CFA Level IEthical and Professional StandardsMedium
A portfolio manager oversees three institutional accounts with the following year-end results: Account A ($10 million, 20% return), Account B ($30 million, 10% return), and Account C ($60 million, 8% return). In a marketing presentation, the manager reports a single 'firm composite return' of 15% for the year, based only on Account A's performance. What is the actual asset-weighted composite return, and has the manager violated the Code and Standards?
- A15%; yes, but only because the return was not annualized
- B9.8%; yes, this is a misrepresentation under Standard I(C)
- C12.7%; no, since 15% is within a reasonable range of actual performance
- D9.8%; no, because managers may highlight their best-performing account
Show answer & explanationAnswer & explanation
Correct answer: B. 9.8%; yes, this is a misrepresentation under Standard I(C)
Asset-weighted return = (10×20 + 30×10 + 60×8)/100 = (200+300+480)/100 = 9.8%. Reporting 15% based on a single cherry-picked account misrepresents overall firm performance, violating Standard I(C) Misrepresentation.
Why the other options are wrong
- A. The violation is about cherry-picking data, not annualization.
- C. 12.7% is not the correct weighted calculation.
- D. Highlighting only the best account without disclosure is misleading, not permissible.
Misrepresentation (I(C))
Members must not make false or misleading statements about investment performance, qualifications, or services.
- Composite returns must reflect all relevant accounts, asset-weighted
- Cherry-picking best performers to represent the firm is a violation
- GIPS compliance helps prevent this type of misrepresentation
Memory trick: Weight it all, don't pick the tall.