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

• Question 3861:

  If every one of your research reports had a statement stating that every research report on issues by a corporate client reflects the unbiased opinion of the analyst, you would be complying with Standard ________.

  A. IV (A.3)

  B. IV (A.1)

  C. IV (A.2)

  D. II (A)

  E. II (C)

  F. II (B)

  Correct Answer: A

  To avoid violations of Standard IV (A.3), one of the procedures members should comply with is the need to protect the integrity of opinions. Members and their firms should establish policies stating that every research report on issues by a corporate client reflects the unbiased opinion of the analyst. In this way, firms ensure that the independence and objectivity of their member analysts is maintained.

• Question 3862:

  Xuanchi Zuan is a successful portfolio manager with Up and Away, a money management fund that operates strongly bullish funds. One of Zuan's clients, Margo Margolis, is about to retire in a couple of years. Margo has been phasing out her risky investments over the past five years, moving them into longterm treasury bonds. However, she recently read in a financial magazine the attractiveness of investing in emerging markets. She was especially enticed by the 30% and 40% annual returns observed in these markets over the past 2-3 years. She approaches Zuan and instructs him to move 30% of her funds into these markets. Zuan should:

  A. none of these answers.

  B. evaluate the emerging market investments and move the funds only if he considers them suitable for investment for Margo.

  C. refuse to do so, pointing out the high risks involved in such investments.

  D. move the funds into emerging market securities per Margo's request.

  Correct Answer: A

  Zuan cannot refuse to do something that his client instructs him to do, as long as it is legal. However, it is his duty to apprise his clients of the risks and returns associated with different instruments and advise them about the suitability of including such investments in their portfolios. Once the client is aware of all the pitfalls and rewards, the final decision must rest with the client. In Margo's case, Zuan should do the same before acting on her instructions. This question relates most directly to Standard IV (B.1) - Fiduciary Duties.

• Question 3863:

  Brikland Strickowski learned a month ago that one of his clients, Stratmann, had been regularly using inside information provided by numerous "contacts" in various firms to generate his trading activity with Brikland. Brikland was surprised at Stratmann's recklessness but did not want to get him into trouble so he did not inform anyone about this. AIMR has been tipped about Stratmann's activity and one of the investigators from AIMR's Professional Conduct Program (PCP) recently got in touch with Brikland about this. Brikland, in his desire not to have his CFA designation voided by AIMR, decided to divulge everything he knew about Stratmann's investment activity, though this information is considered confidential even by AIMR. Which of the following is/are true about this sordid mess?

  I. Brikland violated Standard IV (B.5) - Preservation of Confidentiality -by revealing confidential information about Strattman to the PCP investigator.

  II. Strattman violated Standard V (A) - Prohibition Against Use of Non-Public Information.

  III. Brikland violated Standard I - Fundamental Responsibilities - by not informing his supervisor and/or the SEC about the insider trading.

  IV.

  Brikland violated Standard I - Fundamental Responsibilities - by not dissociating himself from Strattman's portfolio.

  A.

  I, II, III and IV

  B.

  II only

  C.

  II and IV

  D.

  I, II and IV only

  Correct Answer: C

  As an AIMR member, Brikland must cooperate fully with any investigation carried out by the PCP. Since the information revealed during the investigation is kept in strict confidentiality, such a cooperation is not considered a violation of Standard IV (B.5) - Preservation of Confidentiality. Indeed, the Code of Ethics expressly requires members to cooperate with such investigations, failing which the member can be summarily suspended. Note that the Code does not require members to report criminal activity to proper authorities, though doing so is most often prudent and a suggested course of action (Standard I Fundamental Responsibilities). However, if the member knowingly participates in illegal activities or does not dissociate himself from such activities, he would be violating the code.

• Question 3864:

  Standard IV (B.3) deals with ________.

