CFA Level 1 Ethics Quiz 1 Detailed Explanations of Correct Answers
1. Which of the following statements regarding a profession’s code of ethics is
most accurate? A. A code of ethics makes sure that all members of a profession
act ethically at all times. B. A code of ethics communicates the principles and
expected behavior of a profession’s members. C. A code of ethics always
includes standards of conduct.
Explanation: A code of ethics serves as a guide, outlining the fundamental
principles and expected conduct for individuals within a profession. It doesn't
guarantee ethical behavior in every instance, nor does it universally mandate
specific standards of conduct.
2. Which of the following statements is most accurate? A. Ethical behavior at
times may be illegal. B. Legal behavior is always ethical behavior. C. Legal
standards are a benchmark for ethical behavior.
Explanation: Ethical standards can sometimes be more stringent than legal
requirements. Therefore, an action could technically be legal but still considered
unethical within a specific ethical framework.
3. Investment professionals have a special responsibility to act ethically
because: A. the industry is heavily impacted by regulations. B. the profession has
adopted a code of ethics. C. they are entrusted to protect client’s assets.
Explanation: The core of an investment professional's role involves managing and
safeguarding the financial well-being of their clients, placing a significant ethical
obligation on them.
4. Which of the following most likely determines unethical behavior? A.
External factors such as environmental or cultural elements. B. The person’s
intrinsic motivation. C. The person’s lifestyle and character.
Explanation: While internal factors play a role, situational influences and cultural
norms can significantly impact ethical decision-making and are often strong
drivers of unethical behavior.
5. Jill Jones, a Level III candidate, is under investigation for a possible
violation of the code and standards. After considering all available
information, the Designated Officer determines that there was indeed a
violation and recommends certain sanctions. Jones: A. Must accept the
,sanctions. B. Can reject the proposed sanctions in which case the matter is
referred to a hearing panel composed of DRC members and CFA Institute
member volunteers affiliated with the DRC. C. Can reject the proposed
sanctions in which case the matter is referred to the local CFA Institute society.
Explanation: Candidates and members have the right to appeal proposed
sanctions. If rejected, the case is reviewed by a hearing panel within the CFA
Institute's disciplinary process.
6. Alvise Lorenzo is a portfolio manager and a close friend of Mario Sabatini,
the CEO of LOS Corporation. During a private conversation with Sabatini,
Lorenzo found out that LOS is likely to lose an important lawsuit. This
information has not been made public. Lorenzo advises his clients to reduce
their investment in LOS Corporation. Which standard did Lorenzo least
likely violate: A. Preservation of Confidentiality. B. Independence and
Objectivity. C. Material Non-public Information.
Explanation: While Lorenzo used material non-public information and potentially
breached confidentiality, there's no direct indication that his judgment or
recommendations were compromised due to a conflict of interest or lack of
objectivity.
7. Which of the following statements about GIPS is correct? A. Compliance
with GIPS does not eliminate the need for in-depth due diligence on part of
the investor. B. GIPS compliance is a firm-wide process; however, verification
can be performed on specific composites. C. GIPS compliance is regulated by the
CFA Institute.
Explanation: GIPS aims to standardize performance reporting, enhancing
comparability and transparency. However, investors still bear the responsibility to
conduct their own thorough due diligence.
8. GIPS compliance requires that composites must include all: A. Fee-paying
and non-fee paying, discretionary portfolios. B. Fee-paying, discretionary and non-
discretionary portfolios. C. Fee-paying, discretionary portfolios.
Explanation: GIPS mandates that all actual, fee-paying, discretionary portfolios
must be included in at least one composite. Non-discretionary portfolios are
excluded.
, 9. Which of the following is not a section of GIPS? A. Private Equity. B.
Fundamentals of Compliance. C. Implementation.
Explanation: While there is a section on Private Equity within GIPS,
"Implementation" is not one of the primary sections. The core sections cover areas
like Input Data, Calculation Methodology, Composite Construction, Disclosure,
and Presentation and Reporting.
10. Alpha Beta Gamma (ABG) is an investment management firm which has
been in business for two years. ABG wants to achieve compliance with GIPS.
Which of the following statements is most accurate with regards to acquiring
GIPS compliant status? A. Since firms are required to present a minimum of five
years of GIPS compliant investment performance, ABG cannot be GIPS compliant
for another three years. B. ABG can be GIPS compliant by presenting
compliant performance since inception. C. ABG can claim GIPS compliant
status without any other action as long as all subsequent performance reporting is
in compliance with GIPS.
Explanation: Firms with less than five years of performance history can achieve
GIPS compliance by presenting compliant performance data since their inception.
11. ART Investment Management Ltd. is headquartered in country X and
claims compliance with GIPS. It has recently expanded its operations in
country Y where the local law is in conflict with some requirements of the
GIPS standards. Which of the following would be the best course of action for
ART Investment Management Ltd. in country Y? A. Follow the local law and
disclose the conflict. B. Follow GIPS and disclose the conflict. C. The firm cannot
claim compliance with GIPS any longer due to the conflict.
Explanation: When local laws conflict with GIPS, firms should adhere to the local
law but must also fully disclose the nature of the conflict in their GIPS-compliant
presentations.
12. Cynthia Rogers is an equity analyst and runs an internet site where she
posts her research regarding the airline industry regularly. She portrays
herself as an independent analyst and always does her research thoroughly
and diligently. Recently, she entered into an agreement with Arnold Airlines
to promote its stock online for a flat fee. The same week Cynthia posted a
strong buy recommendation for Arnold Airlines stock without making any
disclosures on her website. Which of the following statements is most accurate
with regards to a possible violation of the Standards of Professional Conduct?
