CFA level 1 mock exam sample

Mock Exam

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LEVEL 1 2016
Mock Exam 1—Questions 
Subject
Ethical and Professional Standards
Quantitative Methods
Economics
Financial Reporting and Analysis
Corporate Finance
Portfolio Management
Equity
Fixed Income
Derivatives
Alternative Investments
Total minutes

Questions
1–18
19–32
33–44
45–68

69–77
78–85
86–97
98–109
110–115
116–120

Minutes
27
21
18
36
13
12
18
18
9
8
180

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Questions 1–18 Ethical and Professional Standards

1. Giles Stafford, CFA, is the chief investment officer of a small investment management firm in a
country that already has strict regulations on the way that performance is reported. In most cases
the regulations are stricter than the Global Investment Performance Standards (GIPS®), and he
decides that since he is complying with the local regulations he will claim GIPS compliance.
Which of the following statements best describes the situation?
A. As long as the local regulations are generally stricter, satisfying the local regulations is
sufficient to claim GIPS compliance.
B. Stafford must ensure that all the requirements of GIPS are followed before his firm can claim
compliance. If there are differences between the local laws and the GIPS, the differences
must be disclosed.
C. If the country where Stafford is working cannot be persuaded to use the GIPS as its national
standard for presenting performance, then a firm operating in that country cannot claim GIPS
compliance.
Answer: B
LOS 4c
Stafford must meet the local laws and regulations but must make full disclosure of the conflict in
the compliant presentation.



2. ABC Investment Managers decides to calculate and present performance in compliance with
GIPS®. Which of the following is most accurate?
A. ABC Investment Managers must wait five years before they can claim GIPS compliance and
in the meantime build up five years of compliant data.
B. ABC Investment Managers may present noncompliant data for the past five years as long as
they disclose that it is noncompliant and all future data is compliant with GIPS.
C. ABC Investment Managers must present five years’ historic data (or data from inception of
the firm or composites if their existence is less than five years) that is compliant with GIPS.

Answer: C
LOS 4b
Five years of compliant data must be presented. Each subsequent year ABC must add compliant
data until they have built up to providing 10 years’ data.

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3. Thomas Jewitt, CFA, works for MidWest Brokerage, a firm that specializes in providing
brokerage services to private clients. Occasionally he refers his clients to MidWest’s personal
financial planning department, a subsidiary of MidWest brokerage, for which he receives referral
fees. He does not disclose this arrangement to his clients. Which of the following statements best
describes Jewitt’s actions?
A. Jewitt has violated the CFA Institute Standards because he has not disclosed the arrangement
to his clients.
B. Jewitt is in compliance with the CFA Institute Standards because this is an internal
arrangement within MidWest.
C. Jewitt has violated the CFA Institute Standards; under the Standards, he is not permitted to
receive fees for internal referrals.
Answer: A
LOS 2b
Jewitt has violated Standard VI(C) since the Standard does not distinguish between third‐party

and internal arrangements. All referral fees are permitted but must be disclosed to clients. Even
though it is not a regular occurrence he still needs to disclose the arrangement to his clients at the
time of referral.



