AIM 2: Explain why investments in private pools of capital should only be available to sophisticated investors.

The President's Working Group on Financial Markets (PWG) supports the concept of placing limits on who can invest in private pools to:

A) sophisticated investors so as to lower the demand for private pools and prevent bubbles.

B) insurance companies to lower the amount of credit risk.

C) foreigners to limit the amount of risk in domestic markets.

D) sophisticated investors because they are better able to understand the risks.

The correct answer is D

PWG recommends that only sophisticated investors invest in private pools because private pools can involve complex, illiquid investments, and investment strategies that are not fully disclosed.

AIM 3: Based on the Agreement and in relationship to investments in private pools of capital, list the duties of investors, of fiduciaries that invest less sophisticated investors’ capital, of key creditors and counterparties, of the managers, and of supervisors and regulators.

1、The list of duties that PWG feels that investors in private pools should have includes that investors should:

A) reveal their own financial status to the private pool so the private pool can assess suitability for the investor.

B) limit their positions to domestic private pools.

C) make sure the private pool uses proper performance valuation. 

D) reveal their own financial status to the regulatory authorities so the regulatory authorities can assess suitability of the pool for the investor.

The correct answer is C

Investors should make sure the private pool uses proper performance valuation.

2、In the list of duties that PWG feels that investors in private pools should have, with respect to the managers of a private pool, the investors:

A) should evaluate the managers, but background checks are illegal.

B) cannot legally evaluate the managers nor do background checks.

C) should evaluate the managers and do background checks.

D) can only do background checks because other methods of evaluation are not legal. 

The correct answer is C

The investors should evaluate the managers and do background checks.

3、The role of creditors and counterparties in the private pool market:

A) are losing their importance so the PWG no longer addresses their activities.

B) have never been important, but the PWG addresses their activities as a formality.

C) is becoming increasingly important and their activities are specifically addressed by the PWG.

D) were once important, but they are losing their importance, yet the PWG addresses their activities as a matter of formality.

The correct answer is C

The role of creditors and counterparties in the private pool market is becoming increasingly important and their activities are specifically addressed by the PWG.

4、In the risk management systems of creditors and counterparties in the private pool market, with respect to the use of stress testing and assessment of liquidity risk, the PWG recommends:

A) neither rigorous stress testing nor assessment of liquidity risk.

B) rigorous stress testing, but not assessment of liquidity risk.

C) an assessment of liquidity risk, but not rigorous stress testing.

D) both rigorous stress testing and the assessment of liquidity risk.

The correct answer is D

The PWG recommends both rigorous stress testing and the assessment of liquidity risk.

5、With respect to the amount of information managers reveal, the PWG would probably allow managers to have the most flexibility concerning which of the following types of information?

A) Trade confirmation.

B) Performance evaluation.

C) Cash settlement procedures.

D) Trading strategies.

The correct answer is D

The PWG recognizes that managers should have the right to keep aspects of their trading strategies a secret.

6、According to the PWG, supervisors should use:

A) only formal channels of coordination and cooperation across financial industry sectors and international borders. 

B) both formal and informal channels of coordination and cooperation across financial industry sectors and international borders. 

C) both formal and informal channels of coordination and cooperation across financial industry sectors, but keep their activities domestic.

D) only informal channels of coordination and cooperation across financial industry sectors and keep their activities domestic.

The correct answer is B

According to the PWG, supervisors should use both formal and informal channels of coordination and cooperation across financial industry sectors and international borders.

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