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

• Question 3891:

  Emmy Noether is a senior division manager at Harding and Harding, a money management firm. Emmy is quite fastidious about following the rules of the investment industry and has established specific procedures and guidelines designed to prevent any violations. Recently, it surfaced that one of the employees reporting to Emmy, William Bathwater, had been secretly using inside information on a computer maker to generate profits in his portfolio. William had been extremely clever at hiding these profits and only a serendipitous audit by the Compliance Department revealed the pattern. Emmy, in her capacity as William's supervisor, has:

  A. has not violated any standard in the AIMR code of ethics.

  B. none of these answers.

  C. violated Standard III (E) - Responsibilities of Supervisors - by failing to check William's behavior.

  D. violated Standard III (B) - Duty to the Employer - by failing to check William's behavior.

  Correct Answer: A

  Under Standard III (E) - Responsibilities of Supervisors, members must take reasonable care to ensure that their subordinates do not violate any laws or the code of conduct. This includes designing effective procedures to deter fraudulent activity. However, no amount of scrutiny can prevent the cleverest of frauds. What is expected of the members is that they be diligent enough in carrying out their duties. In the present case, given the facts, Emmy cannot be faulted for William's criminal activity since she hasn't been found to be negligent in any way. Hence, she has not violated Standard III (E) - Responsibilities of Supervisors nor any other standards.

• Question 3892:

  Jorgenson is a senior bond analyst with Morgan Co., a large investment banking firm. Over the past quarter, Morgan's corporate bond department has been betting on the credit spreads in the market narrowing and in anticipation, has invested a large amount of capital in the bonds of two firms, High Tech and Amerizone.com. Unfortunately, the credit spreads have not displayed much activity and as the quarter end is approaching, the department wants to unload the bonds. For this, it puts pressure on Jorgenson to push the bonds on some of his larger clients. Jorgenson believes that both the bonds are good investments since High tech and Amerizone have been doing very well and their prospects look rosy. So he goes ahead and convinces his clients to purchase as much as a third of Morgan's bond holdings in these companies. Morgan has

  A. not violated the AIMR code of ethics.

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

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

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

  Correct Answer: A

  There is no evidence that Jorgenson has bowed to any external pressure in recommending the bonds to his clients. If his analysis indicates, in his judgment, that a security is a good investment and suits the needs of a client, then he should recommend it, regardless of whether there is any external pressure for or against that course of action.

• Question 3893:

  Sterling Drachma is a senior investment consultant currently researching a few high-risk internet stock companies which recently started trading on NASDAQ. Sterling manages 5 large and private investment accounts for which he has discretionary investment authority. Sterling is about 3 years away from retirement and his retirement portfolio is managed by Franc Escudo. Sterling has concluded from his research that two of the internet stocks he has been following are great buys and instructs Franc to divert part of the retirement investments into these stocks. Franc executes the orders as soon as he receives them. Sterling then instructs his brokers to buy the stocks for the two discretionary accounts that he knows are inclined toward high-risk investments. He does not buy any for the remaining three accounts since those are income-oriented, low-risk accounts. In this sequence of events, which of the following is/are true?

  I. Franc has violated Standard IV (B.1) - Fiduciary Duties - by investing retirement account funds in the high-risk stocks.

  II. Sterling has violated Standard IV (B.3) - Fair Dealing - by not treating all his accounts equally.

  III.

  Sterling has violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement account before trading for his client accounts.

  A.

  I, II and III

  B.

  I and III only

  C.

  II and III only

  D.

  III only

  Correct Answer: D

  Franc is managing a personal portfolio and as such must execute the orders of his client. The fact that it is a retirement account makes no difference in this situation. Franc would be in violation if he was managing a pension portfolio or a personal trust portfolio and the investments were deemed in violation of plan directives. Franc, however, should try to understand Sterling's motives in the redeployment of funds since this could prevent his client from what could be reckless investment. Sterling, for his part, as definitely violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement account before trading for his client accounts. Personal transactions should never take precedence over client and employer transactions. He has, however, not violated Standard IV (B.3) - Fair Dealing - by not treating all his accounts equally. Standard IV (B.3) requires a fair treatment of all clients, not an equal treatment precisely because different accounts have different investment needs and risk appetites. The internet stocks should only be bought for accounts for which they are a suitable investment.

