2019 CFA level 3 qbank r 1 2 CFA ins code of ethics and standards of prof conduct standards I–VII 2 questions

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Learning Management System

Question #1 of 199
In the process of recommending an investment, in order to comply with Standard V(A),
Diligence and Reasonable Basis, a CFA Institute member must:

A) have a reasonable and adequate basis for the recommendation.
B) do both of these.

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C) support a recommendation with appropriate research and investigation.

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Question #2 of 199

Jim Crockett is a portfolio manager for Miami Advisors and reports to Vicki Tubbs, the Chief
Investment O cer. Miami has developed a proprietary model that has been thoroughly

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researched and is known throughout the industry as the Miami model. The model is purely
quantitative and takes a given set of client characteristics and universe of potential securities
and forms a portfolio for the investor. Individual portfolio managers are responsible for
selecting securities to t into the model based on recommendations from the rm's research

department and the managers' own judgment. Because of the speci c nature of the inputs to

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the model, each manager is responsible for applying the model on his or her own computer.

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The basic philosophy of the process is thoroughly explained to clients. Crockett does not

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understand the basics of the model, but feels that since it provides pure quantitative output, he
does not need to understand it. However, he misapplies the model for several of his clients. In
reviewing some of Crockett's portfolios, Tubbs nds the errors and points them out to Crockett.

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Which of the following statements regarding Tubbs and Crockett is CORRECT?

A) Crockett has violated the Standards by not considering the appropriateness and
suitability of the investment for his clients.
B) Tubbs has violated the Standards by failing to supervise adequately.
C) Crockett has violated the Standards by not exercising diligence and thoroughness in
making investment recommendations.

Chandra Patel, CFA, manages private client portfolios for QED Investment Advisers. Part of
QED's rm-wide policy is to adhere to CFA Institute Standards of Professional Conduct in the
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management of all client portfolios, and to this end, the rm requires that client objectives,
investment experience, and nancial limitations be clearly established at the outset of the
relationship. This information is updated at regular intervals not to exceed eighteen months.
The information is maintained in a written investment policy statement for each client.
Anarudh Singh has been one of Patel's clients ever since she began managing money ten years
ago. Shortly after his regular situational update, Singh calls to inform Patel that his uncle is ill,
and it is not known how long the uncle will survive. Singh expects to inherit "a sizeable sum of
money," mainly in the form of municipal bonds. His existing portfolio allocation guidelines are
for 75% to be invested in bonds. Singh believes that the expected inheritance will allow him to
assume a more aggressive investment pro le and asks Patel to begin moving toward a 75%

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allocation to equities. He is speci cally interested in opening sizable positions in several
technology rms, some of which have only recently become publicly traded companies. Patel

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agrees to begin making the changes to the portfolio and the next day begins selling bonds from
the portfolio and purchasing stocks in the technology sector as well as in other sectors. After
placing the trade orders, Patel sends Singh an email to request that he come to her o ce

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sometime during the next week to update his investment policy statement. Singh replies to
Patel, saying that he can meet with her next Friday.

A few days before the meeting, however, Singh's uncle dies and the portfolio of municipal
bonds is transferred to Singh's account with QED. Patel sees this as an opportunity to purchase
more technology stocks for the portfolio and suggests taking such action during her meeting

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with Singh, who agrees. Patel reviews her les on technology companies and locates a report

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on NetWin. The analyst's recommendation is that this stock is a "core holding" in the
technology sector. Patel decides to purchase the stock for Singh's account, as well as several

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other wealthy client accounts with high risk tolerance levels, but due to time constraints she
does not review the holdings in each account. Patel does examine the aggregate holdings of the

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accounts to determine the approximate weight that NetWin should represent in each portfolio.
Since Patel has very recently passed the Level III examination leading to the award of the CFA

designation, QED sends a promotional email to all of the rm's clients. The email states "QED is
proud to announce that Chandra Patel is now a CFA (Chartered Financial Analyst). This
distinction, which is the culmination of many years of work and study, is further evidence of the
superior performance you've come to expect at QED." Patel also places phone calls to inform of
her accomplishments several brokers that she uses to place trades for her accounts, stating
that she "passed all three CFA examinations on the rst attempt." One of the people Patel
contacts is Max Spellman, a long-time friend and broker with TradeRight Brokers Inc. Patel uses
the opportunity to discuss her exclusive trading agreement with TradeRight for Singh's account.

