CFA Practice Question
CFA Practice Question
Spassky was assigned the task of managing Fisher's portfolio three days ago when Anand, who was managing Fisher's portfolio, retired. Fisher's portfolio consists of some deep-in-the-money put options, which will be exercised today, resulting in a cash flow of about $40,000. Spassky has not yet had a chance to meet Fisher in person to determine his needs, investment objectives, and risk appetite. He did get a briefing from Anand about the portfolio and has a general idea of Fisher's investment attitude. In fact, over the past two years, Fisher's portfolio has generated handsome returns due to high-risk investments, which Fisher prefers. Spassky's problem is determining what he should do with the $40,000.
According to the Code of Ethics, he should ______
A. "roll over" the put positions for another week or two till he can meet Fisher and discuss reinvestment of the funds.
B. invest the funds in a diversified portfolio with a risk profile similar to what Anand and Fisher have maintained over the past 3 months OR keep the money in cash form and not risk it till he can meet Fisher to discuss the situation.
C. invest the funds in highly liquid, cash-equivalent assets till he can meet Fisher and determine his needs, investment objectives, and risk appetite.
Explanation: In most cases, a portfolio manager must manage a portfolio based on the investment needs and objectives of the portfolio owner consistent with the willingness to bear risk (Standard III (C) - Suitability). One exception to this rule is when a new portfolio manager takes over and has the task of reinvesting funds arising from existing portfolio investments. Since these funds should not be kept idle, a prompt investment of the money in liquid, risk-free securities is prescribed by the Code of Ethics.
User Contributed Comments 10
|ontrack||Does the code prescribe investing in risk free securities? I thought C should be the answer as he just has a general idea of Fishers requirements.|
|cranival||yes the code says so: invest in short-term, highly liquid assets while waiting ...|
|steved333||It makes sense. Do not risk it, but at the same time, you're being paid to generate a return on your clients' money.|
|vikram59||tricky! I hate it when you think one of these questions are so easy and then you are in for a rude shock|
|ridone||so what purpose does the IPS serve if every new portfolio manager needs to be told what to do?|
|copus||If I was the client, and my risk profile is clearly high risk, and i found that the proceeds of my put expiration had been invested in cash, i would be pretty upset...especially if the market gapped up in the interim. For this client, cash not is a suitable investment! I disagree with the Code of Ethics in this case!|
|apiccion||The previous portfolio manager may have violated the code of ethics. It's best to take the most cautious approach until obtaining clarification from the client.|
|Borsh||If i were a client i wouldn't care who invests my money... i see the face of the institution. you have my file.. follow it.|
|marattus||I chose C at first, but then, when I DIDNOT find the words risk-free asset in it, decided that it can be poor junk stocks, though liquid. As a consequence, the answer A seemed to offer greater suitability to preserve client's capital. Anyone with me on this?|
|nfressell2||Cash Equivalent assets may be the word that clarifies it marattus, cash typically is not very volatile unless unexpected inflation/monetary policy changes drastically.|