Question #62
Reading: Reading 42.3 Standards of Professional Conduct Guidance for Standards III
PDF File: Reading 42.3 Standards of Professional Conduct Guidance for Standards III.pdf
Page: 26
Status: Correct
Correct Answer: B
Question
A money management firm creates a new high-yield bond fund. The firm accurately computed the returns from the past three years for each of the bonds in the fund. The firm uses the current portfolio weights to determine an average annual historical return equal to 18%. When the firm advertises the new fund at its issuance, they state an 18% annual historical return. With respect to performance presentation, this is:
Answer Choices:
A. in compliance with the Standards
B. a violation of the Standards because the advertisement implies the firm generated this return
C. a violation of the Standards because they prohibit advertising historical returns on high-risk assets
Explanation
Reporting the historical returns of all assets now in the fund introduces survivorship bias.
Also, the advertisement is misleading because the fund just came into existence and has
no historical record. Thus, the firm has misled the public as to their performance history.
(Module 42.6, LOS 42: III(D))