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When ordering trades for Singh's account, Patel's agreement with TradeRight for brokerage
services requires her to rst o er the trade to TradeRight and then to another broker if
TradeRight declines to take the trade. TradeRight never refuses the trades from any manager's
clients. Patel established the relationship with TradeRight because Singh, knowing the rm's fee
schedule relative to other brokers, asked her to do so. However, because TradeRight is very
expensive and o ers only moderate quality of execution, Patel is considering directing trades
on Singh's account to BullBroker, which charges lower commissions and generally completes
trades sooner than TradeRight.

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Question #3 of 199
Do QED's policies comply with CFA Institute Standards of Professional Conduct with respect to

with which the information is updated?

Information

B) Yes

No

C) No

No

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Yes

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A) No

Frequency

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the information contained within the client investment policy statements and the frequency

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Question #4 of 199

In light of Singh's comments during his telephone call to Patel prior to his uncle's death, which

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of the following actions that Patel can take comply with CFA Institute Standards of Professional
Conduct?

A) Patel may change the current portfolio strategy and begin trading based upon Singh’s
expectations because he advised her to do so.
B) Patel must adhere to the existing portfolio strategy until she meets with Singh to
develop a new portfolio strategy based upon updated nancial information but may
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C) Patel must not place any trades in the account until she meets with Singh to develop a
new portfolio strategy based on the updated information.

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Question #5 of 199
According to CFA Institute Standards of Professional Conduct, may Patel reallocate Singh's
portfolio toward technology stocks after his Uncle dies but before the meeting with Singh?

A) No, because Patel must wait until the next annual meeting to reallocate.
B) No, because Patel and Singh must meet and revise the investment policy statement and
portfolio strategy before reallocating.
C) Yes, because the total value of the municipal bonds received into the account will be too

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large relative to the other assets in the portfolio.

Question #6 of 199

Did Patel violate any CFA Institute Standards of Professional Conduct when she purchased the

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NetWin stock for Singh's portfolio or for the other clients' portfolios?

Other
portfolios

A) No

No

B) No

Yes

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C) Yes

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Singh's
portfolio

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Yes

Question #7 of 199
Which of the following is least accurate regarding the promotional announcement of Patel

passing the Level III exam?

A) The promotional announcement uses the letters “CFA” as a noun and hence is an
improper use of the designation.
B) The announcement violates the Code of Ethics because it implies that obtaining a CFA
charter leads to superior performance.

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C) The fact that a promotional announcement was made violates the restrictions on
misrepresenting the meaning of the CFA designation.

Question #8 of 199
With respect to the choice of broker, did Patel violate any CFA Institute Standards of
Professional Conduct?

A) No.

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B) Yes, since Patel is obligated to seek the best possible price and execution for all clients.

Question #9 of 199

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higher commissions and opportunity costs.

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C) Yes, since Patel failed to properly notify Singh that using TradeRight would lead to

Greg Stiles, CFA, keeps a list of his clients' birthdays and has personally sent them a birthday
card each year at the appropriate time. With respect to this action, which of the following may

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be a violation of Standard III(E), Preservation of Con dentiality?

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A) Sending a gift along with the card.

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B) Hiring a company outside the rm to perform the task.

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C) The mere act of sending a birthday card each year.

Question #10 of 199
Jill Marsh, CFA, works for Advisors where she manages various portfolios. Marsh's godfather is
an accountant and has done Marsh's tax returns every year as a birthday gift. Marsh's
godfather has recently become a client of Advisors and asked speci cally for Marsh to manage
his account. In order to comply Standard IV(B), Disclosure of Additional Compensation
Arrangements, she needs to:

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A) liquidate from her personal portfolio any stocks her godfather owns and verbally tell
her supervisor about the tax services.
B) do neither of the actions listed here.
C) have her godfather cease doing her taxes.

Michael Pennington Case Scenario
Michael Pennington is Senior Vice President of equity investments at Alpha Investment
Advisors, Inc. (AIA). He manages a team of analysts and portfolio managers and is responsible

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for maintaining and developing client relationships. AIA is located in Belgium and provides

Candidate for the CFA designation.

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investment management services to high net work individuals. Pennington is also a Level III

One of Pennington's clients is the Flanders family. Pennington had a long relationship with
Helmut Flanders. Before Flanders's untimely death, he gave Pennington full discretion over his

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portfolio based on an investment policy statement that had been re ned continuously over the
years.

Flanders was the president of a publicly traded manufacturing company, Allux, and 20%
of his portfolio's assets were invested in Allux equity. His contract with Allux prohibited
selling his Allux shares while he was employed.

