Question

ABC Investment Management acquires a new, very large account with two concentrated positions. The firm's current policy is to add new accounts for the purpose of performance calculation after the rest full month of management. Cupp is responsible for calculating the firm's performance returns. Before the end of the initial month, Cupp notices that one of the significant holdings of the new accounts is acquired by another company, causing the value of the investment to double. Because of this holding, Cupp decides to account for the new portfolio as of the date of transfer, thereby allowing ABC Investment to reap the positive impact of that month's portfolio return. What is the reason behind Cupp's decision to account for the new portfolio as of the date of transfer?

1) To accurately reflect the positive impact of the month's portfolio return
2) To avoid any negative impact on the firm's performance returns
3) To comply with the firm's policy of adding new accounts after a full month of management
4) To prevent any potential loss in the value of the investment

Answer 1

Cupp likely included the new account's performance from the date of transfer to enhance the firm's performance metrics, reflecting that month's exceptional returns and potentially manipulating performance numbers against firm policy. Diligent, informed investing usually results in a better performing portfolio compared to a random or uninformed strategy.

Step-by-step explanation:

Regarding the decision made by Cupp at ABC Investment Management to include the new account's performance from the date of transfer, rather than after a full month of management per the firm's policy, it seems Cupp is motivated by the significant capital gain of one of the account's holdings. This action was likely taken to enhance the firm's performance metrics by including the positive outcome of the investment's unexpected growth, reflecting that particular month's exceptional returns. However, such a decision goes against the firm's policy and raises concerns about performance manipulation and ethical standards. When it comes to investing, as illustrated by the E-Trade example, a diligent approach that includes monitoring of investments, being informed by current events, and strategic decision-making generally has a more positive impact on portfolio performance compared to a random or uninformed investment strategy. This disciplined approach could lead to better informed buy/sell decisions, potentially resulting in a stronger year-end performance for the portfolio.