Shortin Mart's Analysis of High-Yield Distressed Corporate Convertible Bonds

Should Portfolio Managers Add Extreme Junk Bonds in a Bullish Market?

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Question

Shortin Mart is a quantitative research analyst with Dataminers, an investment advisory firm which prides itself on finding patterns in past market data. Shortin recently used data on high-yield, distressed firm corporate convertible bonds and discovered that over the last 3 years, this class has generated an astounding

76% rate of return (assuming optimal conversion). Realizing that this result is mainly due to a strong bull market, he recommends to his portfolio managers that if they believe the market will be bullish over the next year, they should add extreme junk bonds to their portfolios. Shortin has

I. not violated any code of ethics.

II. has violated Standard IV (A.1) - Reasonable Basis & Representations.

III. has violated Standard IV (A.2) - Research Reports.

IV. has violated Standard IV (B.2) - Portfolio Investment Recommendations and Actions.

Answers

Explanations

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A. B. C. D.

D

In the present case, Shortin was negligent in that he did not carry out through analysis of his result. For one, he should have used a much longer period to determine a pattern. Second, he should have been careful in laying out all the caveats to his result and even questioned the validity of the result. By not following such a course, he violated Standard IV (A.1) - Reasonable Basis & Representations. Note that he has not violated Standard IV (A.2) - Research Reports.

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