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Flanders had little liquidity needs. His children were grown, and his salary at Allux was

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portfolio.

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su cient to cover his annual expenditures as well as contribute to his investment

A former accountant, Flanders had been extremely knowledgeable and comfortable with
the investment decision-making process.

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Pennington owns 10,000 shares of Allux and serves on Allux's board.
Pennington played golf with Flanders on a regular basis and, with Flanders's help,
developed many client relationships from these outings.

AIA has an agreement with a local brokerage rm, First Brokerage, owned by Pennington's
sister to place all AIA trades through First Brokerage.
Flanders agreed in writing that all trades in his portfolio would be directed to First
Brokerage.
Pennington purchased new carpets for his o ce with soft dollars. He believes that his
managers make better investment decisions when their environment is pleasant and
comfortable.
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Pennington attended an industry conference in the Bahamas with soft dollars. The
program is devoted to improving management of the investment advisory rm. He
believes that a well-run rm makes better investment decisions.

Pennington consistently uses soft dollars to purchase research reports from an
independent research rm that does in-depth analysis of a company's nancial
reporting. Several of his managers have commented on the quality and usefulness of
these reports to their analysis and decision making.
Pennington has an appointment to meet with Flanders's widow, Elise, who, as an artist, left
management of their nancial assets to her husband. She is meeting with Pennington to better

Question #11 of 199

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understand her nancial position.

Which of the following Standards is most relevant regarding Pennington's meeting with Elise?

A) Standard III(A), Loyalty, Prudence, and Care.

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C) Standard III(C), Suitability.

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B) Standard III(E), Preservation of Con dentiality.

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Question #12 of 199

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Standard VI(A), Disclosures of Con icts, requires Pennington to disclose all matters, including
bene cial ownership of securities of other investments, that could be expected to impair the

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member's ability to make unbiased and objective recommendations. Which of the following
matters would least likely be disclosed to Elise?

A) AIA has a soft dollar arrangement with a brokerage rm owned by Pennington’s sister.
B) Pennington owns shares in Allux.
C) Pennington played golf with Helmut Flanders on a regular basis and developed client
relationships from those golf outings.

Question #13 of 199
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Which of the following best describes Pennington's compliance with the CFA Institute Standards

regarding his use of soft dollars? The purchase of:

A) research reports and attending the conference are allowable uses of soft dollars.
B) research reports is an allowable use of soft dollars.
C) both research reports and carpeting are allowable uses of soft dollars.

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Question #14 of 199
Pennington would like to continue to direct trades from Elise's portfolio to his sister's

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brokerage rm. In order to continue with this arrangement and comply with the CFA Institute
Standards, which of the following disclosures are required?

A) Pennington must clearly disclose that his duty as the investment manager is to continue

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to seek to obtain best execution.

B) Pennington must disclose that directed brokerage arrangements that require the
investment manager to commit a certain percentage of brokerage might a ect his
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C) Pennington must disclose policies with respect to all soft dollar arrangements and
b

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receive written consent from Elise that she understands the consequences if he is not

Question #15 of 199

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After determining Elise's risk and return objectives, liquidity needs, tax considerations, and
unique circumstances, Pennington has decided the he must reduce Elise's holding of Allux
shares. He has several other clients, whom he met through Flanders, who also have signi cant
holdings in Allux. Pennington has also decided to reduce his own holdings in Allux since his
term as a director of Allux will be up in June. He does not plan to seek reappointment, but as a
member of the audit committee, he is privy to information about a tender o er. Pennington
realizes this is a complex situation.
Of the following Standards, determine which would least likely help Pennington decide what
actions with respect to selling shares of Allux would be in compliance with the CFA Institute
Standards of Practice.
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A) Standard III(B), Fair Dealing.
B) Standard VI(A), Disclosure of Con icts.
C) Standard III(C), Suitability.

Question #16 of 199
Since Pennington is a director of Allux and a member of the audit committee, what additional
Standard is speci cally applicable to Pennington's decision to sell his and his clients' shares of

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Allux?

B) Standard II, Integrity of Capital Markets.

Question #17 of 199

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C) Standard IV, Duties to Employers.

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A) Standard VII, Responsibilities as a CFA Institute Member or CFA Candidate.

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An analyst who routinely purges the les that support his research and recommendations:

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A) may be violating Standard V(C), Record Retention.

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B) is acting in accordance to Standard IV(A), Loyalty to Employer.

