Learning objectives: Explain the use and efficacy of information disclosures made by investment advisors in predicting fraud. Describe the barriers and the costs incurred in implementing fraud prediction methods. Discuss ways to improve investors’ ability to use disclosed data to predict fraud.
Questions:
21.15.1. Sally recently inherited a substantial windfall and plans to interview three investment advisors who are candidates to manage the money. Because she filtered established advisors, each of her candidates manages in excess of $100.0 million dollars. Before she hires one of the advisors, which of the following documents is likely to be the MOST RELEVANT (or USEFUL) to her?
a. Unfortunately registrations are voluntary
b. Chapter VII of the text of the Solvency II directive
c. Form ADV required by the Investment Advisers Act
d. Form FRTB required by the Basel Committee on Banking Supervision
21.15.2. In the paper "Finding Bernie Madoff" (by Dimmock and Gerken), the authors tested the predictive validity of their regression models. These regression models attempted to predict investment fraud using independent variables such as past problems or violations (i.e., Past Regulatory, Past Civil or Criminal), Referral Fees, Soft Dollars, and Custody. Which of the following did the authors use to test out-of-sample predictive performance of their models?
a. ANOVA table with pivot functionality
b. K-fold cross-validation (k = 10 folds or groups)
c. Multicollinearity test with a high bezel correction
d. Two-sided Chi-square test with three significance levels
21.15.3. In the paper "Finding Bernie Madoff" (by Dimmock and Gerken), the authors produce several findings as they attempt to test the predictability of investment fraud. In regard to their findings specifically, each of the following is TRUE except which is not?
a. Disclosed soft dollars do not significantly predict fraud
b. Direct Theft and Self Dealing are the most common types of fraud
c. Current disclosures required by the SEC have significant power for predicting future fraud
d. Investors (on average) are compensated for fraud risk through superior performance and/or higher fees
Answers here:
Questions:
21.15.1. Sally recently inherited a substantial windfall and plans to interview three investment advisors who are candidates to manage the money. Because she filtered established advisors, each of her candidates manages in excess of $100.0 million dollars. Before she hires one of the advisors, which of the following documents is likely to be the MOST RELEVANT (or USEFUL) to her?
a. Unfortunately registrations are voluntary
b. Chapter VII of the text of the Solvency II directive
c. Form ADV required by the Investment Advisers Act
d. Form FRTB required by the Basel Committee on Banking Supervision
21.15.2. In the paper "Finding Bernie Madoff" (by Dimmock and Gerken), the authors tested the predictive validity of their regression models. These regression models attempted to predict investment fraud using independent variables such as past problems or violations (i.e., Past Regulatory, Past Civil or Criminal), Referral Fees, Soft Dollars, and Custody. Which of the following did the authors use to test out-of-sample predictive performance of their models?
a. ANOVA table with pivot functionality
b. K-fold cross-validation (k = 10 folds or groups)
c. Multicollinearity test with a high bezel correction
d. Two-sided Chi-square test with three significance levels
21.15.3. In the paper "Finding Bernie Madoff" (by Dimmock and Gerken), the authors produce several findings as they attempt to test the predictability of investment fraud. In regard to their findings specifically, each of the following is TRUE except which is not?
a. Disclosed soft dollars do not significantly predict fraud
b. Direct Theft and Self Dealing are the most common types of fraud
c. Current disclosures required by the SEC have significant power for predicting future fraud
d. Investors (on average) are compensated for fraud risk through superior performance and/or higher fees
Answers here:
