CFA LEVEL 1 MOCK EXAM (A)
Questions and Answers
1. Q: A profession is most likely described as a group of people that:
A. has a common level of basic knowledge about a particular
subject.
B. monitors its members based on an agreed-on code of ethics.
C. puts the interests of its members first.: B is correct.
A profession is practiced by members who share and agree to adhere to a common code of ethics, and
a profession is based on a specialized knowledge and skills and service to others.
2. Q: If you are characterizing clients, family, colleagues, and
market participants and the duties owed to them, you are most
likely in which phase of an ethical decision-making framework?
A. Decide
B. Identify
C. Consider: B is correct.
The Identify phase is typically the initial phase of the ethical decision-making framework. In this phase,
you will identify the important facts available as well as those facts that you wish were available to
develop a complete understanding of the situation. In this phase you also identify the stakeholders—
clients, family, colleagues, market participants, and others—and the duties to them.
3. Robin Herring, CFA, is a government bond research analyst at an
,independent credit rating agency. A competitor credit rating agency
just downgraded the bonds of a government Herring follows.
Herring notes that all of the information in the competitor's
report was covered in his analysis published last week. In the
past, Herring has been slow to downgrade bonds, so he starts to
doubt his own analysis after seeing the competitor's report. Her-
ring decides to reissue his credit rating of this government bond
and match the competitor's downgrade. In his revised report,
Herring states that new information has been made available to
justify the downgrade. Herring posts the revision on the credit
rating agency's website and provides it by e-mail to all clients
who received the original. Herring's rating change least likely
violated which of the following CFA Institute Code of Ethics and
Standards of Professional Conduct?
A. Fair Dealing
B. Communication with Clients
C. Diligence and Reasonable Basis: A is correct
because the analyst has dealt fairly with all clients by sending them an e-mail and posting his rating
change on the credit rating agency's website when making material changes to his prior investment
recommendation; therefore, he has not violated Standard III(B)-Fair Dealing. Clients should be treated
fairly when material changes in a member's or candidate's prior investment recommendations are
disseminated, which has been done.
4. PNW Bank publishes Investment Monthly magazine, which
,highlights a specific stock in each issue. Publication of the
magazine invariably causes the highlighted stocks to rise
significantly in value. Rachel Coursing, CFA, manager of PNW's
marketing department, often trades in the securities men-tioned in
the Investment Monthly articles prior to publication of the maga-
zine. Coursing has access to the recommendations prior to the
magazine's publication because the magazine is created in her
department and edited by her. PNW's Code of Ethics restricts
trading by all of the bank's analysts and portfolio managers and
requires their trades to be pre-cleared by the Compliance
Department. Coursing least likely violated which of the following
CFA Institute Standards of Professional Conduct?
A. Priority of Transactions
B. Diligence and Reasonable Basis
C. Material Nonpublic Information: B is correct
because Coursing has not violated Standard V-Investment Analysis, Recommendations, and Actions,
as she is not analyzing investments, making investment recommendations, or taking investment actions
for clients. Coursing has violated Standard VI(B)-Priority of Transactions as clients of the bank have not
been given priority over investment transactions in which a member or candidate is the beneficial
owner. In addition, Coursing violated Standard
II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment
Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and
publication of the magazine will materially impact the market price of stocks highlighted. Even
though Coursing is not required by her bank to pre-clear her trades, she is restricted from trading by
Standard II(A).
, 5. Alexander Newton, CFA, is the chief compliance officer for Mills
Investment Limited. Newton institutes a new policy requiring the
pro rata distribution
of new security issues to all established discretionary accounts
for which the new issues are appropriate. The policy also
provides for the exclusion of newly established discretionary
accounts from the distribution until they
have reached their one-month anniversary date. This policy is
disclosed to all
existing and potential clients. Did Newton most likely violate any
CFA Institute Standards of Professional Conduct?
A. Yes.
B. No, because this allocation policy is not inequitable under the
Standards.
C. No, because this policy has been adequately disclosed to all
existing and potential clients.: A is correct
because under Standard III(B)-Fair Dealing, members and candidates should disclose to clients and
prospective clients how they select accounts to participate in an order and how they determine the
amount of securities each account will buy or sell. Trade allocation procedures must be fair and
equitable, and disclosure of inequitable allocation methods does not relieve the member or candidate
of this obligation. All discretionary accounts should be treated in the same manner. Treating newer
accounts differently would be considered inequitable regardless if this policy is disclosed.
6. Sherry Buckner, CFA, manages equity accounts for government
Questions and Answers
1. Q: A profession is most likely described as a group of people that:
A. has a common level of basic knowledge about a particular
subject.
