MCQ Quiz

Purell, a performance analyst, is reviewing quarterly attribution reports. His firm uses a bottom-up, fundamentals-driven, stock-selection process. The current attribution (comparing stocks to sectors) shows that value came from asset allocation and stock selection was negative. Purell discovers that changing attribution to compare stocks to industries (then rolling to sectors) makes stock selection appear positive. He recommends changing the methodology for client reports without disclosure. Has Purell violated Standard III(D)?

• No, because the firm can choose any valid attribution methodology that aligns with its strategy.
• Yes, because changing methodology to improve perceived results without disclosure is misleading.
• No, because the new methodology better reflects the firm's stock-selection focus.

Singh, a performance analyst, discovers her company's new system calculates both time-weighted and money-weighted returns. The head of client services instructs Singh not to label the return types so the firm can show whichever calculation provides the higher return for each period. If Singh follows this instruction, has she violated Standard III(D)?

• Yes, because reporting inconsistent return types without labeling misrepresents performance completeness.
• No, because both calculation methods are valid and the firm can choose the most favorable.
• No, because clients are unlikely to understand the distinction between return types.

McCoy, vice president at Mastermind Financial Advisers (a new firm), prepares an advertisement that includes equity investment performance he achieved at his prior employer, GP Financial. The advertisement does not identify that the performance was earned at GP Financial and is distributed to existing and prospective clients of Mastermind. Has McCoy violated Standard III(D)?

• No, because McCoy personally achieved the performance and can claim it as his track record.
• Yes, because the advertisement misrepresents Mastermind's performance history by omitting the source.
• No, because past performance is always indicative of future results regardless of firm affiliation.

Taylor of Taylor Trust Company distributes a brochure to potential clients stating that the firm consistently achieves 25% annual growth of assets. The firm's common trust fund did increase 25% for the previous year, but never had an annual growth rate of 25% prior to last year, and the average rate of growth of all Taylor Trust accounts for five years is 5% per year. Has Taylor violated Standard III(D)?

• No, because the 25% growth rate actually occurred for one of the firm's accounts.
• Yes, because the brochure misrepresents the firm's overall performance by generalizing one year's results.
• No, because Taylor can choose to highlight the best-performing period to attract clients.

Judd, a senior partner at Alexander Capital Management, circulates a performance report for capital appreciation accounts for the years 2008-2022, claiming compliance with the GIPS standards. However, composite returns are not calculated by asset weighting portfolio returns as required by GIPS. Has Judd violated Standard III(D)?

• No, because the underlying performance data is accurate regardless of calculation methodology.
• No, because GIPS compliance is voluntary and discrepancies are immaterial.
• Yes, because claiming GIPS compliance without meeting all requirements is a misrepresentation.

Kilmer prepares a presentation showing rates of return for a composite of his firm's discretionary balanced accounts over five years. The composite consists of only a few accounts meeting the balanced criterion, excludes accounts under a certain asset level without disclosure, includes non-balanced accounts to improve results, and Kilmer changes the accounts in the composite over time to achieve better results. Has Kilmer violated Standard III(D)?

• No, because Kilmer has discretion to define composites in the manner most beneficial to the firm.
• Yes, because selective and shifting account inclusion misrepresents the firm's actual performance.
• No, because small accounts can reasonably be excluded from performance presentations.

Davis developed a mutual fund selection product based on historical data from 2000-2015 and tested it retroactively on data from 2016-2022, producing simulated results. In January 2023, advertisements for the product include the 2016-2022 performance results but do not indicate they were simulated. Has Davis violated Standard III(D)?

• No, because the simulated results are based on actual historical market data.
• Yes, because failing to identify simulated results as such misrepresents the nature of the performance.
• No, because backtested strategies using historical data represent genuine investment performance.