rate, which makes A correct. The interest rate on a corporate bond would most likely require a combination of premiums for default, liquidity, and maturity. US Treasury bills are good examples of securities which offer nominal risk-free rates as they are essentially risk-free and backed by the government. The real risk-free rate is a theoretical concept which assumes that there is no inflation or default risk (the chance of not paying back the borrowed funds).

A 10-year annuity pays $700 at the end of each year starting from year 6 onwards. The annual interest rate is 10% during all the years. The present value (PV) of the investment is closest to:

A. $2,570.71

B. $2,670.71

C. $2,770.71

Answer B, see image for explanation

Melissa invests in a security that pays $500 at the beginning of each of the next 5 years, starting from

today. If the annual interest rate is equal to 5%, the future value (FV) of the security is closest to:

A. $2,800.96

B. $2,850.96

C. $2,900.96

Answer C, see image for explanation

See image

Answer A, see image

Melissa buys a share of stock for $55 at Year=0 and later another share at $60 at Year=1. The stock pays $5 dividend per share at the end of Year 1 and Year 2. The stocks are sold for $140 at the end of Year 2. What is the money-weighted rate of return of the portfolio? A. 22.55%

B. 23.55%

C. 24.55%

A, See image

Melissa buys a share of stock for $55 at Year=0 and later another share at $60 at Year=1. The stock pays

$5 dividend per share at the end of Year 1 and Year 2. The stocks are sold for $140 at the end of Year 2.

What is the time-weighted rate of return of the portfolio?

A. 20.6%

B. 21.6%

C. 22.6%

Answer: B

We first break the investment horizon of two years into smaller evaluation periods. For Year 1 the

holding period return is $60 + the dividend of $5 minus the beginning value of $55. This is divided by $55

to find a return of 18.2%. For year 2 we have an ending value of $140 plus $10 in dividends minus the

beginning value of $120 divided by $120. Pay attention that the beginning value is equal to the price of

the second stock multiplied by 2. That’s how we calculate a holding period return equal to 25%. Now we

only have to link both returns and find the time-weighted rate of return. Since we have two years of

5

investment horizon, we take the geomatic mean of the two holding periods. The time-weighted rate of

return is equal to √{(1.182)(1.25) }−1= 21.6%

Calculate the bank discount yield of a T-bill which is priced at $990 and has a face value of $1000 and

140 days until maturity.

A. 2.4%

B. 2.5%

C. 2.6%

Answer C, See image

Calculate the holding period yield of T-bill priced at $96,000 with a face value of $100,000 and 180 days

to maturity.

A. 4.1%

B. 4.2%

C. 4.5%

Answer B, see image

Imagine Jessica purchased a T-bill at $980 which matures at $1000 in 120 days. Which of the following yields is closest to 6.3%?

A. Holding period yield (HPY)

B. Effective annual yield (EAY)

C. Money market yield (CD yield)

Answer B, see image

Question 13

Imagine that Jana purchased a $1000 T-bill which matures in 170 days for a price of $940. What is the

money market yield given that the bank discount yield is equal to 12.7%?

A. 13.5%

B. 14.2%

C. 16.7%

A, see image

What is the bond equivalent rate of a 3-month loan which has a holding period rate of 4%?

A. 7.4%

B. 7.9%

C. 16.3%

Answer: C

First, we need to convert the 3-month yield into a semiannual yield. So, we have 1.04^2−1=~8.2%.

Then, we multiply by 2 to find the bond equivalent rate, which is 16.3%

Which is most accurate about the legal and contractual infrastructure of a company?

A. Both are company-driven infrastructures.

B. Contractual infrastructure is more company-driven while legal infrastructure is driven by

different governmental agencies and regulators.

C. Legal infrastructure is company-driven.

Answer: B

Legal and government infrastructures are usually externally-driven and established by different

government agencies or regulators. A contractual infrastructure, on the other hand, is typically

company-driven as it manages the relationships between the firm and its own stakeholders. A good

example of the latter is an agreement between a company and one of its supplier firms.