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C) is acting in accordance to Standard III(E), Preservation of Con dentiality.

Question #18 of 199
Denise Weaver is a portfolio manager who manages a mutual fund and has pension clients.
When Weaver receives a proxy for stock in the mutual fund, she gives it to Susan Gri th, her
administrative assistant, to complete. When the proxy is for a stock owned in a pension plan,
she asks Gri th to send the proxy on to the sponsor of the pension fund. Weaver has:

A) violated the Standards by her policy on mutual fund and pension fund proxies.

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B) violated the Standards by her policy on mutual fund proxies, but not her policy on
pension fund proxies.
C) not violated the Standards.

Question #19 of 199
While it would be customary to report both ve-year and ten-year performance data, Seminole
Equity Partners has been in existence for only eight years. Because of this, Kurt Dambach does

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not report ten-year data but reports for both ve years and since the inception of the fund. This

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he notes in a footnote at the bottom of the information sheet. This action is:

A) in accordance with the Code and Standards since he has indicated the basis in a
footnote.

B) a violation of the Standard concerning performance presentation.

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Question #20 of 199

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C) a violation of the Standard concerning prohibition against misrepresentation.

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Wes Smith, CFA, works for Advisors, Inc. In order to remain in compliance with Standard V(A),
Diligence and Reasonable Basis, Smith may recommend a security in which of the following

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situations?

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A) Advisors' research department recommends a stock.
B) For either of the reasons listed here.
C) Smith reads a favorable review of the security in a widely read periodical.

Question #21 of 199
Janet Thompson, CFA, is employed as an analyst by Nationwide Securities. According to CFA
Institute Standards of Professional Conduct, which of the following statements about
Thompson's duty to Nationwide is NOT correct? Thompson must refrain from:
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A) making arrangements to go into a competitive business before terminating her
relationship with Nationwide.
B) engaging in independent competitive activity that could con ict with the business of
Nationwide unless she receives written consent.
C) engaging in any conduct that would injure Nationwide.

Bella Brown is an experienced generalist securities analyst employed by Lang & Co., a major
U.S. brokerage rm whose clients have a high regard for her research and stock selection
abilities. She was visited recently by a Lang managing director who said, "Please take a look at

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SpecChem Inc., the specialty chemical producer. They are going to need an investment banker

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soon and, because we make a market in their stock, we will be one of the rms considered for
this business. I had lunch with SpecChem's Treasurer today, who told me that their European
problems are being resolved and that earnings results are de nitely looking good. He likes us
and is expecting you to call him for details." The managing director then left Brown's o ce,

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saying, "It would be great if you could rate the stock a 'Buy'."

In a subsequent hour-long telephone discussion with the Treasurer, Brown obtained some
useful information concerning recent company trends and developments as well as
SpecChem's overall view of the outlook for sales and earnings during the next several quarters.
Brown began thinking quite positively about the company and its prospects. She then reviewed

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some general source material on the chemical industry and read the Standard & Poor's Stock

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Guide on SpecChem Inc. That afternoon, she wrote a report recommending purchase of the

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stock, shown below as Exhibit B. In accordance with Lang's routine procedures for predissemination review of Research Department recommendations, the report has been sent to
the rm's Director of Research, who is aware of the circumstances under which it was

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prepared.
Exhibit B

LANG & COMPANY Company Report
Industrial: Specialty Chemicals Equity Research
Rating: Buy
SpecChem Inc. (NYSE: SCM)
We are initiating coverage of SpecChem Inc. with this report.

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Earnings, up to 51% in the rst quarter, are expected to be up again in the quarter
ending June 30. Higher sales, better margins, an improved geographic sales mix, and
savings from reduced pension expense are all contributing to this year's gains.
Although European production is up only modestly year-over-year, successful cost
reduction e orts are limiting the adverse e ects of weak volume and pricing. A possible

plant closure in September could improve plant utilization by 10%, accompanied by
potentially dramatic margin improvement. However, a $30 million after-tax special
charge could be taken at the time of the closure.
We expect a moderate increase in second half 2014 sales. Although management looks
for European demand to remain slow, it feels that U.S. sales could be above expectations

sizable U.S. government contract in the next few months.

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if auto-related demand strengthens. Management is also optimistic about receiving a

the balance of the year is high.

