CFA Level I: Mock Exam II
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1. Justin Matthews, CFA, is CFO of a bank and serves on the bank's investment
committee. The majority of the committee has voted to invest in medium-term
euro debt. Matthew feels very strongly that this is a poor strategy and that
trends in both the exchange rate and in euro interest rates over the next year
will result in large losses on the position.
According to the Code and Standards, Matthew should:: document his differ-
ence of opinion with the committee.
Standard V(A) Diligence and Reasonable Basis states that if a consensus opinion
has a reasonable basis, a member or candidate who disagrees with it does not have
to disassociate from it but should document the difference of opinion.
2. Kim Vance, CFA, tells a prospective client, "Over the three years I have
been in the business, my equity-oriented accounts have had a mean return
of more than 20% a year." The statement is accurate, but the mean return was
influenced by the account of one client realizing a large gain on a position in
a small-cap company he took based on his own research.
Without this account, the average gain would have been 18% per year. Has
Vance violated CFAI Standards of Professional Conduct?: Yes, because the
statement misrepresents Vance's performance.
This is a violation of Standard III(D) Performance Presentation
3. Joseph Drake, CFA, an investment advisor at Best Wealth Managers, has
identified a growth stock that he believes has the potential to provide excellent
returns over the next five years. He includes this stock on a "recommended
list" that he sends to all of his clients. Drake includes recent earnings, his
estimates of future earnings, and a note that more information is available on
request.
Drake has:: NOT violated the Standards.
It is not a violation of the Standards to present a recommended list of securities,
some of which may not be suitable for some clients. It is permitted to present
investment recommendation in capsule form as long as clients are informed that
more information about the securities is available on request.
4. Brian Farley, CFA, is an investment manager with one client, a $75 million
university endowment fund. A representative of the endowment fund calls
Farley and places a "sell" order on a portfolio holding whose management has
, CFA Level I: Mock Exam II
Study online at https://quizlet.com/_bse5cx
just reduced its earnings guidance for the coming year. Farley also owns the
security and, because the new guidance is public information, places simul-
taneous "sell" orders for both the client account and his personal account.
According to the Standards on fair dealing and priority of transactions, Farley
is in violation of:: Farley is in violation of Standard VI(B) Priority of Transactions.
Client transactions must take PRECEDENCE over members' or candidates' trades.
5. Gabe Klement, CFA, an analyst for HB Investments, is responsible for the
valuation model for an IPO. Without his knowledge, others at HB adjusted
the inputs to the model to increase the estimated value of the shares, and
the offering is oversubscribed. Complying with local securities laws, Klement
purchases shares of the IPO for his personal account and allocates the
remaining shares to client accounts on a pro rata basis.
With regard to the Standard on knowledge of the law, the analyst:: violated the
Standard by purchasing the shares of the IPO but not by allowing the IPO valuation
to be published. Gave violated both Standard I(A) and Standard VI(B) Priority of
Transactions as Standard VI(B) does NOT permit the purchasing of IPO shares.
Standard I(A) Knowledge of the Law requires candidates and members comply with
all applicable rules and regulations, including the CFAI Standards of Practice.
6. Charmaine Townsend, CFA, has been managing equity portfolios for clients
using a model that identifies growth companies selling at reasonable mul-
tiples. With economic growth slowing for the foreseeable future, she has
decided to change to a securities selection model that emphasizes dividend
income and low valuation.
To comply with the Code and Standards, Townsend should most appropriate-
ly:: Promptly notify her clients of the change.
Standard V(B) Communication with Clients and Prospective Clients requires prompt
disclosure of any change that might significantly affect the manager's investment
processes. The disclosure need not be in writing.
