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

• Question 3821:

  Government regulation of charitable organizations and public pension plans:

  A. has increased as these organizations have grown in size and importance.

  B. none of these answers.

  C. has lessened, since there is a growing trend away from charitable organizations since 1989.

  D. is still absent, although there is an effort to change this.

  Correct Answer: A

  Government regulation of charitable organizations and public pension plans has increased as these organizations have grown in size and importance. As such, members who are fiduciaries for these organizations must examine applicable law, client agreement and client guidelines for guidance as to their duties.

• Question 3822:

  The Prudent Man Rule, as it was originally written, was clearly oriented towards ________.

  A. charitable organizations

  B. public pension plans

  C. individual clients

  D. personal trust accounts E. endowments

  Correct Answer: D

  As enunciated, the concept behind the Prudent Man Rule was clearly oriented towards personal trust accounts. Under this rule, trustees must be impartial between income beneficiaries and remainder men and must achieve an equitable balance between current income and the preservation of principal in real terms.

• Question 3823:

  Which Standard deals with personal integrity and prohibits individual behavior that reflects badly on the investment industry?

  A. III (C)

  B. I (D)

  C. II (B)

  D. III

  E. None of these answers

  F. IV (A)

  Correct Answer: B

  Standard II (B) deals with personal integrity and prohibits individual behavior that reflects adversely on the entire profession.

• Question 3824:

  Members ________ to be in compliance with the Performance Presentation Standards to be in compliance with Standard V (B).

  A. are not required

  B. may be required

  C. are always required

  D. none of these answers

  E. will be required, as of 1/1/2001,

  F. will be required, as of 1/1/2002,

  Correct Answer: A

  The PPS are voluntary standards that a member or a firm may adopt in compiling and presenting performance figures. AIMR adopted and promotes the PPS as a method of obtaining industry wide uniformity in performance presentation information so that results are directly comparable among investment managers. Members are not required to be in compliance with the PPS to be in compliance with Standard V (B).

• Question 3825:

  A critical part of Standard IV (A.2) is to distinguish between:

  A. buy side and sell side.

  B. industry and company analysis.

  C. insider trading and appropriate trading.

  D. research reports and investment memoranda.

  E. employees and independent contractors.

  F. CFA charterholders and non-CFA charterholders.

  G. none of these answers.

  Correct Answer: G

  Standard IV (A.2) - Research Reports states the responsibility of AIMR members, CFA charterholders and candidates to include in each research report those key facts that are instrumental to the investment recommendation presented in the report. A critical part of this requirement is to distinguish clearly between opinions and facts.

• Question 3826:

  ERISA fiduciaries must adhere to the following prudent procedures:

  -establish a ________ investment policy for the plan

  -diversify plan assets

  -make investment decisions with the skill and care of a prudent expert

  -monitor investment performance

  -control investment expenses

  -

  avoid prohibited transactions

  A.

  supervisory

  B.

  none of these answers

  C.

  written

  D.

  diversified

  Correct Answer: C

  These procedures are stipulated under the detailing of ERISA fiduciary duties, to ensure that the fiduciary complies with the duty to act with prudence.

• Question 3827:

  When an investment manager uses client brokerage to purchase research services that benefit the investment manager; this is known as ________.

  A. under-the-table agreements

  B. soft dollars

  C. through-research agreements

  D. bartering arrangements

  E. shifting agreements

  Correct Answer: B

  An investment manager often has discretion over the selection of brokers executing transactions. Conflicts arise when an investment manager uses client brokerage to purchase research services that benefit the investment manager, which is commonly called "soft dollars," "soft pounds," or "soft commissions." Whenever a manager uses such client brokerage to purchase services that benefit him, as a fiduciary, he must disclose to clients the methods or policies followed to address the potential conflict.

• Question 3828:

  Level ________ verification applies to the firm.

  A. IV

  B. 0

  C. I

  D. II

  E. III

  Correct Answer: C

  Level I verification applies to all firm composites. Level II verification requires a Level I verification at least on the specific composites being verified at Level II. (Note: There are only two levels of verification.)

• Question 3829:

  Which of the following is/are required by AIMR-PPS with regards to calculation of returns?

  I. For leveraged portfolios, the stated returns must be on an "all-cash" basis, removing the effects of debt financing.

  II. Performance must be based on "gross" returns i.e. before necessary expenses like brokerage and SEC fees.

  III.

  Composites must be asset-weighted using beginning-of-period weights.

  A.

  none of them

  B.

  I, II and III

  C.

  I and III only

  D.

  III only

  Correct Answer: D

  For leveraged portfolios, PPS require a statement of performance using actual returns as well as on an

  "all-cash" basis (i.e. without leverage). Performance must be based on returns after trading expenses like

  brokerage and SEC fees.

  Composites must be asset-weighted using beginning-of-period weights.

• Question 3830:

  Felix Asterix is a shrewd industry analyst working for Obelix, Inc., a brokerage firm of some repute. Asterix had invested about $50,000 in a few stocks trading on the Australian exchange a year ago. Obelix itself is not active outside the US and Asterix's transactions do not represent any violations of the company policies. One of the Australian firms whose shares Asterix holds recently applied for a dual listing on the NYSE and will begin trading in the US in a month. Asterix has advised in his recent research reports that investors would be well-off investing in this dual-listed stock. He does not reveal his holdings in the Australian stock. Felix has:

  I. not violated the AIMR standard since his transactions took place long before the dual listing and he is not obligated to reveal his personal holdings.

  II. violated Standard III (C) - Disclosure of Conflicts to Employer.

  III. violated Standard IV (A.3) - Independence and Objectivity.

  IV.

  violated Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects.

  A.

  I only

  B.

  II and III only

  C.

  II and IV only

  D.

  II, III and IV only

  Correct Answer: D

  This is a classic case of potential conflict and appearance of conflict of interests. Indeed, this kind of situation is so common that it is covered by multiple AIMR standards of ethics. Asterix, as an investment advisor and analyst, should be extremely careful about any potential conflicts of interest that might be perceived as affecting the objectivity of his judgment. Clearly, his substantial Australian holdings, while not in violation of company policies when purchased, are a source of bias now that the stock is trading in the US. Felix must discuss the situation with the Compliance Department at Obelix, Inc. and if he receives the permission to continue holding the stock, should reveal his vested interests to all his potential clients. This ensures that there is no perception of unfair bias and lack of objectivity in his investment recommendations.