You are on page 1of 18

LOMA 357

Chapter 3
Reference: c. 3, p. 3
For this question, if answer choices (1) through (3) are all correct, select answer
choice (4). Otherwise, select the one correct answer choice.

Corporate governance flows from a company's board of directors, with the


establishment of the company's mission, or reason for existence. The board of
directors pursues the company's mission by establishing strategic objectives or
goals. To be effective, objectives should be

A. clearly stated
B. realistic and actionable
C. specific and measurable
D. all of the above
Reference: c. 3, p. 5
Budgeting is necessary at all levels of a financial institution. A company requires a
broad corporate budget as well as detailed budgets for each functional and
operational area. With regard to the control cycle within a company's control
mechanisms, the corporate budget is primarily

A. a steering control
B. a feedback control
C. an enterprise risk control
D. a concurrent control
Reference: c. 3, p. 5
The investment committee is a standing committee that assists the board of
directors in carrying out its governance duties over the company's investments.

A. True
B. False
Reference: c. 3, p. 8
An audit is a systematic examination and evaluation of a company's records, procedures, and
controls. The following statement(s) can correctly be made about audits:

A. In the United States, public companies are required to annually evaluate and attest to the
effectiveness of their company's internal control processes according to a suitable, recognized
control framework.

B. Because the audit staff must maintain a high degree of independence and objectivity, their
function is separate from those of the departments they examine.

A. Both A and B
B. A only
C. B only
D. Neither A nor B
Reference: c. 3, pp. 10-11
A code of conduct is one element of a company's internal control. The following statements are about a
code of conduct. Three of the statements are true, and one of the statements is false. Select the answer
choice containing the FALSE statement.

A. To be most effective, a code of conduct should illustrate situations that employees might encounter
in their work environment, and help employees evaluate the appropriateness of various responses to
a given situation.
B. Financial services companies typically have one code of conduct that applies to all the employees in
the company.
C. A code of conduct is a business policy specifying rules and requirements for ethical behavior for
company executives, company employees, and individuals acting as agents for the company.
D. A code of conduct often provides guidelines for situations involving a conflict of interest or the
acceptance of gifts.
Reference: c. 3, pp. 13
An institutional investor has an investment mission and one or more investment
objectives for each of its investment portfolios. The following statements describe
an investment mission or investment objectives. Select the answer choice
containing the statement that best describes an investment mission.

A. Preserve purchasing power.


B. Grow capital.
C. Preserve and enhance the portfolio's returns across all economic scenarios
while providing consistent periodic distributions.
D. Generate steady income.
Reference: c. 3, pp. 13
Two important broad categories of portfolio management strategies are passive and active
investment strategies. The following statement(s) can correctly be made about an active portfolio
management style:

A. Active portfolio management reflects a bias toward the belief that markets are perfectly efficient.

B. Active portfolio management involves incurring more commissions on trades and more costs for
researching marketing opportunities than does a passive management strategy.

I. Both A and B
II. A only
III. B only
IV. Neither A nor B
Reference: c. 3, pp. 13-14
The following statements are about two important broad categories of portfolio management
strategies: active and passive portfolio management strategies. Select the answer choice
containing the correct statement.

A. An active portfolio management strategy reflects a bias toward the belief that markets
are perfectly efficient.
B. Life insurance companies tend to practice versions of active portfolio management
strategies for the general account.
C. A passive portfolio management strategy is consistent with holding assets that may be
difficult to resell.
D. A passive portfolio management strategy involves incurring more commissions on
trades and more costs for researching market opportunities than does an active
portfolio management strategy.
Reference: c. 3, pp. 17
The CFA Institute's Global Investment Performance Standards (GIPS®) are standards for consistent
reporting of investment performance. The following statement(s) can correctly be made about GIPS:

A. The GIPS standards provide a universal investment reporting methodology that allows a direct, apples-
to-apples comparison of investment performance across different investment management companies,
portfolios, portfolio managers, and jurisdictions.

B. Where laws, regulations, or industry standards already impose requirements related to the presentation
of investment performance, investors should comply with the GIPS standards in addition to applicable
regulatory requirements.

A. Both A and B
B. A only
C. B only
D. Neither A nor B
Reference: c. 3, pp. 19
Data governance is a quality control discipline for assessing, managing, using, improving,
monitoring, maintaining, and protecting organizational information. One primary element of
data governance for the investment function is data integration, which addresses

A. how core information assets achieve and sustain prudent levels of quality across all
functions and processes
B. providing accountability for each aspect of data quality and ensuring its accuracy and
accessibility
C. nuances in data, including standards for understanding, interpreting, and calculating
data elements
D. enterprise-wide methods, practices, processes, and tools for managing information
consistently and effectively across all company functions
Reference: c. 3, pp. 22
In the context of risk limits in investments, the maximum monetary amount that a
company employee has been granted official power to approve for disbursement
without prior approval by someone with higher authority is known as the
employee's

A. stop-loss limit
B. authorization limit
C. risk appetite
D. risk tolerance
Reference: c. 3, pp. 23
In the investment function, a dashboard communicates the current status of
investment outcomes and controls in a readily understandable format.

A. True
B. False
Reference: c. 3, p. 25
One abusive investment practice is insider trading. The following statement(s) can correctly
be made about insider trading:

A. A person does not have to benefit directly from inside information to be guilty of insider
trading.

B. Insider trading only applies to situations in which individuals inside a company take unfair
advantage of and profit from material nonpublic information.

● Both A and B
● A only
● B only
● Neither A nor B
Reference: c. 3, p. 25-26
Consider the following situations with regard to whether the individuals were involved in insider trading.

● Based on information that had not been communicated to the general public, Madison Gurskey, an employee of the
Lilac Company, advised her friend Rose Davenport, who is not a Lilac employee, to purchase Lilac stock. Although
Ms. Davenport purchased the stock, Ms. Gurskey did not.
● Nolan Tripp, an investment professional, sold his stock in the Fountain Company based on his access to an
investment analyst's report that was to be released to the general public the following day.

With regard to these situations, it most likely is correct to say that

A. Ms. Gurskey would not be considered to be in violation of insider trading rules because she did not benefit directly
from the transaction
B. Ms. Davenport would not be considered to be in violation of insider trading rules because she was not a Lilac
employee
C. Mr. Tripp would not be considered to be in violation of insider trading rules because the research report was intended
for release to the general public
D. all of these individuals would be considered to be in violation of insider trading rules
Reference: c. 3, pp. 27-28
In securities trading, one prohibited trade practice involves the purchase or sale of
securities based on advance knowledge of large pending orders from clients. This
practice is known, by definition, as

A. collusion
B. late trading
C. front running
D. market timing
Reference: c. 3, pp. 29
Soft-dollar arrangements consist of situations in which an institutional investor
obtains products or services-often research services-from a broker-dealer, and in
exchange, the institutional investor directs client brokerage commissions to the
broker-dealer providing the product or service.

A. True
B. False
Reference: c. 3, pp. 26-29
The following statements describe individuals who are engaging in potentially unethical
investment practices. Select the answer choice containing the statement that describes an
example of front running.

A. In exchange for obtaining research services from a broker-dealer, an institutional


investor directed client brokerage commissions to that broker-dealer.
B. After the stock market had closed, an investment professional was allowed to trade
mutual funds using that day’s closing prices.
C. Prior to the release of a research report that would reflect unfavorably on a stock
investment, the trading department of an investment company decreased its inventory
position in that particular security.
D. A portfolio manager purchased a stock for his personal account prior to a large
anticipated purchase of this same stock by an account that he manages for a customer.

You might also like