• Question 3894:

  Standard II (C) - Prohibition against Plagiarism - addresses all of the following forms of communication, except:

  A. internet communications

  B. oral presentations

  C. electronic data transfer

  D. written presentations

  E. audio/visual presentations

  F. none of these answers

  G. group meetings

  Correct Answer: F

  Standard II (C) does not concern the form of communication of information to clients, prospects, employees, or the general public. Rather, it concerns the need to acknowledge the source of information used by the member to avoid the appearance of plagiarism.

• Question 3895:

  What is the effective date for compliance with the AIMR-PPS for U.S. and Canadian investments?

  A. January 1, 1995

  B. January 1, 1992

  C. January 1, 1993

  D. January 1, 1994

  Correct Answer: C

  From January 1, 1993, going forward, all of the firm's actual discretionary fee-paying nontaxable portfolios solely invested in U.S. and/or Canadian investments ("North American Portfolios") must be presented in composites that adhere to the Standards.

• Question 3896:

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

  I. Total return - realized and unrealized gains plus income - should be used.

  II. Returns must be based on arithmetic mean calculations.

  III.

  Accrual accounting must be used for fixed-income securities.

  A.

  I, II and III

  B.

  I only

  C.

  I and III only

  D.

  II and III only

  Correct Answer: C

  The PPS require that calculations be based on time-weighted (geometric) returns. Accrual accounting must be used for fixed-income and other securities that accrue income. The performance measurement must be based on total returns.

• Question 3897:

  Joseph Silk is a veteran money manager with Aakanksha, Inc., a hedge fund that caters to high net-worth individuals. His friend, Gribbin, recently incorporated a private business and invited Joseph to be on its board of directors. Gribbin's business is in the paper industry and does not directly or indirectly affect Aakanksha's client base. Joseph accepted the board membership with the understanding that he would participate in Gribbin's business only over the weekends. He considered this a private venture and did not inform Aakanksha's Compliance officer. In not doing so, Joseph has

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

  B. not violated any standards since there is no conflicts of interest between his two professional obligations.

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

  D. violated Standard IV (B.1) - Fiduciary Duties.

  Correct Answer: A

  While Gribbin's business is not in any competition with Aakanksha, Joe's position as a director creates an appearance of conflicts of interest since he will have a say in many decisions of the business, including investments in securities. Hence, before accepting any such position, Joe must discuss the situation with the compliance department at Aakanksha to evaluate the potential conflicts of interest. While Joe is not precluded from being on an outside Board, not getting this cleared with his current employer represents a violation of Standard III (C) - Disclosure of Conflicts to Employer.

• Question 3898:

  ________ accounting is mandatory for fixed-income securities.

  A. Accrual

  B. Cash

  C. Flexible

  D. Equal

  E. Risk-free

  F. Total

  Correct Answer: A

  Accrual accounting must be used for fixed-income securities and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and numerator.

• Question 3899:

  According to the AIMR-PPS when presenting results, annual returns for all years must be presented. Performance for periods of less than one year

  A. must be treated as all of the other performance results.

  B. must not be included in the presentation.

  C. must not be annualized.

  D. must be prorated and appropriate disclosures made.

  Correct Answer: C

  Annual returns for all years must be presented. Performance for periods of less than one year must not be annualized. This is a requirement for presentation of results.

• Question 3900:

  Mirabelle is an experienced analyst who has worked for the investment research arm of Clifford and Clifford, Inc. for the past 7 years. Recently, TransOmega retained Clifford and Clifford to conduct a study on possible takeover candidates in the aviation industry. Mirabelle has been given the project and two assistants to conduct the research. During their review, Mirabelle's assistants located a research report created recently by Donaldson, a freelance analyst. Mirabelle found the report thorough, though she did not agree with many of Donaldson's conclusions. She carried out further inquiry along those lines and modified the report with new conclusions. She showed the completed report, with proper attributions to Donaldson in places where she had used his results, to a senior partner, John Cliff of Clifford and Clifford. The report was approved and released to TransOmega. In this case,

  A. both Mirabelle and John Cliff violated the standards.

  B. only Mirabelle violated the plagiarism standard by using Donaldson's report.

  C. only John Cliff violated the Standard of Reasonable Care (IVA.1) by not adequately monitoring Mirabelle.

  D. neither Mirabelle nor John Cliff violated any of the standards.

  Correct Answer: D

  Since proper care was taken at all steps, no violation has occurred. The use of Donaldson's report is acceptable as long as proper acknowledgments are given.