B. monitors its members based on an agreed-on code of ethics.
C. puts the interests of its members first.: B is correct.
A profession is practiced by members who share and agree to adhere to a common code of ethics, and
a profession is based on a specialized knowledge and skills and service to others.
2. Q: If you are characterizing clients, family, colleagues, and
market participants and the duties owed to them, you are most
likely in which phase of an ethical decision-making framework?
A. Decide
B. Identify
C. Consider: B is correct.
The Identify phase is typically the initial phase of the ethical decision-making framework. In this phase,
you will identify the important facts available as well as those facts that you wish were available to
develop a complete understanding of the situation. In this phase you also identify the stakeholders—
clients, family, colleagues, market participants, and others—and the duties to them.
3. Robin Herring, CFA, is a government bond research analyst at an
,independent credit rating agency. A competitor credit rating agency
just downgraded the bonds of a government Herring follows.
Herring notes that all of the information in the competitor's
report was covered in his analysis published last week. In the
past, Herring has been slow to downgrade bonds, so he starts to
doubt his own analysis after seeing the competitor's report. Her-
ring decides to reissue his credit rating of this government bond
and match the competitor's downgrade. In his revised report,
Herring states that new information has been made available to
justify the downgrade. Herring posts the revision on the credit
rating agency's website and provides it by e-mail to all clients
who received the original. Herring's rating change least likely
violated which of the following CFA Institute Code of Ethics and
Standards of Professional Conduct?
A. Fair Dealing
B. Communication with Clients
C. Diligence and Reasonable Basis: A is correct
because the analyst has dealt fairly with all clients by sending them an e-mail and posting his rating
change on the credit rating agency's website when making material changes to his prior investment
recommendation; therefore, he has not violated Standard III(B)-Fair Dealing. Clients should be treated
fairly when material changes in a member's or candidate's prior investment recommendations are
disseminated, which has been done.
4. PNW Bank publishes Investment Monthly magazine, which
,highlights a specific stock in each issue. Publication of the
magazine invariably causes the highlighted stocks to rise
significantly in value. Rachel Coursing, CFA, manager of PNW's
marketing department, often trades in the securities men-tioned in
the Investment Monthly articles prior to publication of the maga-
zine. Coursing has access to the recommendations prior to the
magazine's publication because the magazine is created in her
department and edited by her. PNW's Code of Ethics restricts
trading by all of the bank's analysts and portfolio managers and
requires their trades to be pre-cleared by the Compliance
Department. Coursing least likely violated which of the following
CFA Institute Standards of Professional Conduct?
A. Priority of Transactions
B. Diligence and Reasonable Basis
C. Material Nonpublic Information: B is correct
because Coursing has not violated Standard V-Investment Analysis, Recommendations, and Actions,
as she is not analyzing investments, making investment recommendations, or taking investment actions
for clients. Coursing has violated Standard VI(B)-Priority of Transactions as clients of the bank have not
been given priority over investment transactions in which a member or candidate is the beneficial
owner. In addition, Coursing violated Standard
II(A)-Material Nonpublic Information by trading on material nonpublic information. The Investment
Monthly article written by PNW is considered nonpublic until the magazine is widely distributed, and
publication of the magazine will materially impact the market price of stocks highlighted. Even
though Coursing is not required by her bank to pre-clear her trades, she is restricted from trading by
Standard II(A).
, 5. Alexander Newton, CFA, is the chief compliance officer for Mills
Investment Limited. Newton institutes a new policy requiring the
pro rata distribution
of new security issues to all established discretionary accounts
for which the new issues are appropriate. The policy also
provides for the exclusion of newly established discretionary
accounts from the distribution until they
have reached their one-month anniversary date. This policy is
disclosed to all
existing and potential clients. Did Newton most likely violate any
CFA Institute Standards of Professional Conduct?
A. Yes.
B. No, because this allocation policy is not inequitable under the
Standards.
C. No, because this policy has been adequately disclosed to all
existing and potential clients.: A is correct
because under Standard III(B)-Fair Dealing, members and candidates should disclose to clients and
prospective clients how they select accounts to participate in an order and how they determine the
amount of securities each account will buy or sell. Trade allocation procedures must be fair and
equitable, and disclosure of inequitable allocation methods does not relieve the member or candidate
of this obligation. All discretionary accounts should be treated in the same manner. Treating newer
accounts differently would be considered inequitable regardless if this policy is disclosed.
6. Sherry Buckner, CFA, manages equity accounts for government
