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

• Question 3521:

  In a pension plan, the duty of a fiduciary is to the ________.

  A. Board of Directors

  B. none of these answers

  C. plan sponsor

  D. immediate supervisor

  E. plan participants and their beneficiaries

  Correct Answer: E

  In a pension plan, the duty of the fiduciary is to the plan participants and their beneficiaries rather than to the plan sponsor that has the power to hire and fire the investment manager. If urged to make investments that might be of direct benefit to a sponsoring community or to the community at large, the manager must ensure that such investments are legal and do not impair the integrity of the funds in question or the financial security of the participants/beneficiaries.

• Question 3522:

  Standard V (B) deals with ________.

  A. None of these answers

  B. Priority of Transactions

  C. Preservation of Confidentiality

  D. Performance Presentation

  E. Prohibition against Use of Material Nonpublic Information

  F. Disclosure of Conflicts to Clients and Prospects

  G. Prohibition against Misrepresentation

  H. Disclosure of Referral Fees

  Correct Answer: D

  Standard V (B) - Performance Presentation - states that members shall not make any statements that misrepresent the investment performance that they or their firm have accomplished or can expect to achieve.

• Question 3523:

  Standard III (E) - Responsibilities of Supervisors points out that when violations do occur, ________ procedures may be inadequate.

  A. compliance

  B. none of these answers

  C. legal

  D. fiduciary duty

  Correct Answer: A

  If a member has adopted reasonable procedures and taken steps to institute an effective compliance program, then the member may not be in violation of Standard III (E). The fact that violations do occur may indicate, however, that the compliance procedures are inadequate. Furthermore, a member may be in violation of Standard III (E) if he or she knows that the procedures designed to detect and prevent violations are not being followed.

• Question 3524:

  Dayon Grimley has been working as a Tech Sector analyst with an advisory firm for the past 3 years. Recently, he read an analytical report by Sam Swetson about the trends and research developments in the computer chips industry. The report was an in-depth analysis of how the industry had developed, where it seemed to be headed and what impact the developments could have on the growth of the entire industry. In a footnote, Sam had speculated about a secret, ultra-fast chip rumored to be under development by Chipcorn, Inc. Dayon decided to pursue this line of research and called up a highly placed official at Chipcorn. While the official did not confirm or deny the existence of the ultra-fast chip, he did reveal enough for Dayon to conclude that the development was, in fact, in the final stages and the chip could be out in the market in as little as 3 months. He quickly modified Sam's report, with a separate section on the super-chip and recommended that his clients increase the weighting on tech stocks by 20%. The report made no mention about his interview with Chipcorn official nor Sam Swetson's report. Dayon has:

  I. violated Standard II (C) - Prohibition against Plagiarism.

  II. violated Standard II (B) - Professional Misconduct.

  III. violated Standard IV (A.1) - Reasonable Basis and Representations.

  IV.

  violated Standard V (A) - Prohibition against Use of Material Nonpublic Information.

  A.

  II and IV only

  B.

  II and IV only

  C.

  I and IV only

  D.

  I and III only

  Correct Answer: C

  By not properly acknowledging Sam's report, Dayon violated Standard II (C) - Prohibition against Plagiarism. Also, since the information about the super-chip was non-public and obviously material, Dayon violated Standard V (A) - Prohibition against Use of Material Nonpublic Information.

• Question 3525:

  The AIMR-PPS recommend that both ________ and ________ risks be presented in conjunction with composite returns.

  A. absolute; unsystematic

  B. total; market

  C. external; internal

  D. unsystematic; systematic

  Correct Answer: B

  Total risk relates to the variability of actual (absolute) returns not relative to the market. Market (systematic) risk relates to the volatility of returns relative to the market or some other benchmark.

• Question 3526:

  Tomonaga Olawando is a research analyst currently doing research on Cleebok Shoes, a footwear manufacturer infamous for its exorbitantly priced shoes. Tomonoga has been interviewing Pollyanna Givens, a senior vice president with the public relations division. Pollyanna has told him that the investment community has underestimated the payoffs from Cleebok's plan to outsource shoe production to Mexico, thus cutting productions costs significantly. She told him her estimate puts thecost savings close to $600 million, as against the figure of $370 million quoted by a few active analysts. In his report, Tomonaga states that the extra savings of $230 million a year will raise the stock price by 26% over the next year and hence, represents a great buy. Tomonaga has

  I. not violated any code of ethics.

  II. has violated Standard IV (A.1) - Reasonable Basis and Representations.

  III. has violated Standard IV (A.2) - Research Reports.

  IV.

  has violated Standard IV (B.2) - Portfolio Investment Recommendations and Actions.

  A.

  III only

  B.

  II and III only

  C.

  II, III and IV only

  D.

  I only

  Correct Answer: B

  By taking an opinion of a person and representing as a fact in his research report, Tomonaga has violated Standards IV (A.1) and IV (A.2).

• Question 3527:

  Standard III (B) is known as ________.

  A. Interactions with Clients and Prospects

  B. Preservation of Confidentiality

  C. None of these answers

  D. Fair Dealing

  E. Investment Process

  F. Duty to Employer

  G. Prohibition against Use of Material Nonpublic Information

  H. Professional Misconduct

  Correct Answer: F

  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 3528:

  The allocation of shares in oversubscribed IPOs to investment managers for their personal account is a perk that is most clearly a violation of Standard ________.

  A. II (B) - Professional Misconduct

  B. IV (A.3) - Independence and Objectivity

  C. None of these answers

  D. IV (B.6) - Prohibition against Misrepresentation

  E. IV (B.8) - Disclosure of Referral Fees

  Correct Answer: B

  External sources may try to influence the investment process by offering analysts and portfolio managers a variety of perks. Corporations may be seeking expanded research coverage; issuers and underwriters may wish to promote new securities offerings; brokers typically want to increase commission business. The perks may include gifts, invitations to lavish functions, tickets and so on. One type of perk that has gained particular notoriety is the allocation of shares in oversubscribed IPOs to investment managers for their personal accounts. This practice is a violation under Standard IV (A.3).

• Question 3529:

  Stewart has been hired by Goodner Industries, Inc., to manage its pension fund. Stewart's fiduciary duty is owed to:

  A. the management of Goodner.

  B. the participants and beneficiaries of Goodner's pension plan.

  C. the shareholders of Goodner.

  D. each of these answers equally.

  Correct Answer: B

  Under Standard IV (B.1), Fiduciary Duties, members who manage a company's pension funds owe a fiduciary duty to the participants and benefits of the plan, not the management of the company or the company shareholders.

• Question 3530:

  When formulating an investment policy for a client, which of the following falls under "investor objectives?"

  A. proxy voting

  B. none of these answers

  C. return objectives

  D. time horizon

  E. liquidity needs

  F. investable funds

  Correct Answer: C

  Return objectives are considered under "investor objectives." Liquidity needs, time horizon and proxy voting are considered under "investor constraints."