CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 3701:

  Which of the following are mandatory disclosure requirements under AIMR-PPS?

  I. The number of portfolios and assets in each composite.

  II. The fees deducted or not deducted from the calculations of returns.

  III. The volatility of the aggregate composite return.

  IV.

  Benchmarks that the composites are expected to track.

  A.

  I only

  B.

  I and II only

  C.

  I, II and III only

  D.

  III and IV only

  Correct Answer: B

  (III) and (IV) are recommended disclosures while (I) and (II) are mandatory.

• Question 3702:

  Paul Erdosh is an independent contractor who was hired by Arbitrage Securities to carry out a research project involving the software industry. The scope of the research was broad and the aim was to identify relatively undervalued stocks in that sector. During the course of the research, Paul realized that two of the companies in the sector were prime takeover targets if anyone bothered to do more research on them. He decided to sell this finding to MandA Consultants and obtain a research contract from them. He did not inform Arbitrage Securities about this deal, though he did submit a competent research report on the software industry to them. Paul has

  A. not violated Standard III (B) - Duty to Employer.

  B. violated Standard III (B) - Duty to Employer - because by selling the information to a rival firm, he has potentially harmed Arbitrage Securities' business.

  C. not violated Standard III (B) - Duty to Employer - because he is an independent contractor, not an employee of Arbitrage Securities.

  D. violated Standard III (B) - Duty to Employer. He needs written permission from Arbitrage Securities before releasing any of his findings to third parties.

  Correct Answer: A

  Arbitrage Securities hired Paul to do a research project that did not involve identifying specific merger/ acquisition candidates. Hence, Paul's discovery is tangential to the original project and as such, cannot be considered the property of Arbitrage Securities. Standard III (B) does apply to Paul even though he is a contractor; however, it does not preclude him from selling his findings without Arbitrage Securities' permission as long as the information is not related to the project he was hired to conduct.

• Question 3703:

  If the use of leverage is ________, the performance presented must include the effects of the leverage.

  A. mandatory

  B. nondiscretionary

  C. discretionary

  D. optional

  Correct Answer: C

  If the use of leverage is nondiscretionary (i.e. mandated by the client), performance must be presented on an all-cash basis.

• Question 3704:

  Under the AIMR Code of Ethics, members shall practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their ________.

  A. families

  B. employer

  C. public contacts

  D. profession

  E. none of these answers

  Correct Answer: D

  In accordance with the Standards, members will also strive to maintain and improve their competence and the competence of others in the profession.

• Question 3705:

  Under ERISA, fiduciaries must:

  -act solely in the interest of and for the exclusive purpose of benefiting, the plan participants and

  beneficiaries;

  -act with the ________, prudence and diligence of a prudent person acting in like capacity;

  -diversify the plan's investments to protect it from the risk of substantial loss;

  -act in accordance with the provisions of the plan documents to the extent that the documents comply with

  ERISA;

  -refrain from engaging in prohibited transactions.

  A. caution

  B. care, skill

  C. none of these answers

  D. attention

  Correct Answer: B

  A fiduciary is required to discharge all duties with respect to a plan "with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims."

• Question 3706:

  The value of a real estate portfolio requires, at minimum, ________ review.

  A. weekly

  B. quarterly

  C. daily

  D. monthly

  E. annual

  Correct Answer: B

  The practice of providing quarterly reports satisfies the quarterly review requirements. The issuance process should include a review of the real estate portfolio, a review of net asset value for financial and performance purposes, and review and disclosure of any factors that might result in a material change to net asset value.

• Question 3707:

  When an investment manager's client instructs the manager to use the client's brokerage to purchase goods or services for the client, this is known as:

  A. horizontal brokerage and does not violate any fiduciary duty.

  B. horizontal brokerage and violates the manager's fiduciary duty.

  C. directed brokerage and does not violate any fiduciary duty.

  D. straight brokerage and does not violate any fiduciary duty.

  E. straight brokerage and violates the manager's fiduciary duty.

  F. directed brokerage and violates the manager's fiduciary duty.

  Correct Answer: C

  When an investment manager's client instructs the manager to use the client's brokerage to purchase goods or services for the client, this is known as directed brokerage. Because brokerage is an asset of the client and the brokerage is used to benefit that client, not the manager, such practice does not violate fiduciary duty.

• Question 3708:

  The investment community's need for a common, accepted set of guidelines to promote fair representation and full disclosure in every firm's presentation performance results to clients and prospective clients has guided the development of the

  A. AIMR Standards for Calculation of Returns

  B. AIMR Standards of Practice

  C. AIMR Performance Presentation Standards

  D. AIMR Performance and Calculation Investment Board

  Correct Answer: C

  The Performance Presentation are the manifestation of a set of guiding ethical principles and should be interpreted as minimum standards for presenting investment performance.

• Question 3709:

  Monserrat Troy is a portfolio analyst at Merryl Flynch Inc., a leading investment bank. Merryl's corporate policy prohibits its employees from trading in IPOs even if they are not being underwritten by Merryl. Recently, a fast-growing internet firm, Netblaze, announced that it was going public. Monserrat's friend, Victor, told her that he could get her bid in for a few shares of the IPO. The size of the deal was very small, amounting to less than a couple of thousand dollars. Monserrat went ahead and bought the shares but did not think it was necessary to inform her supervisor about it. She:

  A. violated Standard II (B) - Professional Misconduct - by violating company policy.

  B. did not violate the AIMR code of conduct even though she violated the company policy since the size of her transaction was extremely small.

  C. violated Standard III (B) - Duty to Employer - by violating company policy.

  D. violated Standard III (C) - Disclosure of Conflicts to Employer - by violating company policy.

  Correct Answer: D

  Merryl's policy is designed to prevent any conflicts or even appearances of conflicts of interest when its employees trade in capital markets. If Monserrat wants to trade in a particular IPO, she needs to obtain special permission from Merryl's Compliance department (and such permission may or may not be granted by Compliance). Without such an exception, Monserrat's behavior is a violation of Standard III(C) Disclosure of Conflicts to Employer. Note that Standards II (B) and III (B) do not apply to this situation.

• Question 3710:

  Which of the following AIMR Standards states that the financial analyst shall indicate the basic characteristics of the investment involved when preparing a research report not directly related to a specific portfolio or client?

  A. III D

  B. III C

  C. None of these answers

  D. IV (A.2)

  Correct Answer: D

  Standard IV (A.2) - Research Reports states: "Members shall indicate the basic characteristics of the investment involved when preparing for public distribution a research report that is not directly related to a specific portfolio or client."