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
| User | Comment |
|---|---|
| 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. |