MCQ Quiz

Gubler is CIO of an insurance subsidiary with an IPS requiring liquid investments (high-grade bonds, large-cap equity) and a max maturity of 5 years. He invests 4% of the portfolio in a venture capital seed fund with a 3-year lockup and laddered exit, because the return potential is very attractive. Has Gubler violated Standard III(C)?

• Yes, because the investment violates the specific liquidity and asset class constraints of the IPS.
• No, because 4% is a de minimis amount and does not impair the overall portfolio liquidity.
• No, because as CIO he has the discretion to deviate from the IPS for superior opportunities.

McDowell suggests to Crosby, a risk-averse client, that he use covered call options in his equity portfolio to enhance income and provide partial downside protection. McDowell explains the risks, including tax liabilities and capped upside. Has McDowell violated Standard III(C)?

• Yes, because derivatives like options are inherently too risky for risk-averse clients.
• No, because he judged the suitability of the strategy in the context of the entire portfolio.
• Yes, because covered calls limit the upside potential, which violates the duty to maximize returns.

The trustee of the MPG pension fund amends the IPS to restrict investments in products negatively affecting consumer health (ESG constraint). Van Cleef, an external manager, buys tobacco stock for the fund, arguing that the high dividend yield is his primary priority. Has Van Cleef violated Standard III(C)?

• No, because a manager's primary fiduciary duty is to maximize financial returns.
• Yes, because he failed to follow the specific mandate and constraints of the client's IPS.
• No, because the ESG restriction was politically motivated and not financially grounded.

Smith, an investment adviser, has two clients: Robertson (60, wealthy, high risk tolerance) and Lanai (40, modest income, low risk tolerance). Smith recommends that both clients invest 20% of their portfolios in zero-yield, small-cap, high-technology equity issues. Has Smith violated Standard III(C)?

• No, because the allocation is only 20% and provides diversification for both portfolios.
• Yes, because he applied the same strategy to clients with materially different risk profiles and needs.
• No, because small-cap equities are suitable for long-term investors regardless of current income needs.

Evans, a portfolio manager, learns that his client Jones has received an inheritance that quadruples his net worth to $1 million. Jones's previous IPS was based on a much smaller asset base and strict income needs. What is Evans's immediate obligation under Standard III(C)?

• Immediately invest the new cash according to the existing asset allocation weights.
• Reassess and update the IPS to reflect the significant change in Jones's financial circumstances.
• Wait for the annual review meeting to discuss the changes with Jones.

Perkowski manages a high-income mutual fund. He purchases a zero-dividend stock because he believes it is undervalued and the company is in a growth industry. The fund's prospectus emphasizes high current income. Has Perkowski violated Standard III(C)?

• No, because the stock offers capital appreciation potential which benefits investors.
• Yes, because a zero-dividend stock is inconsistent with the fund's 'high income' mandate.
• No, provided the stock represents a small percentage of the total portfolio.

Kim, a portfolio manager for a family office with a capital preservation objective, chooses to invest in Dong Inc. over Park Inc. Although Park has better short-term financials, Dong has superior ESG scores, which Kim believes indicate better management quality and lower tail risk (accidents/fines). Has Kim violated Standard III(C)?

• No, because considering ESG factors as part of risk/return analysis is consistent with suitability.
• Yes, because he prioritized non-financial factors over financial metrics.
• Yes, because ESG investing is inherently speculative and violates the capital preservation mandate.

Snead manages pension funds with long-term objectives. To boost her quarterly performance bonus, she shifts the portfolios into high-beta (high risk) stocks without client approval. The clients ask why their portfolios are suddenly so volatile. Has Snead violated Standard III(C)?

• No, because high-beta stocks act as a proxy for high returns, which benefits the pension funds.
• Yes, because she altered the risk profile contrary to the IPS to benefit her own compensation.
• No, because she did not change the asset allocation percentages, only the security selection.