20. Do you have risk limits in terms of:

■I Maximum percentage of the security outstanding

■I Maximum percentage of daily volume (alternatively, how many days to liquidate if you never want to be more than, say, 15 percent of the daily volume). Describe how these limits are applied. Are they applied on an account-by-account basis as well as on an overall basis (i.e., the sum total of all accounts under your direction)?

21.    Define the risk factors that drive your returns. Does your risk software follow all of these factors? If not, how do you compensate?

22.    Describe the process by which you review your daily results. What reports do you look at?

23.    What process exists to ensure that accounts are traded in a parallel fashion?

24.    Of the various fundamental factors followed by your risk system, define a normal band around each one.

25.    Does redemption risk enter into your portfolio management? If so, how?

26.    Have you had any material trading errors over the past year? If so, what were the circumstances?

27.    At year-end, how would you define successful portfolio management? What statistics should we look to as guidance for measuring the quality of risk-adjusted performance?

28.    Describe controls over valuation of your portfolio.

29.    Describe the nature of the credit review you perform for custodians and executing brokers.

APPENDIX B

Calculation of Account

Performance________________________________

Performance measurement provides an objective, quantitative assessment of the change in value of a portfolio or portfolio segment over an evaluation period, including the impact of any cash flows during that period. The calculation of total return in the absence of cash flows for a period is based on the formula

MVE-MVB (17B>1)

pW MVB

where rp(t) = Portfolio return

MVE = Market value of portfolio at end of period, including all accrued

income MVB = Portfolio's market value at beginning of period, including all

income accrued up to end of previous period

This definition of a portfolio's return is valid only if there are no intraperiod cash flows. In practice, this condition is often violated as cash flows frequently occur due to capital allocated to or removed from the portfolio (client's account) or through transactions from buying and selling securities.

If cash flows do occur over the period in which returns are calculated, we need to do the following: