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

• Question 3881:

  Standard III includes which of the following?

  A. Reasonable Basis and Representations

  B. Preservation of Confidentiality

  C. All of these answers

  D. Performance Presentation

  E. Use of Professional Designation

  F. None of these answers

  Correct Answer: F

  Standard III deals with Obligation to Inform Employer of Code and Standards, Duty to Employer, Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and Responsibilities of Supervisors.

• Question 3882:

  According to the Prudent Investor Rule, the trustee must:

  -adhere to loyalty, impartiality and ________

  -maintain overall portfolio risk at a reasonable level

  -provide for reasonable diversification of trust investments

  -act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents

  -

  be cost conscious when investing

  A.

  commitment

  B.

  none of these answers

  C.

  prudence

  D.

  diversification

  E.

  supervisors

  Correct Answer: C

  Modern Portfolio Theory dictates that trustees consider a portfolio in its entirety and not just on an investment-by-investment basis. As a fiduciary, therefore, the trustee must:

  -adhere to fundamental fiduciary duties of loyalty, impartiality and prudence.

  -maintain overall portfolio risk at a reasonable level

  -the trade-off between risk and return is the fiduciary's central concern.

  -provide for reasonable diversification of trust investments.

  -act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.

  -be cost conscious when investing.

• Question 3883:

  When dealing with charitable organizations, the fiduciary must consider all of the following, except: A. general economic conditions.

  B. the charity's present and anticipated financial requirements.

  C. investigation of supervisory activities once violation is known to have occurred.

  D. long and short-term institutional needs in carrying out the charitable purpose.

  E. expected total return on its investments.

  F. trends in security price levels.

  Correct Answer: C

  As fiduciaries for charitable organizations, members must consider: long and short-term institutional needs in carrying out the charitable purpose, the charity's present and anticipated financial requirements, expected total return on its investments, trends in security price levels and general economic conditions. Investigation of violations involving supervisors is a compliance procedure under Standard III (E), not under Standard IV (B.1), which deals with Fiduciary Duties.

• Question 3884:

  Argus is a large-accounts money manager with a high-profile hedge fund. He manages all his accounts in a very efficient manner and all his clients are satisfied with his performance. Argus has one character flaw, though. He is given to making sexually inappropriate comments in mixed company, touching female employees in inappropriate ways and cracking adult jokes loudly. This makes many of the other employees uncomfortable in his presence. Argus

  A. none of these answers.

  B. has violated AIMR standard on professional incompetence.

  C. has violated AIMR standard on professional conduct.

  D. has not violated any AIMR standard since he has kept his clients satisfied and the professional misbehavior is an internal matter to be handled by his superiors.

  Correct Answer: C

  Standard II (B) is designed to address professional behavior and personal integrity. The behavior should not put the firm at risk in any way or reflect adversely on the profession. Argus's behavior leaves his firm open to sexual harassment lawsuits and in general, reduces the productivity and comfort zone of female employees. Hence, he is in violation of Standard II (B) - Professional Misconduct.

• Question 3885:

  According to the AIMR-PPS, systems incompatibilities

  A. causes distortion of performance presentation and needs to be disclosed.

  B. are one reason for which a firm may not claim compliance for all assets.

  C. cannot be used as a reason for not claiming compliance for all assets.

  D. render a firm unable to claim compliance with the PPS, thus the firm should ensure compatibility.

  Correct Answer: C

  Systems incompatibilities cannot be used as a reason for not claiming compliance for all assets (i.e., a firm cannot make the claim of compliance for only those assets that are measured and monitored on compatible systems).

• Question 3886:

  Brokers who knowingly or recklessly engage in excessive trading in customers' accounts are known to be ________.

  A. over-selling

  B. mixing

  C. churning

  D. none of these answers

  E. shingling

  Correct Answer: C

  Brokers and dealers are held to a higher standard of care than the average person. They are liable for knowingly or recklessly engaging in excessive trading in customers' accounts, (churning); for accepting funds when they are insolvent, for manipulating the market and for fraud under the shingle theory.

• Question 3887:

  When a manager is responsible for the portfolios of pension plans or trusts, the duty of loyalty is owed to the ________.

  A. beneficiaries

  B. none of these answers

  C. stockholders of the firm

  D. investing public

  E. entity who hires the manager

  F. corporation

  G. board of directors

  H. manager's supervisor(s)

  Correct Answer: A

  The first step in fulfilling a fiduciary duty is to determine what the responsibility is and to who it is owed. Members should take particular care in determining the identity of the "client" to whom the duty of loyalty is owed. In the context of an investment manager managing the portfolios of pension plans or trusts, the client is not the person or entity who hires the manager but, rather, the beneficiaries of the plan or trust. The duty of loyalty is owed to the beneficiaries.

• Question 3888:

  Because it is not the preferred method recommended by the PPS, the use of ________ valuation needs to be disclosed.

  A. new-date

  B. settlement-date

  C. trade-date

  D. old-date

  E. survivor-date

  Correct Answer: B

  Trade-date valuation is recommended when calculating performance, although settlement-date valuation is acceptable if disclosed.

• Question 3889:

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

  A. research reports and investment memoranda.

  B. insider trading and appropriate trading.

  C. CFA charterholders and non-CFA charterholders.

  D. none of these answers.

  E. employees and independent contractors.

  F. industry and company analysis.

  G. the buy side and the sell side.

  H. facts and opinions.

  Correct Answer: H

  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 3890:

  NL is a country with no securities laws. LS is a country that has securities laws that are less strict than the AIMR code of ethics while MS has securities laws that are stricter than the code of ethics. Which of the following is/are true?

  I. A member who lives in NL must always follow the AIMR code.

  II. A member who lives in MS is governed by the AIMR code.

  III. A member lives in NL but does business in MS. If MS laws apply to her business transactions, she must follow the AIMR code.

  IV.

  A member lives in LS and does business in NL. He must always follow the AIMR code.

  A.

  II and IV only

  B.

  I and IV only

  C.

  I, II, III and IV

  D.

  II and III only

  Correct Answer: B

  An AIMR member must always adhere to the code of ethics, unless the laws governing his/her behavior are stricter, in which case, the stricter laws must be followed. A member governed by MS must always follow the MS laws since they are stricter. Standard I.