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

• Question 3911:

  In order to inform your employer that as a member of AIMR, you must abide by the code of ethics, you must:

  A. inform the legal department in writing.

  B. inform senior management in writing.

  C. inform your immediate supervisor in writing or by email.

  D. inform your supervisor in writing, by email or orally.

  Correct Answer: C

  Standard III (A)

• Question 3912:

  Spassky was assigned the task of managing the portfolio of Fisher three days ago when Anand, who was

  managing Fisher's portfolio, retired. Fisher's portfolio consists of some deep-in-the-money put options,

  which will be exercised today, resulting in a cash flow of about $40,000. Spassky has not yet had a chance

  to meet Fisher in person to determine his needs, investment objectives and risk appetite. He did get a

  briefing from Anand about the portfolio and has a general idea about Fisher's investment attitude. In fact,

  over the past two years, Fisher's portfolio has generated handsome returns due to high-risk investments

  which Fisher prefers. Spassky's problem is determining what he should do with the $40,000.

  According to the AIMR Code of Ethics, he should:

  A. keep the money in cash form and not risk it till he can meet Fisher to discuss the situation.

  B. "roll over" the put positions for another week or two till he can meet Fisher and discuss the reinvestment of the funds.

  C. invest the funds in a diversified portfolio with a risk profile similar to what Anand and Fisher have been maintaining over the past 3 months.

  D. invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine his needs, investment objectives and risk appetite.

  Correct Answer: D

  In most cases, a portfolio manager must manage a portfolio based on the investment needs and objectives of the portfolio owner consistent with the willingness to bear risk. One exception to this rule is when a new portfolio manager takes over and has the task of reinvesting funds arising from the existing portfolio investments. Since these funds should not be kept idle, a prompt investment of the money in liquid, risk-free securities is prescribed by the AIMR code of Ethics.

• Question 3913:

  Liz Hurley is an investment advisor who has recently started advising a client, Zeta, regarding investment decisions. Zeta lives in Imphal, where investment laws are quite lax, almost non-existent. Hurley is domiciled in Britania, where investment laws clearly specify that the laws governing finance professionals in any given case are the laws that govern their clients. Britania laws, in general, are far stricter than the AIMR code of ethics. In her dealings with Zeta, Hurley must follow

  A. Imphal's laws.

  B. Britania's laws.

  C. AIMR's code of ethics.

  D. a combination of Britania's laws and AIMR code which results in a stricter set of laws.

  Correct Answer: C

  In her dealings with Zeta, Hurley is governed by Imphal's laws, as specified by Britania's laws. Since Imphal laws are almost non-existent, the code of ethics sets a stricter standard and hence, as an AIMR member, Hurley must follow the AIMR code. Standard I.

• Question 3914:

  "Restricted Periods" are discussed in Standard IV (B.4), Priority of Transactions. Another name for restricted periods is ________ periods.

  A. blackout

  B. restrained

  C. none of these answers

  D. captive

  Correct Answer: A

  Firm procedures should prevent managers or employees from initiating trades in a security for which their firms have a pending buy or sell order within a 24-hour period. Firms must determine specific requirements relating to such blackout, or restricted periods.

• Question 3915:

  Arbaaz, an AIMR member, works for an investment advisory firm, Leon Investments. His friend, Shahzad, recently asked him for some investment recommendations. Arbaaz analyzed Shahzad's portfolio over a weekend and suggested some changes. While he did not accept any remuneration, Shahzad promised him some gifts if his portfolio "performed well." Arbaaz did not inform his employer since he thought he was helping a friend and in any case, the Shahzad's account was extremely small and there were no financial payments. Arbaaz has:

  A. violated Standard III (B), Duty to Employer.

  B. has not violated Standard III (B), Duty to Employer, because there was no financial remuneration.

  C. has not violated Standard III (B), Duty to Employer, because Shahzad's account was too small to be deemed lost business for Leon Investments.

  D. has not violated Standard III (B), Duty to Employer, because Arbaaz is free to do what he wants on his time as long as it doesn't affect Leon Investments.

  Correct Answer: A

  While Arbaaz did not receive any monetary compensation, there is a possibility of gifts in the future. Standard III (B) applies even when there is no actual receipt of compensation; what is important is the possibility of future payments in cash or kind. By not obtaining a written permission from his employer before advising Shahzad, Arbaaz violated Standard III (B).