  A. Duty to Employer

  B. Professional Misconduct

  C. Interactions with Clients and Prospects

  D. None of these answers

  E. Prohibition against Use of Material Nonpublic Information

  F. Preservation of Confidentiality

  G. Fair Dealing

  H. Investment Process

  Correct Answer: G

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 3865:

  Chan and Chung are two of the five Managing Directors of Alfalfa, a mid-size hedge fund. In a recent court case involving a securities lawsuit, Chan was called on to testify as an expert on securities research. During his testimony, Chan had to invoke several results from a proprietary research carried out by his staff at Alfalfa. He did so without specifically attributing the results to them. At around the same time, Chung had to meet with a few prospective clients for a business presentation. During this presentation, he showed them some of the results obtained by Chan's team, without specifically acknowledging the research team. Instead, he referred to them with phrases like, "our studies indicate that..." In this set of events, as it relates to Standard II(C) - Prohibition against Plagiarism,

  A. neither Chan nor Chung has violated the standard.

  B. Chan has not violated the standard while Chung has.

  C. both Chan and Chung have violated the standard.

  D. Chan has violated the standard while Chung has not.

  Correct Answer: D

  In the interactions with clients, senior management members represent the firm and as such, do not have to give specific attribution to research results obtained by employees of the firm. Hence, Chung has committed no violation. On the other hand, in the capacity of an expert, Chan is not representing the firm but himself. In such a case, he has to properly acknowledge the sources of all results he quotes. Refer to Standard II(C).

• Question 3866:

  Standard III (E) is ________.

  A. Obligation to Inform Employer of Code and Standards

  B. Duty to Employer

  C. Responsibilities of Supervisors

  D. Disclosure of Conflicts to Employer

  E. None of these answers

  F. Disclosure of Additional Compensation Arrangements

  Correct Answer: C

  Standard III (A) deals with the Obligation to Inform Employer of Code and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer. Standard III (D) deals with Disclosure of Additional Compensation Arrangements. Standard III (E) deals with Responsibilities of Supervisors.

• Question 3867:

  Fiduciaries are obligated to vote proxies:

  A. none of these answers.

  B. on an "as needed" basis, depending on the issue at hand.

  C. only when there is a nonroutine governance issue.

  D. only when there is a change in firm capitalization.

  E. in an informed and responsible manner.

  F. only when management requests the fiduciary to vote, in writing.

  Correct Answer: E

  As part of a fiduciary's duty of loyalty, they are obligated to vote proxies in an informed and responsible manner. A fiduciary who fails to vote, casts a vote without considering the impact of the question or votes blindly with management on nongovernance issues may violate this duty of loyalty.

• Question 3868:

  AIMR Standard ________ prohibits plagiarism.

  A. I (D)

  B. IV (A)

  C. None of these answers

  D. II (C)

  E. III (B)

  Correct Answer: D

  Standard II (C) - Prohibition against Plagiarism states: "Members shall not copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material. Members may use, without acknowledgment, factual information published by recognized financial and statistical reporting services or similar sources."

• Question 3869:

  When formulating an investment policy for a client, all of the following fall under "investor constraints," except ________.

  A. liquidity needs

  B. regulatory and legal circumstances

  C. risk tolerance

  D. tax considerations

  E. expected cash flows

  F. investable funds

  G. investor preferences, circumstances and unique needs

  H. none of these answers

  Correct Answer: C

  Risk tolerance is considered under "investor objectives."

• Question 3870:

  Which of the following can be found in Standard I?

  A. Members shall deliver a copy of the Code to their employer.

  B. Members shall not participate in any professional conduct involving dishonesty, fraud, deceit, etc.

  C. Members shall not knowingly participate or assist in any violation of laws, rules or regulations.

  D. Members shall exercise diligence and thoroughness in making investment recommendations or in taking investment actions.

  E. Members shall not misrepresent investment performance.

  Correct Answer: C

  Standard I states that members shall: "A. Maintain knowledge of and comply with all applicable laws of any governing agency or professional association governing the member's professional activities, and B. Not knowingly participate or assist in any violation of laws, rules or regulations."