CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 3501:

  When creating composites, ________ returns must not be mixed with asset-plus-cash returns.

  A. model

  B. portfolio

  C. asset-only

  D. cash

  E. performance

  Correct Answer: C

  To be in compliance with the PPS, a firm creating a composite must meet this requirement.

• Question 3502:

  Smirlee Montero is a fixed income analyst at a small investment firm. She has been studying the subject of "Body Language" in order to gauge the effectiveness of reading into the dispositions of people. Based on her own empirical tests carried out over the past two years involving 64 different subjects, she has concluded that during the meetings with analysts, a senior management official is usually more excited and waves hands quite often when the information like earnings report (which is released a couple of days later) is very favorable. On the other hand, if the earnings are short of expectations, the official tends to be sober and appears more introspective. There are other body signs which she uses to evaluate possible signals about the quality of information that is pending. In a recent meeting with Chronotron, Inc.'s quarterly analyst meeting, she concluded using her technique that Chronotron's earnings are very likely much lower than projected earlier. This information was not actually released in the meeting whose main focus was on the company's plans for the next quarter. In her report, Smirlee presented a detailed analysis of the publicly available information which supported her hunch and wrote, "Based on this and certain other observations, it is my opinion that Chronotron's is not doing as well as we earlier estimated. Therefore, I would recommend selling this stock before the firm releases its earnings numbers." Smirlee has:

  A. violated Standard IV (A.1) - Reasonable Basis and Representations by using a non-conventional and controversial technique.

  B. violated Standard IV (A.2) - Research Reports by failing to distinguishing between fact and opinion.

  C. violated Standard V (A) - Prohibition against use of Material, Non-Public Information.

  D. has not violated any Standards.

  Correct Answer: D

  There is no evidence that in her report, Smirlee has tried to pass off an opinion as fact. While her new technique is unconventional, using it would not be a violation of Standard IV (A.1) only if used in isolation. Since she has diligently analyzed public information on Chronotron, she cannot be accused of not having a reasonable basis for recommendation. The AIMR Standard of Ethics do not prohibit a use of new techniques but rather encourage tempering them with more orthodox analysis.

• Question 3503:

  Standard IV (B) is known as ________.

  A. Preservation of Confidentiality

  B. Duty to Employer

  C. Professional Misconduct

  D. Prohibition against Use of Material Nonpublic Information

  E. Interactions with Clients and Prospects

  F. Investment Process

  G. Fair Dealing

  H. None of these answers

  Correct Answer: E

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 3504:

  Fiduciary duty includes a duty of loyalty and a reasonable standard of ________.

  A. care

  B. none of these answers

  C. prudence

  D. custody

  Correct Answer: A

  Standard IV (B.1) - Fiduciary Duties - states: Because the fiduciary is in a position of trust, the duty required in fiduciary relationships exceeds what may be acceptable in other industries. Fiduciaries owe undivided loyalty to their clients and must place client interests before their own. The investment manager's fiduciary responsibility to a client includes a duty of loyalty and a duty to exercise a reasonable standard of care. Investment actions should be carried out for the sole benefit of the client and in a manner the manager believes to be in the interest of the client, given the known facts and circumstances.

• Question 3505:

  When a trustee for private investment funds has responsibility toward current beneficiaries who are income oriented and future beneficiaries ("remaindermen") who are capital growth oriented, she has primary fiduciary duty toward:

  A. both have to be treated on the same footing.

  B. the income beneficiaries.

  C. the remaindermen.

  D. insufficient information.

  Correct Answer: A

  Personal trust account trustees are subject to the "Prudent Man Rule" in their investment behavior and are required to follow the guidelines of the trust. In particular, when there are conflicting interests involved, the trustee is required to maintain an equitable balance between the interests of different groups. Standard IV

  (B.1) - Fiduciary Duties - and the Topical Study, "Fiduciary Duty."

• Question 3506:

  Level II verifiers must obtain and review ________ to ensure proper recording of cash flows.

  A. end of period returns

  B. accounting methods

  C. bank reconciliation

  D. cash flow statements

  Correct Answer: C

  This procedure must be carried out to determine whether capital contributions and withdrawals that are used in the performance calculations are recorded in the proper accounts, at the right amounts and on a timely basis.

• Question 3507:

  Standard I includes rules on which of the following?

  A. Professional Misconduct

  B. All of these answers

  C. Use of Professional Designation

  D. None of these answers

  E. Prohibition against Plagiarism

  Correct Answer: D

  Standard I refers to compliance with laws, rules and regulations and their violation. Standard II Relationships with and Responsibilities to the Profession - includes rules on the use of Professional Designation, Professional Misconduct and Prohibition against Plagiarism.

• Question 3508:

  Smithers is a financial analyst with XYZ Brokerage Company. She is preparing a purchase recommendation on JNI Corporation. Which of the following situations would represent a conflict of interest for Smithers and, therefore, would have to be disclosed?

  I. Smithers is on a retainer as a consultant to JNI.

  II. XYZ holds for its own account a substantial common stock position in JNI.

  III. Smithers has material beneficial owners of JNI through a family trust.

  IV.

  Smithers' brother-in-law is a supplier to JNI.

  A.

  II and III only.

  B.

  I, II and III only.

  C.

  II only.

  D.

  I and IV only.

  E.

  III only.

  F.

  IV only.

  G.

  I only.

  H.

  I, II and IV only.

  Correct Answer: B

  This question pertains to Standard IV (B.7), Disclosure of Conflicts to Clients and Standard III (C), Disclosure of Conflicts to Employer. Statements I, II and III describe conflicts of interest for Smithers or for her firm that would have to be disclosed. Statement I describes an employment relationship between the analyst and the company subject to recommendation. Statement II describes the beneficial interest of the analyst's employer in the company's stock. Statement III describes the analyst's own beneficial interest in the company stock. In Statement IV, the relationship between the analyst and the company through a relative is so tangential that it does not create a conflict of interest necessitating disclosure.

• Question 3509:

  The Standards state that when presenting material to others, members shall not "copy or use, in substantially the same form as the original, material prepared by another without acknowledging and identifying the name of the author, publisher, or source of such material." The analyst may use information from other sources without acknowledgment, however, if the information:

  A. is factual information published in recognized financial and statistical reporting services.

  B. does not include a buy or sell recommendation.

  C. was originally communicated verbally.

  D. is being reported only to the member's employer or associates.

  Correct Answer: A

  This question relates to Standard II (C), Prohibition against Plagiarism, which states that members may use factual information published in recognized financial and statistical reporting services without attribution. Even if the information is communicated verbally, members must use proper attribution of the material. Whether or not the plagiarized material is combined with a buy/sell recommendation or reported only to the member's employer or associates does not change the fact that the member is copying material without acknowledgment.

• Question 3510:

  Portfolios that include more than one asset class are called ________ portfolios.

  A. quasi-asset

  B. multivariate

  C. multiple leverage

  D. univariate-asset

  E. multiple-asset

  Correct Answer: E

  If the firm does not have discretion over the asset mix, the segments of the various asset classes, with their respective cash positions, must be included in composites composed of like assets.