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Exam CFA® Level 1 topic 1 question 50 discussion

Actual exam question from Test Prep's CFA® Level 1
Question #: 50
Topic #: 1
[All CFA® Level 1 Questions]

Spassky was assigned the task of managing the portfolio of Fisher three days ago when Anand, who was managing Fisher's portfolio, retired. Fisher's portfolio consists of some deep-in-the-money put options, which will be exercised today, resulting in a cash flow of about $40,000. Spassky has not yet had a chance to meet Fisher in person to determine his needs, investment objectives and risk appetite. He did get a briefing from Anand about the portfolio and has a general idea about Fisher's investment attitude. In fact, over the past two years, Fisher's portfolio has generated handsome returns due to high-risk investments which Fisher prefers. Spassky's problem is determining what he should do with the $40,000. According to the AIMR Code of Ethics, he should:

  • A. keep the money in cash form and not risk it till he can meet Fisher to discuss the situation.
  • B. "roll over" the put positions for another week or two till he can meet Fisher and discuss the reinvestment of the funds.
  • C. invest the funds in a diversified portfolio with a risk profile similar to what Anand and Fisher have been maintaining over the past 3 months.
  • D. invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine his needs, investment objectives and risk appetite.
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Suggested Answer: D 🗳️
In most cases, a portfolio manager must manage a portfolio based on the investment needs and objectives of the portfolio owner consistent with the willingness to bear risk. One exception to this rule is when a new portfolio manager takes over and has the task of reinvesting funds arising from the existing portfolio investments. Since these funds should not be kept idle, a prompt investment of the money in liquid, risk-free securities is prescribed by the AIMR code of Ethics.
by KAla7223 at Jan. 30, 2023, 5:56 a.m.

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KAla7223
1 year, 11 months ago
Spassky should invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine his needs, investment objectives and risk appetite. This is in line with the Standard III (B.1) of the AIMR Code of Ethics, which requires portfolio managers to put the interests of their clients ahead of their own and to make investment decisions based on the client's investment objectives and risk tolerance. By keeping the funds in cash or cash equivalent assets, Spassky is ensuring that Fisher's funds are safe and easily accessible while he determines Fisher's investment objectives and risk appetite.
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