Question #60
Reading: Reading 42.5 Standards of Professional Conduct Guidance for Standards V
PDF File: Reading 42.5 Standards of Professional Conduct Guidance for Standards V.pdf
Page: 30
Status: Correct
Correct Answer: B
Question
BlueRock Fund uses a proprietary asset selection model that it believes gives the firm a competitive advantage. The model is applied to a universe of all small-cap domestic equities and all publicly-traded corporate bonds. The asset allocations generated by this model range from +200 percent in small-cap equities/-100 percent in bonds to +200 percent in bonds/-100 percent in small-cap equities. Since the fund can invest in both equities and bonds, it is classified as a balanced fund. In the prospectus BlueRock describes the fund's investment policy as "a balanced fund, with 50 percent of the assets invested in bonds and 50 percent in equities, on average." On this basis, BlueRock is:
Answer Choices:
A. in violation of CFA Institute Standards concerning the disclosure of security selection and portfolio construction processes
B. in violation of the CFA Institute Standard concerning Fiduciary Duty
C. not in violation of any CFA Institute Standard
Explanation
Clearly, the risk profile of this fund is much different from a typical balanced fund. In fact,
it could be effectively described as a hedge fund if +200/-100 allocations are typical.
BlueRock is in violation of the Standard concerning disclosure of security selection and
portfolio construction processes.
(Module 42.8, LOS 42: V(B))