7. Wells Investments implements a new procedure for unsolicited trade re-
quests that an advisor believes are inconsistent with the client's IPS:
+ If the trade will have only a minimal impact on the client's portfolio, first
advise the client in what way the trade deviates from the IPS, and then request
Study online at https://quizlet.com/_bse5cx
1. Justin Matthews, CFA, is CFO of a bank and serves on the bank's investment
committee. The majority of the committee has voted to invest in medium-term
euro debt. Matthew feels very strongly that this is a poor strategy and that
trends in both the exchange rate and in euro interest rates over the next year
will result in large losses on the position.
According to the Code and Standards, Matthew should:: document his differ-
ence of opinion with the committee.
Standard V(A) Diligence and Reasonable Basis states that if a consensus opinion
has a reasonable basis, a member or candidate who disagrees with it does not have
to disassociate from it but should document the difference of opinion.
2. Kim Vance, CFA, tells a prospective client, "Over the three years I have
been in the business, my equity-oriented accounts have had a mean return
of more than 20% a year." The statement is accurate, but the mean return was
influenced by the account of one client realizing a large gain on a position in
a small-cap company he took based on his own research.
Without this account, the average gain would have been 18% per year. Has
Vance violated CFAI Standards of Professional Conduct?: Yes, because the
statement misrepresents Vance's performance.
This is a violation of Standard III(D) Performance Presentation
3. Joseph Drake, CFA, an investment advisor at Best Wealth Managers, has
identified a growth stock that he believes has the potential to provide excellent
returns over the next five years. He includes this stock on a "recommended
list" that he sends to all of his clients. Drake includes recent earnings, his
estimates of future earnings, and a note that more information is available on
request.
Drake has:: NOT violated the Standards.
It is not a violation of the Standards to present a recommended list of securities,
some of which may not be suitable for some clients. It is permitted to present
investment recommendation in capsule form as long as clients are informed that
more information about the securities is available on request.
4. Brian Farley, CFA, is an investment manager with one client, a $75 million
university endowment fund. A representative of the endowment fund calls
Farley and places a "sell" order on a portfolio holding whose management has
, CFA Level I: Mock Exam II
Study online at https://quizlet.com/_bse5cx
just reduced its earnings guidance for the coming year. Farley also owns the
security and, because the new guidance is public information, places simul-
taneous "sell" orders for both the client account and his personal account.
According to the Standards on fair dealing and priority of transactions, Farley
is in violation of:: Farley is in violation of Standard VI(B) Priority of Transactions.
Client transactions must take PRECEDENCE over members' or candidates' trades.
5. Gabe Klement, CFA, an analyst for HB Investments, is responsible for the
valuation model for an IPO. Without his knowledge, others at HB adjusted
the inputs to the model to increase the estimated value of the shares, and
the offering is oversubscribed. Complying with local securities laws, Klement
purchases shares of the IPO for his personal account and allocates the
remaining shares to client accounts on a pro rata basis.
With regard to the Standard on knowledge of the law, the analyst:: violated the
Standard by purchasing the shares of the IPO but not by allowing the IPO valuation
to be published. Gave violated both Standard I(A) and Standard VI(B) Priority of
Transactions as Standard VI(B) does NOT permit the purchasing of IPO shares.
Standard I(A) Knowledge of the Law requires candidates and members comply with
all applicable rules and regulations, including the CFAI Standards of Practice.
6. Charmaine Townsend, CFA, has been managing equity portfolios for clients
using a model that identifies growth companies selling at reasonable mul-
tiples. With economic growth slowing for the foreseeable future, she has
decided to change to a securities selection model that emphasizes dividend
income and low valuation.
To comply with the Code and Standards, Townsend should most appropriate-
ly:: Promptly notify her clients of the change.
Standard V(B) Communication with Clients and Prospective Clients requires prompt
disclosure of any change that might significantly affect the manager's investment
processes. The disclosure need not be in writing.
7. Wells Investments implements a new procedure for unsolicited trade re-
quests that an advisor believes are inconsistent with the client's IPS:
+ If the trade will have only a minimal impact on the client's portfolio, first
advise the client in what way the trade deviates from the IPS, and then request
