CFM Due Diligence & Fund Selection 2

Question 1

During operational due diligence, which document most directly reveals how a fund handles cash movements between investor accounts and trading accounts?

Accepted Answer

Cash management policy

Answer

A fund's cash management policy details the controls and procedures governing how cash is moved between accounts, a key operational risk area.

Question 2

A fund manager claims a 3-year track record but recently replaced the lead portfolio manager. How should a due diligence analyst treat this performance history?

Accepted Answer

Discount it since strategy continuity may be broken

Answer

When key personnel change, past performance may not reflect future management style, so the track record should be discounted or contextualized accordingly.

Question 3

Which metric best measures a fund manager's ability to add value relative to the risk taken, specifically adjusting for systematic market exposure?

Accepted Answer

Jensen's alpha

Answer

Jensen's alpha measures excess return above what is predicted by the CAPM given the fund's beta, isolating manager skill from market risk.

Question 4

In fund selection, what is the primary purpose of reviewing a fund's Form ADV Part 2?

Accepted Answer

To understand fees, conflicts of interest, and investment strategies

Answer

Form ADV Part 2 is the investment adviser's disclosure brochure covering strategies, fees, disciplinary history, and conflicts of interest.

Question 5

A fund's Sharpe ratio improves from 0.6 to 1.2 after a methodology change in return smoothing. What concern does this raise?

Accepted Answer

Return smoothing may be artificially reducing reported volatility

Answer

Return smoothing can suppress reported volatility, inflating the Sharpe ratio and masking true underlying risk in illiquid or opaque portfolios.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Due Diligence & Fund Selection 2