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Based on the factors noted above, our con dence level concerning earnings levels over

We think SpecChem stock is undervalued and believe it can easily reach the low 100s on
the strength of continuing earnings momentum. The downside is estimated to be in the

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mid-80s. There is plenty of room for upside earnings surprises if volume and prices
improve, which would take the stock up strongly. Purchase is recommended.
Analyst: Bella Brown

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Research Department

This report is based upon information which we consider reliable, but we do not represent that

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it is accurate, and it should not be relied upon as such. We, or persons involved in the

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preparation or issuance of this material, may, from time to time, have long or short positions in

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the securities of the company mentioned herein.

Question #22 of 199
Under the CFA Institute Code and Standards, it is the responsibility of the Director of Research,
a CFA Institute member to:

A) exercise reasonable supervision over those subject to their supervision or authority to
prevent any violation of applicable statues, regulations or provisions of the Code and
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B) not knowingly participate or assist in any violation of laws, rules, or regulations.
C) both of these.

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Question #23 of 199
Under the current circumstances, the Director of Research should:

A) allow the report to be distributed, as is.
B) require the report to be redone with a neutral or hold rating pending the outcome of
the awarding of the investment banking business.
C) require the report to be redone to ensure compliance with CFA Institute Standards.

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Question #24 of 199

The research report, as shown, has several aspects which violate CFA Institute Standards of
Professional Conduct. Which of the following is NOT an apparent violation of CFA Institute
Standards?

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A) The report violates guidelines on investment performance presentation.
B) The report does not distinguish between fact and opinion.
C) The report does not adequately discuss the factors important to analysis,

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recommendations, or action.

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Question #25 of 199

As to the process by which Brown's report in Exhibit B came into being, which of the following is

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least likely a procedural error in violation of CFA Institute Standards of Professional Conduct?

A) Brown has violated the Standard relating to the prohibition against plagiarism.
B) Brown has violated the Standard relating to disclosure of basic characteristics.
C) Brown has violated the Standard relating to independence and objectivity.

Question #26 of 199

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Brown has been invited to visit the world headquarters of SpecChem. Brown expects that the
information that she learns there will help her to ush out some of the ne details in her
research on SpecChem's stock. SpecChem plans to pay for all of Brown's expenses trip,
including meals, accommodations and lodging. In order to comply with the Code and
Standards, which of the following actions should Brown take? Brown should:

A) Accept the reimbursement but disclose the total reimbursed expense-paid trip in the
report.
B) Pay for all her travel expenses.

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C) Accept the reimbursement if she is con dent that her report will still be objective.

Question #27 of 199

Brown submits her report to the Director of Research for review, as required by Lang's

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procedures. Although the Director of Research supports Brown's general conclusion, he is
somewhat more optimistic about SpecChem's near-term prospects, and based on his own
thorough investigation believes that the stock could touch $150. The Director of Research
changes the report to indicate a target price somewhat higher than originally predicted by
Brown. Brown is con dent that the Director of Research's conclusion has a reasonable basis,

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but thinks that $150 is on the high side of what is likely. The Director of Research adds his own

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name to the report to re ect his contribution.

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In order to comply with CFA standards, must Brown request that her name be taken o the
report before it is disseminated?

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A) Yes, because Brown should dissociate from the report.
B) No.

C) Yes, because the Director of Research has misrepresented his contribution.

Question #28 of 199

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Jill Marsh, CFA, works for Advisors where she manages a portfolio for a wealthy family. Marsh
earns 1% of the portfolio's value each year in the form of a commission from Advisors. The
family just told her that any year the portfolio she manages earns more than a 10% return, the
family will give her the use of the family's vacation home for one week. Marsh will comply with
Standard IV(B), Additional Compensation Arrangements, if she:

A) sends an e-mail to her supervisor about the vacation home.
B) does nothing with respect to this.
C) delivers a typed memo to her supervisor about the vacation home the rst time she

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uses it.

Question #29 of 199

A nancial analyst and CFA Institute member sends a preliminary research report on a

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company to his supervisor. The supervisor approves the report, but then the analyst receives
news that causes him to revise downward the earnings estimate of the company. The analyst
resubmits the report to the supervisor with the new earnings estimate. The analyst soon nds
out that the supervisor plans to release the rst version of the report with the rst earnings

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estimate without a reasonable and adequate basis. In response to this the analyst must:

A) only insist that the rst report be followed up by a revision.

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authorities.

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B) both insist that a follow up report be issued and take up the issue with regulatory

C) insist that the supervisor change the earnings forecast or remove his (the analyst's)

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name from the report.

Question #30 of 199

An analyst belongs to a nationally recognized charitable organization, which requires dues for
membership. The analyst has worked out a deal where he provides money management advice
in lieu of paying dues. Which of the following must the analyst do?

