Dolores Bridgestone, CFA, manages small-cap portfolios for institutional clients. Bridgestone is convinced, given the deteriorating economic conditions, that as a group, small-cap equities will underperform during the next 12-24 months. To preserve her client’s wealth, Bridgestone sells what she considers to be the most vulnerable small-cap equities. After considerable research, she buys large-cap equities that she believes are better positioned to weather the expected economic downturn. Has Bridgestone violated any CFA Institute Standards of Professional Conduct? A. No. B. Yes, relating to suitability. C. Yes, relating to loyalty, prudence, and care. D. Yes, relating to diligence and reasonable basis.
B
I’d say B. Not C because she sold the small caps in order to limit the impact of the economic downturn on clients’ portfolios, so she was loyal and prudent. However, if she manages small caps, she has probably violated the IPS and client preferences by purchasing large caps (they probably have large caps in their total portfolio), so her actions were not suitable with client preferences and she has violated the standard related to suitabliity.
isn’t suitability a subsection of Loyalty, prudence and care?
I choose A as she only sold the most vulnerable small cap holdings and did not violate the asset allocation strategy. I don’t believe a small cap fund can never hold some large caps at one point of time. Also the way she did is to risk manage the fund which is prudent.
over05 Wrote: ------------------------------------------------------- > I choose A as she only sold the most vulnerable > small cap holdings and did not violate the asset > allocation strategy. I don’t believe a small cap > fund can never hold some large caps at one point > of time. Also the way she did is to risk manage > the fund which is prudent. it says she manages small cap portfolios…you cant purchase large caps in that port unless you tell everyone first… loyalty prudence and care is more putting their needs before yours… large cap purchase is not a suitable investment for this investment objective…i say b
Well, between sticking to the asset allocation strategy and risk loosing with a high probability and adjusting holdings to lower risk, which one is more prudent and suitable?
Schweser really screwed me up on one answer explanation where it said loyalty only relates to competing with your current employer. Got slaughtered taking that notion into the mocks.
over05 Wrote: ------------------------------------------------------- > Well, between sticking to the asset allocation > strategy and risk loosing with a high probability > and adjusting holdings to lower risk, which one is > more prudent and suitable? you gotta stick to the strategy i say… you cant go start investing in large caps if you are a precious metal fund manager and see the metals values going down. you just gotta be a good manager and minimize losses within the boundaries set by the investment policy statement. people invest in small caps for small cap exposure… adding large caps to a fund could screw someone who is already heavily exposed to large cap funds
Sticking to the IPS will ALWAYS trump any other consideration.