Ethics & Investment Consulting Process Flashcards

A foundation's Investment Policy Statement mandates ESG screening that excludes tobacco companies. The consultant finds a tobacco stock that maximizes risk-adjusted returns. The consultant should:

Answer: Exclude the stock in compliance with the IPS mandate

The IPS is a binding governance document; the consultant must honor its constraints, including ESG screens, regardless of return implications.

Which performance attribution method separates manager returns into allocation effect, selection effect, and interaction effect?

Answer: Brinson-Hood-Beebower (BHB) attribution

The BHB attribution model decomposes active returns into allocation, selection, and interaction effects relative to a benchmark.

Under CIMA standards, a consultant must disclose to clients all of the following EXCEPT:

Answer: The firm's internal salary structure of all employees

Internal employee compensation details are confidential HR matters and not material conflicts requiring client disclosure.

A consultant serving as a trustee for a pension fund has a personal account at a brokerage that receives directed brokerage from the fund. This arrangement most directly raises a concern about:

Answer: Self-dealing and conflict of interest

A trustee benefiting personally from fund transactions constitutes self-dealing, a serious fiduciary breach.

In the investment consulting process, 'capital market assumptions' are used primarily to:

Answer: Project expected returns, risks, and correlations across asset classes for asset allocation modeling

Capital market assumptions provide forward-looking estimates of returns, volatility, and correlations that feed into strategic asset allocation optimization.

Which of the following is a PRIMARY characteristic of an 'absolute return' investment objective versus a 'relative return' objective?

Answer: Absolute return objectives target a specific positive return regardless of market conditions

Absolute return strategies aim to generate positive returns in any market environment, unlike relative return strategies that measure success against a benchmark.

A CIMA charterholder is asked to backtest a trading strategy using data that was used to develop the strategy. The primary ethical and analytical concern is:

Answer: Data snooping bias that inflates backtested performance

Using the same data for both strategy development and backtesting creates data snooping bias, producing artificially superior historical results.