A) Resign from the position because the relationship is a con ict with the Standards.
B) Must treat the charitable organization as his employer.
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C) Nothing since he is not an employee of the charitable organization.

Question #31 of 199
Ned Brenan manages two dozen pension accounts, one of which earned over 25% during the
past two years. Brenan tells prospective clients that based on past experience they can expect a
25% return on their funds. Which of the following statements is CORRECT?

but Brenan has not violated Standard I(C), Misrepresentation.

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A) Brenan has violated Standard of Professional Conduct III(D), Performance Presentation,

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B) Brenan has not violated Standard of Professional Conduct III(D), Performance
Presentation, but Brenan has violated Standard I(C), Misrepresentation.

C) Brenan has violated both Standard of Professional Conduct III(D), Performance

Question #32 of 199

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Presentation, and Standard I(C), Misrepresentation.

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May Frost, CFA, is an equity research analyst for a "precious metals mining" exchange traded

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fund which has recently started signi cantly outperforming its benchmark after several years of
stagnation. Upon investigating the source of the outperformance, Frost learns that the fund has

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experienced severe style drift, and now has a signi cant proportion of its resources invested in
technology and Internet stocks. Frost reviews the fund's prospectus and learns the current

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sector weighting violates multiple prospectus covenants. Frost contacts her supervisor and the
fund's compliance department and is told the portfolio weighting is not her responsibility and
that she should not pursue the matter further. Frost reviews the rm's whistleblower policy,
contacts personal legal counsel, and then contacts regulatory authorities regarding the style
drift and prospectus violations. Frost is most likely:

A) in violation of Standard III(E) "Preservation of Con dentiality."
B) in violation of Standard IV(A) "Loyalty."
C) not in violation of the Code and Standards.

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Question #33 of 199
While having a conversation with a prospective client, John Henry states that his performance
across all of his past clients over the past ve years was over 20%, which was 200 basis points
higher than his benchmark. He tells the client that while the benchmark may rise or fall over
time, his excess performance will remain consistent. Henry violated the Standards of
Professional Conduct because:

A) he cannot discuss performance without clearly stating that the composite does not
conform to GIPS.
B) the statement of excess performance is misleading with respect to its certainty.

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C) he cannot discuss prospective future performance in any manner.

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Question #34 of 199

Dixie Miller, a Level II CFA candidate, heads the research department of a large brokerage rm.
The rm has many analysts, some of whom are subject to the CFA Institute Code of Ethics and
Standards of Professional Conduct. If Miller delegates some of her supervisory duties, which
statement best describes her responsibilities under the CFA Institute Code and Standards?

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A) Miller's supervisory responsibilities do not apply to those subordinates who are not

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subject to the CFA Institute Code and Standards.

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B) Miller retains supervisory responsibilities for those duties delegated to her
subordinates.

C) CFA Institute Standards prevent Miller from delegating supervisory duties to

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subordinates.

Question #35 of 199
Nancy Korthauer, CFA, has launched a new hedge fund called the Korthauer Tautology Fund
and is actively soliciting clients from competitor's rms. Client presentations are necessarily
brief and often take place with the prospective client's current investment advisor in the room.
The Code and Standards require that:

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A) a prospective client’s current investment advisor not participate in meetings.
B) all client presentations provide a thorough review of all elements of the investment
management process. Abbreviated presentations are forbidden.
C) member or candidate provide (on request) additional detail information which supports
the abbreviated presentation.

Question #36 of 199

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A company has a de ned bene t plan that is currently under-funded. The plan sponsor has
instructed the portfolio manager of the plan to invest more aggressively to bring the funding

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level up to an adequate amount. Which of the following statements best describes the course
of action the portfolio manager should take? The portfolio manager should:

A) invest more aggressively because his duciary duties lie with the plan sponsor.

funding level of a plan.

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B) not invest more aggressively because this is not the method used to increase the

C) not invest more aggressively since this may expose the plan to too much risk and may

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not be in the best interest of the plan's bene ciaries.

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Question #37 of 199

Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients. She

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typically chooses funds from a list of 40 funds that she has thoroughly researched. The Burns, a
married couple that are a client, asked her to consider the Hawkeye fund for their portfolio.
Hoolihan had not previously considered the fund because when she rst conducted her
research three years ago, Hawkeye was too small to be considered. However, the fund has now
grown in value, and cursory research uncovers no fundamental aws with the fund. She puts
the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund ends up
being the best performing fund on her list. Hoolihan has:

A) violated the Standards by not dealing fairly with clients.
B) violated the Standards by not having a reasonable and adequate basis for making the
recommendation.
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C) not violated the Standards.