1. Which of the following statements regarding a profession’s code of ethics is
most accurate? A. A code of ethics makes sure that all members of a profession
act ethically at all times. B. A code of ethics communicates the principles and
expected behavior of a profession’s members. C. A code of ethics always
includes standards of conduct.
Explanation: A code of ethics serves as a guide, outlining the fundamental
principles and expected conduct for individuals within a profession. It doesn't
guarantee ethical behavior in every instance, nor does it universally mandate
specific standards of conduct.
2. Which of the following statements is most accurate? A. Ethical behavior at
times may be illegal. B. Legal behavior is always ethical behavior. C. Legal
standards are a benchmark for ethical behavior.
Explanation: Ethical standards can sometimes be more stringent than legal
requirements. Therefore, an action could technically be legal but still considered
unethical within a specific ethical framework.
3. Investment professionals have a special responsibility to act ethically
because: A. the industry is heavily impacted by regulations. B. the profession has
adopted a code of ethics. C. they are entrusted to protect client’s assets.
Explanation: The core of an investment professional's role involves managing and
safeguarding the financial well-being of their clients, placing a significant ethical
obligation on them.
4. Which of the following most likely determines unethical behavior? A.
External factors such as environmental or cultural elements. B. The person’s
intrinsic motivation. C. The person’s lifestyle and character.
Explanation: While internal factors play a role, situational influences and cultural
norms can significantly impact ethical decision-making and are often strong
drivers of unethical behavior.
5. Jill Jones, a Level III candidate, is under investigation for a possible
violation of the code and standards. After considering all available
information, the Designated Officer determines that there was indeed a
violation and recommends certain sanctions. Jones: A. Must accept the
,sanctions. B. Can reject the proposed sanctions in which case the matter is
referred to a hearing panel composed of DRC members and CFA Institute
member volunteers affiliated with the DRC. C. Can reject the proposed
sanctions in which case the matter is referred to the local CFA Institute society.
Explanation: Candidates and members have the right to appeal proposed
sanctions. If rejected, the case is reviewed by a hearing panel within the CFA
Institute's disciplinary process.
6. Alvise Lorenzo is a portfolio manager and a close friend of Mario Sabatini,
the CEO of LOS Corporation. During a private conversation with Sabatini,
Lorenzo found out that LOS is likely to lose an important lawsuit. This
information has not been made public. Lorenzo advises his clients to reduce
their investment in LOS Corporation. Which standard did Lorenzo least
likely violate: A. Preservation of Confidentiality. B. Independence and
Objectivity. C. Material Non-public Information.
Explanation: While Lorenzo used material non-public information and potentially
breached confidentiality, there's no direct indication that his judgment or
recommendations were compromised due to a conflict of interest or lack of
objectivity.
7. Which of the following statements about GIPS is correct? A. Compliance
with GIPS does not eliminate the need for in-depth due diligence on part of
the investor. B. GIPS compliance is a firm-wide process; however, verification
can be performed on specific composites. C. GIPS compliance is regulated by the
CFA Institute.
Explanation: GIPS aims to standardize performance reporting, enhancing
comparability and transparency. However, investors still bear the responsibility to
conduct their own thorough due diligence.
8. GIPS compliance requires that composites must include all: A. Fee-paying
and non-fee paying, discretionary portfolios. B. Fee-paying, discretionary and non-
discretionary portfolios. C. Fee-paying, discretionary portfolios.
Explanation: GIPS mandates that all actual, fee-paying, discretionary portfolios
must be included in at least one composite. Non-discretionary portfolios are
excluded.
, 9. Which of the following is not a section of GIPS? A. Private Equity. B.
Fundamentals of Compliance. C. Implementation.
Explanation: While there is a section on Private Equity within GIPS,
"Implementation" is not one of the primary sections. The core sections cover areas
like Input Data, Calculation Methodology, Composite Construction, Disclosure,
and Presentation and Reporting.
10. Alpha Beta Gamma (ABG) is an investment management firm which has
been in business for two years. ABG wants to achieve compliance with GIPS.
Which of the following statements is most accurate with regards to acquiring
GIPS compliant status? A. Since firms are required to present a minimum of five
years of GIPS compliant investment performance, ABG cannot be GIPS compliant
for another three years. B. ABG can be GIPS compliant by presenting
compliant performance since inception. C. ABG can claim GIPS compliant
status without any other action as long as all subsequent performance reporting is
in compliance with GIPS.
Explanation: Firms with less than five years of performance history can achieve
GIPS compliance by presenting compliant performance data since their inception.
11. ART Investment Management Ltd. is headquartered in country X and
claims compliance with GIPS. It has recently expanded its operations in
country Y where the local law is in conflict with some requirements of the
GIPS standards. Which of the following would be the best course of action for
ART Investment Management Ltd. in country Y? A. Follow the local law and
disclose the conflict. B. Follow GIPS and disclose the conflict. C. The firm cannot
claim compliance with GIPS any longer due to the conflict.
Explanation: When local laws conflict with GIPS, firms should adhere to the local
law but must also fully disclose the nature of the conflict in their GIPS-compliant
presentations.
12. Cynthia Rogers is an equity analyst and runs an internet site where she
posts her research regarding the airline industry regularly. She portrays
herself as an independent analyst and always does her research thoroughly
and diligently. Recently, she entered into an agreement with Arnold Airlines
to promote its stock online for a flat fee. The same week Cynthia posted a
strong buy recommendation for Arnold Airlines stock without making any
disclosures on her website. Which of the following statements is most accurate
with regards to a possible violation of the Standards of Professional Conduct?
