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:

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.

View Answer

Answer: D

Explanation:

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.