Question #38 of 199
Roger Halpert, CFA, prepares a company research report in which he recommends a strong

"buy." He has been careful to ensure that his report complies with the CFA Institute Standard
on research reports. According to CFA Institute Standards of Professional Conduct, which of the
following statements about how Halpert can communicate the report is most correct?

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A) Halpert can make his report in person.

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B) Halpert can make his report in person, by telephone, or by computer on the Internet.

Question #39 of 199

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C) Halpert can transmit his report by computer on the Internet.

A money management rm has the following policy concerning new recommendations: When a
new recommendation is made, each portfolio manager estimates the likely transaction size for

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each of their clients. Clients are noti ed of the new recommendation in the order of their

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estimated transaction size—largest rst. All clients have signed a form where they acknowledge

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and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is:

A) not a violation because the clients have signed the consent form.

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B) not a violation because the clients are aware of the policy.
C) a violation of the standard.

Question #40 of 199

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Randal Brooks is the chief economist for a large brokerage rm. In the aftermath of a national
tragedy, Brooks feels that it is very possible that the stock market will drop signi cantly and not
recover for several years. However, he does not believe that this is the most likely scenario but
merely that the risk of investing in equities has increased. He decides to write a market
commentary to the brokerage clients that discusses the reasons why the market will remain
stable and talks about why he, as a private citizen, feels patriotic. He does not mention the

increase risk in equities. Brooks has:

A) not violated the Standards.
B) violated the Standards by not including all of the relevant factors in the research report,

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but not by making patriotic statements.

Question #41 of 199

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and making patriotic statements.

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C) violated the Standards by not including all of the relevant factors in the research report

While servicing his clients' accounts, an analyst who is a CFA charterholder, determines that
one client is probably involved in illegal activities. According to Standard III(E), Preservation of

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Con dentiality, the analyst may NOT do which of the following?

A) Contact the appropriate governmental authorities about the determination.

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B) There are no exceptions in this list.

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C) Contact CFA Institute about the determination.

Question #42 of 199

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The O'Douls (husband and wife) have decided to work with Jane Mack, CFA, to have her
recommend an investment portfolio for them. The O'Douls are novice investors and Mack has
determined their asset allocation model falls into the conservative category. After researching
various investment options for the O'Douls, Mack has made a recommendation that they divide
their account on a 25%/75% basis between shares of a computer peripherals manufacturing
company her brokerage rm is underwriting and investment grade corporate bonds. The
O'Douls are not aware that Mack's rm is underwriting an o ering of the company in question.
Which CFA Institute Standard(s) has Mack violated given her actions?

A) Standard V(A), Diligence and Reasonable Basis, and I(D), Misconduct.

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B) Standard VI(A), Disclosure of Con icts, and III(C), Suitability.

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C) Standard III(B), Fair Dealing, and III(A), Loyalty, Prudence, and Care.

Rajiv Singh, a CFA charterholder, works as an equity analyst with Horizon Investments, a large
broker/dealer. After ski-resort developer HighLife misses a quarterly earnings target, Singh

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changes his recommendation on HighLife from buy to hold. Singh has been following HighLife
for years. In several previous research reports on HighLife, Singh told clients that, based on his
detailed analysis of the nancial statements and market position, he believed HighLife had
stopped picking up market share. He had mentioned concerns about HighLife several times in

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quarterly earnings.

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his reports and said in the most recent report that he would downgrade the stock if it missed

Singh had produced his monthly report on HighLife just a week before the earnings

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announcement, and because he had just written about his intention to downgrade the stock, he
felt he did not need to inform clients of his recommendation change until the next monthly

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report.

