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

• Question 3641:

  ________ measures, which relate to the total variability of actual returns (i.e. beta), indicate the risk of having returns different from that particular benchmark or index.

  A. Index

  B. Absolute

  C. Volatility

  D. Risk

  Correct Answer: C

  It is very important not to confuse risk with volatility. The type of risk that volatility measures represent are only one of many risks.

• Question 3642:

  Marmella is a corporate associate with an investment banking firm, Corpfins. She recently put together a business proposal which would allow Corpfins to take on White Papers Inc., a producer of premium printing paper, as a business client for all its underwriting needs. In this proposal, Marmella has promised that her team will provide full research coverage for White Papers, with the clause that the team will not be the first on the street to release a "sell" recommendation. Marmella has

  A. violated Standard IV (A.3) - Independence and Objectivity.

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

  C. not violated the AIMR code of ethics.

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

  Correct Answer: A

  By agreeing to a clause that prevents her from releasing an objective research report under all circumstances, Marmella has violated Standard IV (A.3) - Independence and Objectivity - because not only is there an appearance of impropriety and conflict of interest, but the contract clearly hinders Marmella's judgment.

• Question 3643:

  According to the Prudent Investor Rule, the trustee must: - adhere to loyalty, impartiality and prudence maintain overall portfolio risk at a reasonable level - provide for reasonable ________ 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. supervision

  B. commitment

  C. diversification

  D. none of these answers

  Correct Answer: C

  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 3644:

  In allowing a claim of being in compliance with the PPS, AIMR requires that the compliance be on a "firmwide" basis. Which of the following does not qualify as "a firm" in this requirement?

  A. A subset of assets managed in one or more base currencies.

  B. An entity registered with the appropriate regulatory authority.

  C. A subsidiary or a division of a parent organization.

  D. None of these answers.

  Correct Answer: A

  The entire subset of a firm's assets which are managed in one or more bases currencies must be included in the definition of "a firm" as far as PPS is concerned. For example, an organization cannot claim a proper subset of the assets it manages in Netherlands as "a firm" and claim compliance for that subset. It must include the entire portfolio managed in the Netherlands Guilders.

• Question 3645:

  What is the effective date for compliance with the AIMR-Performance Presentation Standards for discretionary fee-paying portfolios meeting the definition of a wrap-fee account?

  A. January 1, 1997

  B. July 1, 1994

  C. July 1, 1995

  D. January 1, 1995

  Correct Answer: C

  From July 1, 1995, going forward, all of the firm's actual discretionary fee-paying portfolios meeting the definition of a wrap-fee account must be presented in composites that adhere to the Standards.

• Question 3646:

  Connery, a smart professional, passed his Level II CFA exam 2 years ago. He could not take the Level III exam due to professional time commitments elsewhere. He is thinking of taking Level III a couple of years from now, once things settle down on his personal front. His resume, which he has sent to a few prestigious firms, states that he is a candidate in the CFA program and has successfully completed Level II exam. He makes no exaggerated claims about his abilities on his resume. Connery has:

  A. violated Standard II (A) - Use of Professional Designation. He cannot claim to be CFA - Level II.

  B. not violated any standards.

  C. violated Standard II (A) - Use of Professional Designation. He cannot claim to be in the CFA program since he is not registered to take Level III exam.

  D. violated Standard II (A) - Use of Professional Designation. He cannot claim to be in the CFA program without having completed the Level III exam.

  Correct Answer: C

  Standard II (A) - Use of Professional Designation, states that a person must be registered to take the next higher level of the exam to be a "candidate" in the CFA program.

• Question 3647:

  Standard IV (B.4) deals with ________.

  A. Disclosure of Conflicts to Clients and Prospects

  B. Prohibition against Misrepresentation

  C. None of these answers

  D. Disclosure of Referral Fees

  E. Priority of Transactions

  F. Prohibition against Use of Material Nonpublic Information

  G. Preservation of Confidentiality

  H. Performance Presentation

  Correct Answer: E

  Standard IV (B.4) deals with the priority of transactions of clients and employers over transactions in investments in which the member is the beneficial owner.

• Question 3648:

  Which of the following is NOT one of the goals of AIMR-PPS?

  A. Enforce a single standard on the various performance presentations through a mandatory adoption of the PPS.

  B. None of these answers.

  C. Bolster the notion of self-regulation and enhance the professionalism in the industry.

  D. Improve the service offered to investment management clients.

  Correct Answer: A

  The PPS are voluntary standards and are not necessarily binding on AIMR members. AIMR, of course, encourages adoption of these standards. The Standards have been designed to meet the following four goals: - achieve greater uniformity and compatibility amongst the various performance presentations; improve the service offered to investment management clients; - enhance the professionalism in the industry; - bolster the notion of self-regulation.

• Question 3649:

  Under Standard IV (B.6), Prohibition against Misrepresentation, a member may discuss a "guaranteed" investment, as long as that investment is which of the following?

  A. domestic stocks

  B. foreign stocks

  C. medium-term notes

  D. long-term bonds

  E. none of these answers

  F. short-term Treasury securities

  Correct Answer: F

  Standard IV (B.6) prohibits statements that an investment is "guaranteed", or that superior returns can be expected in the future based on the member repeating past success. It does not preclude truthful statements on investments with guaranteed returns, such as some insurance contracts, short-term Treasury securities and insured bank deposits.

• Question 3650:

  According to the AIMR-PPS, performance must be calculated

  A. before or after the deduction of trading expenses, as long as that information is disclosed.

  B. before or after the deduction of trading expenses, without the need for disclosures because there will be no difference in the numbers.

  C. before the deduction of trading expenses.

  D. after the deduction of trading expenses.

  Correct Answer: D

  Performance must be calculated after the deduction of trading expenses (e.g., broker commissions and SEC fees), if any. This is a requirement for calculation of returns.