CFA Level I: Mock Exam II Questions
And Answers With Verified Solutions
100% Correct Newly Updated 2025
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: - ANSWER✔✔document
his difference 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.
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? - ANSWER✔✔Yes, because
the statement misrepresents Vance's performance.
This is a violation of Standard III(D) Performance Presentation
,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: - ANSWER✔✔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.
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 just
reduced its earnings guidance for the coming year. Farley also owns the security
and, because the new guidance is public information, places simultaneous "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: - ANSWER✔✔Farley is in violation of Standard VI(B) Priority of
Transactions.
Client transactions must take PRECEDENCE over members' or candidates' trades.
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: -
ANSWER✔✔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.
Charmaine Townsend, CFA, has been managing equity portfolios for clients using
a model that identifies growth companies selling at reasonable multiples. 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 appropriately: -
ANSWER✔✔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.
Wells Investments implements a new procedure for unsolicited trade requests 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 the client's
approval for the trade.
And Answers With Verified Solutions
100% Correct Newly Updated 2025
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: - ANSWER✔✔document
his difference 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.
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? - ANSWER✔✔Yes, because
the statement misrepresents Vance's performance.
This is a violation of Standard III(D) Performance Presentation
,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: - ANSWER✔✔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.
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 just
reduced its earnings guidance for the coming year. Farley also owns the security
and, because the new guidance is public information, places simultaneous "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: - ANSWER✔✔Farley is in violation of Standard VI(B) Priority of
Transactions.
Client transactions must take PRECEDENCE over members' or candidates' trades.
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: -
ANSWER✔✔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.
Charmaine Townsend, CFA, has been managing equity portfolios for clients using
a model that identifies growth companies selling at reasonable multiples. 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 appropriately: -
ANSWER✔✔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.
Wells Investments implements a new procedure for unsolicited trade requests 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 the client's
approval for the trade.
