Mock PM - few short Q

ETHICS 1. Natali. the PM, wanted to sell the stock, was asked by the client not to, and she doesn’t sell. Somehow, “A) Loyalty” is not violated? I would think that loyalty to both employer and client are violated because she has no reasonable basis to hold it. I don’t even see how “C) Independence and Objectivity” is really being violated. EQUITIES 53. I had previously thought that Residual Income applies to NI - $k and EVA (or EP) applies to NOPAT - $WACC. This question says that residual income provides for one method with an equity charge and one method with a total capital charge but EVA provides for only one method. So my understanding now is that Residual Income is a “general term” to describe “profit” and it can be broken down into the RI formula (equity charge) and EVA formula (capital charge). EVA, however, is a more specific term that applies only to the total capital charge formula. Please confirm. PORTFOLIO MANAGEMENT 60. I got this wrong because I didn’t see how beta is involved in choosing the active portfolio weights. If you look at page 546 of CFAI Volume 6, it clearly shows that the only inputs needs are residual variance and alpha in order to compute weights. Only then do you APPLY those weights to find the portfolio’s weighted alpha, beta, and residual variance. What am i missing?

Loyalty standard Only applies to Employer. If you look in the standards the Client loyalty is like Loyalty,blank, blank. I got the question wrong for the same reason 53. Had the same problem, i would assume what your wrote. Similar to FCFF and FCFE valuations. 60. Beta is used to find Alpha to plug into the formula. I got all three of those wrong as well

I think that question 60 could’ve been worded differently. If you have alpha and residual variance then you don’t need the Beta so not sure why you would require Beta in this scenario. Unfortunately the explanation doesn’t provide any help either. You could make a case for both of the answers but I really hope a question like this does not pop up on the real exam.

  1. Ok even if loyalty refers to just employer loyalty, she was being disloyal to employer by not acting in the best interest of the employer’s client accounts. How is Independence and Objecticity violated? 53. Can anyone else confirm that Residual Income actually refers to the RI formula (NI - $k) and the EVA formula (NOPAT - $WACC)? 60. I see their point of view. To get alpha you need beta. But you already have alpha. Nothing we can do about something like this.

In the TB model - you need Beta - also to calculate the Active Portfolio Beta. which is used to calculate the w0 weight. Independence and objectivity is violated since she wanted to go with a “sell recommendation” but without doing anything - just bcos someone mentioned it - she switches to keeping the stock recommendation. So Loyalty was the one not violated.

Didn’t the answer say for #1 that she was intimidated by the guy that was a large client and a director of the subject company. By not selling the stock she kept him happy and his investment in the company.