On the same day that the HighLife report was released, Singh initiated coverage on another
company, the convenience-store operator QuickStop, with a Buy rating. His research report is
distributed that afternoon. A client sends Singh a sell order for QuickStop via e-mail the same
day the new recommendation is being disseminated to all Singh's clients and prospects.
John Womack, a Level II CFA candidate, is a trader at Horizon. Womack, walking past the
conference room during an investment meeting, learns of the initiation of the buy rating on
QuickStop. Prior to the dissemination of the buy rating to Horizon's clients, he buys up a large
block of QuickStop shares for Horizon's account in anticipation of clients' interest in the stock.
When the rating is released to the rm's customers, he lls the incoming customer orders out
of Horizon's inventory, generating a modest pro t for the company.
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Horizon is drafting trade-allocation guidelines for companywide use. Five regulations the
company is considering are listed below:
Regular orders are processed and executed on a pro-rata basis.
Shares in initial public o erings will be allocated on a pro-rata basis to the rm's
portfolio managers according to advance indications of interest from the managers.
When the full amount of a block order is not executed, partially executed orders are
allocated on a rst-in, rst-out basis.
Orders must be recorded in writing and stamped with the time of the order and the
execution.
All clients participating in block trades are give the same execution price, and all clients

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are charged the same commission.

Question #43 of 199

When Singh receives the sell order for QuickStop, he should:

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A) ask the client to delay the order until he sees the new research report.

B) process the sell order immediately to ful ll his duciary duty to the client.

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C) tell the client about the buy rating and advise him not to sell the stock.

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Question #44 of 199

Womack's trading actions are a violation of:

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A) Standard III(E): Preservation of Con dentiality and Standard VI(B): Priority of
Transactions.

B) Standard IV(A): Loyalty to Employer and Standard III(B): Fair Dealing.
C) Standard III(A): Loyalty, Prudence, and Care and Standard VI(B): Priority of Transactions.

Question #45 of 199
With regard to his coverage of HighLife stock, Singh:

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A) violated the reasonable-basis Standard by downgrading a stock just because it missed
one quarterly earnings estimate.
B) did not violate the Standards for reasonable basis or research reports.
C) violated the research reports Standard because he failed to di erentiate between facts
and opinions.

Question #46 of 199

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After Singh changed his investment recommendation for HighLife from a "buy" to a "hold," he

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violated:

A) Standard I(C): Misrepresentation by not exercising diligence and thoroughness in his
research.

B) Standard III(B): Fair Dealing by not telling clients about the downgrade of HighLife in the

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wake of his promise to downgrade the stock if it missed estimates.

C) Standard V(A): Loyalty, Prudence, and Care by not exercising reasonable care and

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prudent judgment in his research.

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Question #47 of 199

Horizon's proposed IPO-allocation procedures are:

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A) not a violation of Standard III(B): Fair Dealing if they are disclosed to all clients and
prospects.

B) a violation of Standard III(A): Loyalty, Prudence, and Care but not Standard VI(B): Priority
of Transactions.
C) not a violation of Standard I(B): Independence and Objectivity.

Question #48 of 199

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Which of the following trade allocation procedures being considered for Horizon's trade
allocation policy would NOT be consistent with Standard III(B), Fair Dealing?

A) All clients participating in block trades are give the same execution price, and all clients
are charged the same commission.
B) Regular orders are processed and executed on a pro-rata basis.
C) When the full amount of a block order is not executed, partially executed orders are

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allocated on a rst-in, rst-out basis.

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Question #49 of 199

A client calls his money manager and asks the manager to liquidate a large portion of his assets
under management for an emergency. The manager warns the client of the risk of selling many

of:

A) Standard III(C), Suitability.

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assets quickly but says that he will try to get the client the best possible price. This is a violation

B) none of the Standards listed here.

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C) Standard V(A), Diligence and Reasonable Basis.

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Question #50 of 199

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An analyst nds a stock that has had a low beta given its historical return, but its total risk has
been commensurate with its return. When writing a research report about the stock for clients
with well-diversi ed portfolios, according to Standard V(B), Communication with Clients and
Prospective Clients, the analyst needs to mention:

A) the relationship of the historical total risk to return only.
B) the relationship of the historical beta and return only.
C) both the historical beta and total risk and return.

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Question #51 of 199
Which of the following is a possible breach of duciary duties by a CFA Institute member who
manages assets on behalf of a client?

A) Neither of these breach duciary duties.
B) Voting all proxies of stocks the client owns.
C) Using directed brokerage.

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Question #52 of 199

Nicholas Brynne, CFA, develops a trading model while working for CE Jones, an investment
management rm. By working on the model at home from his personal computer, Brynne is
able to devote additional work hours. Although the trading model is successful, Brynne loses

model. Nicholas is most likely:

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his job in a company restructuring, and decides to start his own practice using the trading

A) in violation of the Standards because he did not receive permission from his employer
to keep or use the les after employment ended.

computer.

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B) not in violation of the Standards because the trading model was created using his home

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C) in violation of the Standards because he did not have permission to build the trading

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model using his home computer.

Question #53 of 199

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