• Question 3916:

  Cariella is a junior analyst who is currently preparing a report on a diamond producing firm, Dense Carbon, Inc. Dense Carbon recently announced that the results of a mining survey in its South African diamond mines were in, which revealed substantial amounts of diamond reserves for the first time. It has offered to take a few industry analysts for a tour of the facilities and take stock of the situation first hand. During this tour, all expenses, including air-fare and basic accommodations, were provided for by Dense Carbon. Since the visit spanned a weekend, Dense Carbon also arranged for a Safari tour for all the analysts. Cariella did not consider the safari to be an undue entertainment, given the fact that the analysts had to be in the middle of nowhere for 5 days. She was quite assiduous in her appraisal of the mining reserves and in the final analysis, the tour proved extremely valuable to her analysis. However, she did not reveal the fact about the Safari trip to her employer. Cariella has

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

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

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

  IV.

  not violated the AIMR code of ethics.

  A.

  I only

  B.

  I and III only

  C.

  I, II and III only

  D.

  IV only

  Correct Answer: B

  Standard IV (A.3) - Independence and Objectivity requires members to use reasonable care and judgment while making investment recommendations. In particular, it requires that members avoid even appearances of conflict of interest or circumstances that could affect their independence or objectivity. While Dense Carbons travel arrangements for the analysts might not be considered an unnecessary "gift" (this is a gray area), the safari definitely is an unacceptable arrangement from the AIMR code of ethics' perspective. By accepting this gift, Cariella violated Standard IV (A.3). By not disclosing this fact to her employer, she violated Standard III (C) - Disclosure of Conflicts to Employer.

• Question 3917:

  Which of the following AIMR Standards states that client transactions must have priority over transactions in which the analyst is a beneficial owner?

  A. V

  B. None of these answers

  C. VII

  D. VI

  Correct Answer: B

  It is Standard IV (B.4) which states that client transactions must have priority over transactions in which the analyst is a beneficial owner so that such personal transactions do not operate adversely to their client's or employer's interests.

• Question 3918:

  Standard II (C) deals with ________.

  A. None of these answers

  B. Obligation to Inform Employer of Code and Standards

  C. Disclosure of Conflicts to Employer

  D. Duty to Employer

  E. Fundamental Responsibilities

  F. Plagiarism

  G. Use of Professional Designation

  H. Professional Misconduct

  Correct Answer: F

  Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer.

• Question 3919:

  If a firm uses discretionary leverage, it must present performance using:

  A. all-cash basis i.e. removing leverage effects.

  B. both actual returns and all-cash basis.

  C. none of these answers.

  D. actual returns.

  Correct Answer: B

  For discretionary leverage, both actual returns and all-cash returns must be presented.

• Question 3920:

  Kruskal Meriwether is a senior research analyst with Bellwether Advisors. He has been following Crystals and Candles a publicly traded firm which makes high-quality diamond jewelry. Kruskal, after extensive interviews with senior management at Crystals, has inferred that the firm is about to take over a diamond-mining firm in South Africa at a rock-bottom price. The Crystal management has refused to explicitly confirm or deny this but Kruskal firmly believes that such a deal is in the works. He has not used any inside information; just pieced together information from various avenues to come to this conclusion. In his reports, he states, "All my research seems to indicate that Crystal and Candles is likely to buy a South African diamond producer at a bargain price. Clearly, now is the time to buy Crystal and Candles' stock." 2 weeks after his report is released, Crystal's management announces that it has no intentions of making any acquisitions in the near future. This leads to a 7% decline in Crystal's stock, causing a large decline in the accounts of Kruskal's clients. Kruskal has

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

  B. not violated any AIMR code in this incident.

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

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

  Correct Answer: B

  Kruskal's recommendations were not based on whim, unsubstantiated rumors or inside information. It is clear that he put in much research behind his recommendation. The fact that his recommendation turned out to an incorrect choice ex post does not mean he was negligent. An investment advisor cannot be expected to be correct 100% of the time. What is expected of them is professional competence and diligence (Code of Ethics). Nothing in this incident indicates that Kruskal lacked either of these.