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

• Question 3551:

  According to the Prudent Investor Rule, the trustee must: -adhere to ________, impartiality and prudence

  -maintain overall portfolio risk at a reasonable level

  -provide for reasonable diversification of trust investments

  -act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents

  -

  be cost conscious when investing

  A.

  supervisors

  B.

  loyalty

  C.

  none of these answers

  D.

  commitment

  E.

  diversification

  Correct Answer: B

  Modern Portfolio Theory dictates that trustees consider a portfolio in its entirety and not just on an investment-by-investment basis. As a fiduciary, therefore, the trustee must:

  -adhere to fundamental fiduciary duties of loyalty, impartiality and prudence.

  -maintain overall portfolio risk at a reasonable level

  -the trade-off between risk and return is the fiduciary's central concern.

  -provide for reasonable diversification of trust investments.

  -act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.

  -be cost conscious when investing.

• Question 3552:

  Members can comply with Standard IV (A.1) by undertaking the following:

  I. Analyzing basic investment characteristics

  II. Analyzing portfolio needs of the client

  III. Establishing compliance procedures to prevent violations of Code and Standards

  IV.

  Maintaining files to support investment recommendations

  A.

  I, II and IV

  B.

  II and IV

  C.

  I and IV

  D.

  I and II

  E.

  II, III and IV

  F.

  III and IV

  G.

  I, II, III and IV

  H. II and III

  Correct Answer: A

  Condition III applies to compliance with Standard III (E). For Standard IV (A.1), which deals with the Investment Process, members should investigate the investment's basic characteristics by looking at research reports. Also, a member has a continuing responsibility to review a client's needs and circumstances to determine whether or not the risk exposure of the total portfolio serves the client's needs. Finally, a member must maintain research files to justify investment decisions later under scrutiny.

• Question 3553:

  Standard III (C) is ________.

  A. Responsibilities of Supervisors

  B. None of these answers

  C. Duty to Employer

  D. Disclosure of Conflicts to Employer

  E. Disclosure of Additional Compensation Arrangements

  F. Obligation to Inform Employer of Code and Standards

  Correct Answer: D

  Standard III (A) deals with the Obligation to Inform Employer of Code and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer. Standard III (D) deals with Disclosure of Additional Compensation Arrangements. Standard III (E) deals with Responsibilities of Supervisors.

• Question 3554:

  Jurgens is a portfolio manager with an investment firm based in New York. One of her firm's clients has told Jurgens that he will compensate her beyond that provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgens should:

  A. Turn down the additional compensations because it will result in conflicts with the interest of other client's accounts.

  B. Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance.

  C. Obtain permission from her employer prior to accepting the compensation arrangement.

  D. Receive permission from AIMR for the compensation arrangement.

  Correct Answer: C

  This question pertains to Standard III (D), Disclosure of Additional Compensation Arrangements. If Jurgens were to be compensated, based on the account's performance, beyond that provided by her firm, such a practice is not a violation of the Standards, so long as Jurgens discloses the arrangement inwriting to her employer and obtains permission from the employer before entering the agreement. Members are not required to receive permission from AIMR for such arrangements.

• Question 3555:

  Under Standard III (E) - Responsibilities of Supervisors - which of the following are NOT employees that are covered under this standard?

  A. Level I CFA candidates

  B. CFA charterholders

  C. None of these answers

  D. Non AIMR members

  E. CFA candidates

  F. AIMR members

  Correct Answer: D

  As long as investment professionals have employees subject to their control or influence - whether or not the employees are AIMR members, CFA charterholders or candidates for the CFA designation - they exercise supervisory responsibility and hence, are subject to Standard III (E). The non-AIMR members themselves are not subject to compliance.

• Question 3556:

  Under ERISA, fiduciaries must:

  -act solely in the interest of and for the exclusive purpose of benefiting, the plan participants and

  beneficiaries;

  -act with the care, skill, prudence and diligence of a prudent person acting in like capacity;

  -diversify the plan's investments to protect it from the risk of substantial loss;

  -act in accordance with the provisions of the plan documents to the extent that the documents comply with

  ________;

  -refrain from engaging in prohibited transactions.

  A. AIMR regulations

  B. AIMR code of ethics

  C. None of these answers

  D. ERISA

  Correct Answer: D

  ERISA establishes several guidelines for fiduciary conduct with respect to employee benefit plans. These principles evolved from the common law of trusts, as interpreted by state courts and pre-ERISA requirements for the tax qualification of plans. Fiduciaries must observe these guidelines in all aspects of their dealings with a plan or its assets.

• Question 3557:

  Standard II (B) is known as ________.

  A. Professional Misconduct

  B. Fair Dealing

  C. Interactions with Clients and Prospects

  D. Preservation of Confidentiality

  E. None of these answers

  F. Prohibition against Use of Material Nonpublic Information

  G. Duty to Employer

  H. Investment Process

  Correct Answer: A

  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 3558:

  What is the effective date for compliance with the AIMR-Performance Presentation Standards for non-U.S. and/or non-Canadian investments and taxable portfolios?

  A. January 1, 1994

  B. January 1, 1993

  C. January 1, 1992

  D. January 1, 1995

  Correct Answer: A

  From January 1, 1994, going forward, all of the firm's actual discretionary fee-paying portfolios invested in non-U.S. and/or non-Canadian investments ("international portfolios") and taxable portfolios (both North American and international) must be presented in composites that adhere to the Standards.

• Question 3559:

  The Performance Presentation Standards are designed for

  A. investment consultants.

  B. current clients.

  C. prospective clients.

  D. all of these are beneficiaries of the AIMR Performance Presentation Standards.

  Correct Answer: D

  The primary beneficiaries of the PPS are prospective clients who are attempting to compare performance of different investment firms. However, current clients attempting to evaluate their investment managers performance also benefit from the PPS. Consultants may also use the information when evaluating performance data.

• Question 3560:

  Standard IV (B.6) deals with ________.

  A. Preservation of Confidentiality

  B. Prohibition against Use of Material Nonpublic Information

  C. None of these answers

  D. Disclosure of Referral Fees

  E. Priority of Transactions

  F. Disclosure of Conflicts to Clients and Prospects

  G. Prohibition against Misrepresentation

  H. Performance Presentation

  Correct Answer: G

  Standard IV (B.6) prohibits members from making statements that misrepresent the services they are capable of performing, their qualifications and their academic or professional credentials.