2013 morning Q 11 Part C.

Q 11C Ibsen also distributes externally managed funds with different regional focuses. Five years ago, the firm adopted a manager continuation policy (MCP) to evaluate its external managers. The MCP consists of a number of criteria against which Ibsen evaluates its external managers. Several external managers have recently underperformed but have still been retained. Dahl proposes new MCP guidelines for two of the criteria with the objective of reducing the risk of misclassifying zero- or negative-value-added managers as skilled (Type I error). He outlines the existing and proposed guidelines in Exhibit 2.

Exhibit 2 Selected MCP Criteria Criterion Existing MCP Proposed MCP Guideline Guideline Statistical significance for zero-value-added return outcomes 15% 5% Exceptions allowed for MCP guideline violations No Yes

ANSWER QUESTION 11-C IN THE TEMPLATE PROVIDED ON PAGE 79. C. Determine the most likely effect on the risk of committing a Type I error (decrease, no effect, increase) for each criterion if the proposed guideline is implemented. Justify each response with one reason.

Note: Consider each criterion independently. (6 minutes)