CFA Level 1 v1.0

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Exam contains 3960 questions

Standard IV of the Standards of Professional Conduct deals with Relationships with and Responsibilities to ________.

  • A. None of these answers
  • B. Clients and Prospects
  • C. AIMR
  • D. Supervisors
  • E. the Employer B


Answer : Explanation

Explanation:
Standard IV of the Standards of Professional Conduct deals with Relationships with and Responsibilities to Clients and Prospects.

Each of the following is true regarding Standard II (A), except:

  • A. You must be registered for the next CFA exam in order to call yourself a candidate.
  • B. This standard relates to business cards and letterheads.
  • C. This standard does not relate to oral statements.
  • D. There is no designation for someone who has passed Level I, II, or III.
  • E. All of these answers.
  • F. Candidates may state that they have completed Level I, II, or III.


Answer : C

Explanation:
Standard II (A) relates to the responsibility of AIMR members and candidates to use their professional designation properly and in a non-misleading manner. A person must be registered to take the next scheduled CFA exam to be a "candidate" in the CFA program. There is no designation for someone who has passed
Level I, II, or III of the CFA exam. Candidates may state, however, that they have completed Level I, II, or III. The standard applies to all related explanations or descriptions of the CFA designation, including letterheads and business cards, resumes, directory listings, printed advertising, brochures and oral statements to clients and prospects.

Standard ________ pertains to fair dealing with customers and clients.

  • A. III (B)
  • B. IV (B.3)
  • C. IV (A)
  • D. I (D)
  • E. None of these answers


Answer : B

Explanation:
Standard IV (B.3) states: "Members shall deal fairly and objectively with all clients and prospects when disseminating investment recommendations, disseminating material changes in prior investment recommendations and taking investment action."

Social investments:

  • A. should never be used in pension fund investing.
  • B. in pensions must be well thought-out, making sure that such investments are legal and do not impair the integrity of the funds in questions or the financial security of the participants or beneficiaries.
  • C. none of these answers.
  • D. have yet to be used as an investment in pension funds in the U.S.
  • E. are proper investment vehicles for pensions, since they are a "public good."


Answer : B

Explanation:
In a pension plan, the first and foremost duty of the fiduciary is to the plan participants and their beneficiaries rather than to the plan sponsor that has the power to hire and fire the investment manager. Consequently, if urged to make investments that might be of direct benefit to a sponsoring community or to the community at large, the manager must ensure that such investments are legal and do not impair the integrity of the funds in question or the financial security of the participants/ beneficiaries.

Which of the following are considered basic characteristics of a security and must be included in research reports?

  • A. business risk
  • B. degree of uncertainty
  • C. annual expected income
  • D. yield-to-maturity
  • E. all of these answers
  • F. both degree of liquidity and yield-to-maturity
  • G. expected annual rate of return


Answer : E

Explanation:
Members should include the following information in research reports:
- expected annual rate of return
- annual amount of income expected (current and future)
- current rate of income return of yield to maturity
- degree of uncertainty associated with cash flows
- degree of marketability/liquidity
- business, financial, political, sovereign and market risks

Fundamental Responsibilities is dealt with under:

  • A. Standard I
  • B. Standard III
  • C. None of these answers
  • D. Standard V
  • E. Standard II
  • F. Standard IV


Answer : A

Explanation:
Fundamental Responsibilities is dealt with under Standard I.

Corporate directors are governed by the ________. Trustees are governed by the ________.

  • A. none of these answers
  • B. "common sense doctrine"; business judgment rule
  • C. business judgment rule; Prudent Man Rule
  • D. business judgment rule; "common sense doctrine"
  • E. "common sense doctrine"; Prudent Man Rule
  • F. Prudent Man Rule; business judgment rule
  • G. Prudent Man Rule; "common sense doctrine" C


Answer : Explanation

Explanation:
This question is trying to highlight the different standards of business care fiduciaries must uphold in charitable organizations and trusts respectively. Thus, fiduciaries at charities are bound by the business judgment rule, since they are comparable to directors of business corporations. In contrast, trustees are governed by the Prudent Man Rule. This distinction in the standard duties applicable to fiduciaries in different situations should be recognized.

Maria Golino is a financially savvy client of Hector Gomez, a portfolio manager with a small investment firm. Maria recently directed Hector to execute all trades on her behalf with Omega Brokerage. Omega charges higher commissions than most other brokerage firms but in this case, has agreed to provide research to
Hector on behalf of Maria. Hector does not object to this and starts directing Maria's trades to Omega. Hector has

  • A. violated Standard IV (B.1) - Fiduciary Duties.
  • B. violated Standard IV (A.2) - Research Reports.
  • C. violated Standard IV (B.8) - Disclosure of Referral Fees.
  • D. not violated any standards.


Answer : D

Explanation:
The practice in which a portfolio manager directs trades to a particular brokerage in exchange for additional goods or services at the behest of the client is known as "directed brokerage." This practice is not in violation of any AIMR standards since the portfolio manager is acting on the instructions of his client and the benefits accrue to the client. Standard IV (B.1) - Fiduciary Duties - and the Topical Study "Fiduciary Duty."

Another name for "covered" person is ________.

  • A. guardian
  • B. none of these answers
  • C. ombudsman
  • D. access person
  • E. fiduciary
  • F. supervisor D


Answer : Explanation

Explanation:
Access or covered persons have knowledge of pending or actual investment recommendations or action. The firm's definition of access (covered) person should be broad enough to cover all people with that knowledge.

Which of the following can be found in Standard IV?

  • A. Members must use the CFA designation in a dignified manner.
  • B. Members shall make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation.
  • C. Members shall comply with any prohibitions on activities imposed by their employer if a conflict of interest exists.
  • D. Members shall maintain knowledge of AIMR's Code of Ethics.
  • E. If members receive material nonpublic information in confidence, they shall not breach that confidence by trading or causing others to trade in securities to which such information relates.


Answer : B

Explanation:
Standard IV states: "Members shall make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation."

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.


Answer : B

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

Kruskal Meriwether is a senior research analyst with Bellwether Advisors. He has been following Crystals & 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 & 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 & 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.


Answer : B

Explanation:
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.

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 F


Answer : Explanation

Explanation:
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.

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 B


Answer : Explanation

Explanation:
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.

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


Answer : B

Explanation:
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.

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Exam contains 3960 questions

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