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

• Question 3781:

  Which of the following relating to procedures for complying with Standard III (E) is false? The compliance procedures should:

  A. outline permissible conduct.

  B. delineate procedures for reporting violations and sanctions.

  C. be easy to understand.

  D. outline the scope of the procedures.

  E. designate a compliance officer.

  F. none of these answers.

  Correct Answer: F

  All the statements are true. Adequate compliance procedures should be drafted so that they are easy to understand. They should designate a compliance officer and clearly define the officer's authority and responsibility; outline the scope of the procedures; outline permissible conduct and delineate procedures for reporting violations and sanctions.

• Question 3782:

  Christine Crumbwell and Dorothy Drummond are two portfolio managers with Neptune Funds. Cristine is managing the personal trust fund of Paul Roker, who created the fund as an income support for his wife and a legacy for his two sons after his wife's death. Dorothy is in charge of a fund created by Katey Koric. Katey had started this fund as a long-term investment but recently decided to shift the asset mix toward municipal and high-income bonds. Her friend pointed out a great investment opportunity in the newly issued, high-yield-high-income Orange County bonds and Katey instructed Dorothy to sell off a large chunk of the stock holdings in the fund and reinvest in the Orange County bonds. Dorothy spoke to Christine about this and they both agreed that the bonds were an excellent buy. Dorothy carried out Katey's instructions and Christine decided that Paul's portfolio would be better off if she sold some of the small cap stocks and bought the bonds and followed Dorothy's suit.

  I. Dorothy has violated Standard IV (B.1) - Fiduciary Duties by not discussing the issues further with Katey.

  II. Christine has violated Standard IV (B.1) - Fiduciary Duties by tilting the portfolio mix toward high-income instruments.

  III.

  Katey has violated Standard V (A) - Prohibition Against Use Of Non-Public Information.

  A.

  I, II and III

  B.

  I and II only

  C.

  I only

  D.

  II only

  Correct Answer: D

  Christine, as a manager of a personal trust, has to balance the interests of the income beneficiaries and the remaindermen who need capital appreciation. By tilting the asset mix toward high-income bonds, Christine has violated her fiduciary duties toward Paul Roker's sons by effectively transferring some of their wealth to their mother. On the other hand, Dorothy has violated no such duty since she in charge of an advisory account. The account belongs to Katey alone and she is free to instruct Dorothy to change investments as she pleases. Finally, the Orange County bonds have already been issued and there is no misuse of any inside information so Katey cannot be accused of insider trading. Standard IV (B.1) Fiduciary Duties

• Question 3783:

  Which of the following is not a violation of Standard II (C)?

  A. Using a chart that was prepared by another analyst in a presentation, without acknowledgment.

  B. All of these answers are violations.

  C. Giving an oral report and citing specific quotations, attributable to "leading analysts," without specific reference.

  D. Use of statistical information provided by Standard and Poor's, without acknowledgment.

  E. Use of a small part of an analyst's work who is employed in a completely different (non-competitive) industry, without acknowledgment.

  Correct Answer: D

  Using excerpts from articles or reports prepared by others, either verbatim, or with only a slight change, without acknowledgment; citing specific quotations, attributable to "leading analysts," without specific reference; using charts or graphs without stating their sources; and copying proprietary computerized spreadsheets or algorithms without seeking the authorization of their creators - all of these practices are violations of Standard II (C). Only globally recognized sources of factual material such as that provided by Standard and Poor's, or Moody's Investors Service, can be used without acknowledgment, since such information is already in the public realm.

• Question 3784:

  Which of the following can be found in Standard V?

  A. Members shall not undertake any independent practice in competition with employer without written consent.

  B. Members shall not participate in plagiarism.

  C. Members shall make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in breach of a duty.

  D. Members shall maintain appropriate records to support the reasonableness of recommendations.

  E. Members shall maintain knowledge of and comply with all applicable laws.

  Correct Answer: C

  Standard V states: "Members shall make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in breach of a duty."

• Question 3785:

  The primary determinant of a fiduciary's powers and duties are to be found in the ________.

  A. board of director's meeting minutes

  B. governing documents (trust documents and investment management agreements)

  C. FDIC General Rules

  D. ERISA Statement of Procedures

  E. none of these answers

  F. ERISA Funding Guidelines

  Correct Answer: B

  Fiduciaries must manage any pool of assets in their control in accordance with the terms of the governing documents (such as trust documents and investment management agreements), which are the primary determinant of a fiduciary's powers and duties. Whenever their actions are contrary to provisions of those instruments or applicable law, fiduciaries are exposed to liability through litigation brought by parties at interest.

• Question 3786:

  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 and Representations.

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

  IV.

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

  A.

  III and IV only

  B.

  II and III only

  C.

  I only

  D.

  II only

  Correct Answer: 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 and Representations. Note that he has not violated Standard IV (A.2) - Research Reports.

• Question 3787:

  ________ provide a relative measure for the riskiness of a strategy.

  A. Volatility measures

  B. Benchmarks

  C. Indexes

  D. Investor universes

  E. Disclosures

  Correct Answer: B

  Benchmarks, including market indexes, manager universes and normal portfolios, provide a relative measure for the riskiness of a strategy.

• Question 3788:

  According to Standard V (B), firms can claim compliance with the PPS only if their presentation is ________ in compliance with the Performance Presentation Standards in all material respects.

  A. none of these answers

  B. retroactively

  C. fully

  D. at least 50 percent

  E. partially

  Correct Answer: C

  If members or firms want to claim compliance with PPS, their presentation must be fully in compliance with the PPS in all material respects. To claim compliance with the PPS without meeting the mandatory requirements of the PPS is a violation of Standard V (B).

• Question 3789:

  Wolfram Hitchwalker is a money manager with Armadillo Investments. He currently manages a few retirement accounts, clients who have a steady current income need and are averse to capital loss. Wolfram recently read a research report which concluded that the stock of HighFly, Inc. was a great buy because of a pending expansion plan into Southeast Asia which would double the profits of HighFly from foreign operations. Wolfram decided that the analysis was sound and that his clients could gain significantly if he bought the HighFly stock now and sold it once the price run-up occurred. Accordingly, he sold some of the fixed income securities in his client accounts and bought shares of HighFly. After two weeks, he sold the shares at a substantial profit and reinvested the funds back in fixed income securities. Wolfram has

  I. not violated any code of ethics since the investment was wise and made his clients better off.

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

  III. has violated Standard IV (B.1) - Fiduciary Duties.

  IV.

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

  A.

  II and IV only

  B.

  III and IV only

  C.

  I only

  D.

  II only

  E.

  IV only

  F.

  III only

  Correct Answer: A

  Even though the transaction turned out to be profitable for the clients ex post, the decision to invest in the stock was unwise ex ante. Wolfram should have recognized that his clients do not have the risk appetite for speculative securities, given their need for current income and preservation of the principal. Clearly, speculation in stocks is not an appropriate investment for these clients.

• Question 3790:

  What is the effective date for compliance with the AIMR-Performance Presentation Standards for including accrued income in market value performance calculations?

  A. January 1, 1997

  B. January 1, 1993

  C. July 1, 1995

  D. January 1, 1992

  Correct Answer: A

  From January 1, 1997, going forward, all of the firm's composites and performance presentations must include accrued income in market value performance calculations. In addition, all of the firm's performance presentations, including presentations of historical performance, must contain a measure of composite dispersion.