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AIF TRAINING – QUESTIONS AND ANSWERS
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AIF TRAINING – QUESTIONS AND ANSWERS
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AIF TRAINING – QUESTIONS AND ANSWERSIn the event of litigation, factors a judge will consider when making a determination of
fiduciary status include all the following: - Answers-1. Number of implementation options
2. Scope of services
3. Sophistication of client
An investment advisor must take discretion of the investment assets in order to provide
comprehensive and continuous investment advice. T or F - Answers-False - An
investment advisor need not take discretion in order to provide comprehensive and
continuous investment advice.
A fiduciary or co-fiduciary cannot be held responsible for a breach of their fiduciary
responsibility if they can demonstrate they were not aware of a particular duty or
requirement. T or F - Answers-F - Ignorance is not a viable defense.
Expected returns are uncertain. Under the normal distribution curve, approximately 95%
of the expected returns fall within one standard deviation of the mean. T or F. - Answers-
False - Under the normal distribution curve, one standard deviation encompasses 66%
of the sample and two standard deviations encompass 95% of the sample. Thus , a
portfolio with an expected return of 8% and standard deviation of 17% could be
expected to have a return of less than -9% or more than 25% in approximately 3 years
out of 9.
The most widely used estimate of absolute risk is? - Answers-Standard deviation -
Alpha and the Sharpe Ratio are measures of risk-adjusted return. Beta is a measure of
market risk. Standard deviation is the most widely accepted measure of absolute risk.
All of the following are true of the policy portfolio EXCEPT:
1. It relates to asset allocation based upon efficient markets
2. It should always be reflected in the Investment Policy Statement (IPS)
3. Ideally, it is used to model a portfolio that will allow portfolio principal and returns to
meet projected liabilities.
4. It is focused on Alpha - Answers-4. The policy portfolio is contrasted with the pricing
portfolio. The policy portfolio establishes the asset allocation that should be reflected in
all Investment Policy Statements. Ideally, a well crafter policy portfolio is effective in
meeting projected liabilities. The policy portfolio does not address the possibility that
managers can outperform on risk adjusted return bases; therefore, Alpha is not
considered in the policy portfolio. Risk, as measured by Beta, is a focal point of the
policy portfolio. Alpha is the focus of the pricing portfolio.
Who would normally be considered a fiduciary? - Answers-1. A professional providing
comprehensive and continuous advice
2. Trustee of a private trust
3. Someone with discretion to buy and sell investable assets.
Note: A stock broker/registered representative is not considered a fiduciary
,Regulatory Oversight is primarily provided by State Attorney General under which
pieces of legislation - Answers-1. UPIA
2. UPMIFA
3. UMPERSA
Note: Taft-Hartley plans are governed by ERISA, which falls under the oversight
responsibility of the DOL, IRS and PBGC.
Legislation underlying the Practices indicates that U.S. Courts should have access to
investment assets in the event there are egregious violations of fiduciary responsibility.
T or F - Answers-True - Practice 1.6 reads, "Clients assets are protected from theft and
embezzlement." Because all of the Practices are substantiated by legislation, you can
infer that the statement is correct.
All of the following are decisive factors to consider when analyzing the number of asset
classes to include in a portfolio EXCEPT:
1. Portfolio size
2. Investment expertise of decision-makers
3. Existing brokerage platform limitations
4. Ability of decision-makers to properly monitor investments - Answers-3. All else being
equal: the larger the portfolio size, the more asset classes that should be available; the
greater the investment expertise of the decision makers, the more asset classes that
should be available; and lastly, the greater the ability to monitor the investments, the
more assets classes that should be available. Brokerage platform should not be a
deciding factor on the number of asset classes because if a particular platform cannot
accommodate the required asset classes, it is likely that another platform could. The
fiduciary should assure the platform meets the needs of the participants, rather than fail
to meet the participants' investment needs because of platform limitations
The investment policy statement should be specific enough that a ________ could
implement the plan. - Answers-The investment policy statement should be specific
enough that a competent third party could implement the plan. In the event the
investment advisor is unable to perform his or her duties, the IPS must be used to
replicate the process the investment manager was following. An investment
professional, CPA, or Broker implies that a level of professional expertise is required,
which is not the case.
The best way to rebalance a particular asset class is to: - Answers-Resampled
efficiency optimization takes into account uncertainty regarding the accuracy of the input
values to the optimizer: asset class expected returns, risks, and correlations. As a
result, the resampled efficiency approach results in more conservative expected returns
for the portfolio as evidenced by a lower efficient frontier line.
Which of the following is a reason to prepare an investment policy statement:
Select one:
1. Supports the paper trail
, 2. Provides implementation guidance in estate planning
3. Arguably fulfills the most important function a fiduciary performs
4. All of the above - Answers-All of the provided answers are valid reasons for having an
Investment Policy Statement. The IPS supports the paper trail and will provide
documentation for the investment decisions made inside the plan. The IPS will specify
the implementation guidelines for any type of client, including estate planning. The
creation of the IPS is probably the most critical function the fiduciary performs. Without
it, the investment strategy could not be adequately defined and consistently
implemented and monitored.
Practice 2.4 (Selected asset classes are consistent with the client's time horizon and
risk and return objectives) does not apply to participant-directed plans. T or F - Answers-
False
Ordinarily, any restriction on an investment program has the potential to reduce the
portfolio's total return and could cause a breach of investment fiduciary responsibility.
However, socially responsible investing screens are specifically permitted by UPIA
when:
Select one:
The fiduciaries are in agreement that SRI considerations are their primary responsibility
The investment is supporting a worthy cause
The plan has included two investments that are not screened for SRI for each SRI
option
A donor specifically identifies social screens in their gift - Answers-As a rule, any
restriction on an investment program that is expected to reduce the portfolio's total
return is likely a breach of fiduciary responsibility. The UPIA specifically permits the
following exceptions: the trust documents establishing the private trust, foundation, or
endowment permit the use of SRI; a donor directs the use of an SRI strategy; and/or a
reasonable person would deduce from the foundation's/endowment's mission that SRI
would be adopted. SRI screens that are not expected to reduce the returns of a
portfolio, or are likely to improve returns, would be permissible in any type of portfolio
The most important decision in the Hierarchy of Decisions is: - Answers-The time
horizon of the investment strategy has to be determined first, making it the most
important decision of the asset allocation decision-making process. All other decisions
within the Hierarchy of Decisions flow from this first one. Until you know how long you
have to invest the assets, you cannot decide the appropriate level of risk/return, which
asset classes are appropriate, what will be the mix among them, which sub-asset
classes will be considered, and which managers/funds/ETFs will be used for
implementation.
What are the consequences to an investment option that fails to meet watch list criteria?
- Answers-The fund shall be reviewed by the investment committee.
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