4. Valery de Picarde, CFA, is the director of a major Karamba‐owned investment management
firm’s branch in Indopulo. Karamba is known as the world’s center of investment management
with securities laws stricter than the CFA Institute Code and Standards. In Indopulo, an emerging
market, the local securities laws and regulations are embryonic. They are very vague regarding
the definition of insider trading and have no provision regulating soft dollars. De Picarde’s
client is a citizen of Karamba but residing in and doing business in Indopulo. The client and de
Picarde’s business dealings are under the jurisdiction of the laws of Indopulo.
Which is the most appropriate action for de Picarde to follow when dealing with this client?
A. De Picarde should follow the laws of Karamba since they are stricter that the laws of
Indopulo.
B. De Picarde does not need to comply with the laws of Karamba since the client is not resident
there, and can therefore take full advantage of soft‐dollars arrangements but not insider
trading opportunities.
C. As a CFA Institute member, de Picarde must comply with the CFA Institute Code and
Standards regarding insider trading and soft dollars, as they are stricter than the laws of
Indopulo.
Answer. C
LOS 2a
According to Standard I(A) the rule of thumb is that members must comply with the stricter of
the applicable laws (in this case Indopulo’s laws) and the Code of Standards.
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5. James Richards, CFA, who is a quantitative analyst at Chelsea Investments, a money management
firm, has recently been working on a quantitative risk management model for a convertible
arbitrage strategy. Richards recently attended a CFA Institute conference where he learned that
High Finance, a competing investment advisory firm, is also developing a similar model but
approaching it from a different angle. He did not agree with the main assumptions of the High
Finance model although he admitted that its new methodology is innovative. Upon returning to his
office, Richards adopted High Finance’s quantitative techniques but kept the original assumptions
from his model. The results are promising, and Jane Seamore, the CEO of Chelsea Investments, is
pleased with Richards’s research. She appears in public seminars to present the new methodology
and to win client mandates. Which of the following complies with the CFA Institute Standards?
A. Richards or Seamore must credit High Finance for having developed the model.
B. Richards should not have misappropriated the quantitative techniques from High Finance.
C. Seamore does not need to refer to either Richards or High Finance developing the model in
an oral presentation.
Answer: A
LOS 2b
Standard I(C): Misrepresentation says Richards or Seamore must acknowledge the original
source of the quantitative techniques, although Richards can take credit for the final results.
Richards is employed by Chelsea Investments; therefore, the intellectual property of research
work generally belongs to the employer, unless specified differently.

6. Catherine Vieira, CFA, has been recently recruited to head the Asian research department in Hong
Kong of a Paris‐based brokerage firm. The firm employs many analysts spread across different
countries in Asia, some of whom are members of CFA Institute and subject to the CFA Institute
Standards. Vieira thinks that the firm’s compliance procedures need to be significantly upgraded
to adequately deal with current global requirements. Which is the best course of action for Vieira
according to the CFA Institute Standards?
A. Vieira should not delegate supervisory duties until the compliance procedures are upgraded.
B. Vieira should seek to improve the compliance procedures before she accepts supervisory
responsibility.
C. Vieira may only accept supervisory responsibility after notifying her employer she is not
happy with the compliance procedures.
Answer: B
LOS 2b
If the compliance procedures are inadequate, she should not accept responsibility until reasonable
procedures are in place. Standard IV(C) states that supervisory responsibility remains with
the supervisor, although the actual supervision duties can be delegated. Members can rely on
reasonable procedures to detect and prevent violations to applicable statutes, regulations and
provisions of the Code and Standards.

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7. Which of the following actions is least likely to support an information barrier (firewall)?
A. Limit the number of people in the firm who have access to material nonpublic information.
B. Place securities on a restricted list when the firm has access to material nonpublic
information.
C. Limit the number of major institutional clients who regularly receive “special investment
tips” prior to information being made public.
Answer: C
LOS 2c
Firewalls are intended to block the dissemination of material nonpublic information. Choice C is
still dissemination and therefore in violation of Standard II(A).



8. William Johnson, CFA, is a stock analyst covering the oil sector. Through his contacts in the oil
industry, he has accumulated and analyzed several pieces of nonpublic information. Although
none of the information is material, Johnson reached the conclusion that one of the companies
he covers has discovered a new oil field, which will probably have a major impact on future
earnings. According to the CFA Institute Standards, Johnson:
A. Should urge the oil company to make the information public immediately.
B. Is allowed to use the information to make investment recommendations and decisions.
C. Is not allowed to make investment recommendations or take actions based on this information.
Answer: B
LOS 2b
Each individual piece of information is nonmaterial so Johnson does not violate the Code and
Standards; his action is permissible under the “mosaic” theory.

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