CFA Reading 3 Quiz

Match the following terms: 1) Equity Risk Premium 2) Ex-Date 3) Exogenous Variables 4) Externality 5) Fibonacci Sequence

1) The expected return on equities minus the risk free rate 2) The first date that a share trades without the dividend 3) Items whose equilibrium values are determined outside the model being considered 4) An effect of a market transaction that is borne by other parties other than those transacted 5) Elliot Wave theory believes that market values follow patterns that are the ratios of the numbers in this order

Match the following terms: 1) Financial Leverage 2) Fisher Effect 3) Flat Price 4) Floor 5) Forward Curve

1) the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a proportional change in operating income 2) The thesis that the real interest rate in an economy is stable over time so that changes in nominal interest rates are the result of changes in expected inflation 3) The full price of a bond minus accrued interest 4) A series of put options on an interest rate, with each option expiring at the date on which the floating loan rate will be reset 5) A series of forward rates, each having the same time frame

A former hedge fund manager is launching a new private wealth management firm. The manager offers an incentive of $10,000 to any adviser who joins the firm with a minimum of $200,000 in committed investments. The manager places notice of the opening in several industry web portals and career search sites. Which of the following is correct according to the Code and Standards?

A member is not eligible for the new position unless he/she is currently unemployed because soliciting the clients of the member's current employer is prohibited

Jones changes the recommendation for a stock from "buy" to "sell" this afternoon and emails all clients today. A client calls the next morning with on order to 'buy" the same stock. Jones should:

Advise the client of the change in recommendation before accepting the order

Brown sat for the Level III CFA exam this past weekend. He updates his resume to say "In finishing the CFA program, I improved my skills related to researching investments and managing portfolios. I will be eligible for the CFA Charter upon completion of the required work experience".

Brown violated the Code and Standards by incorrectly stating that he was eligible for the CFA Charter.

Which statement about a manager's use of client brokerage commissions violates the Code of Standards?

Client brokerage commissions may be directed to pay for the investment manager's operating expenses.

One of the discretionary accounts managed by Smith is ABC Company employee profit sharing plan. ABC's president asked that Smith vote for management's recommended directors when they receive the proxy statement, rather than the directors proposed by a dissident shareholder group. Smith does not want to lose the account since he/she has placed ABC's transactions with a broker who provides useful information on tax free bonds. While not applicable to ABC, the tax free bond information is helpful to Smiths other clients. The brokerage firm offers the lowest commissions and best execution of trades. Smith investigates the proxy issues and concludes that management's slate of directors will serve the shareholders best and votes accordingly. Smith:

Did not violate the Standards by voting the shares for management or in directing the the trades to the brokerage firm.

Which of the following statements is a stated purpose of disclosure in Standard VI(C) - Referral Fees?

Disclosure will help the client evaluate any possible partiality shown in the recommendation of services.

An investment banking department of a brokerage firm receives material nonpublic information about a pending merger which would have considerable value to the brokerage firm clients. Which one of the following is the best policy for the brokerage firm?

Establish physical and informational barriers within the firm to prevent the exchange of the information between the investment banking and brokerage operations.

Which of the following clearly conflicts with the recommended procedures for compliance presented in the CFA Standards of Practice Handbook?

For confidentiality reasons, personal transactions and holdings should not be reported to employers unless mandated by regulatory organizations.

Gomez has been asked to speak (without compensation) at an upcoming investment conference hosted by one of the third party investment managers used by his pension fund. The manager of the event offers to cover all conference and travel costs for Gomez and make the conference free for Gomez and three additional members of his investment team. Gomez is also invited to a free golf outing for all speakers at the event hosted by the sponsoring firm. Which of the following is least likely to violate Standard I(B)?

Gomez may accept only the offer to have his conference-related expenses paid by the host firm.

Which of the following is a correct statement of a member's or candidate's duty under the Code and Standards?

In the absence of applicable law or regulatory requirements, the Code and Standards govern the member's or candidate's actions.

Johnson was recently terminated as one of team of five managers of an equity fund. Johnson was one of two value focused managers and was terminated to reduce costs. In a letter sent to prospective employers, Johnson presents (with written permission of the firm, the performance history of the fund to demonstrate his past success.

Johnson violated the Code and Standards by claiming the investment performance as his own.

Jones is president of a local bank and has hired ABC Investment Bank to seek a merger partner. The bank is not listed on a stock exchange and has not disclosed that it is seeking a strategic alternative. ABC discussed the bank's desire to merge with several other banks, all of whom believe that they should wait for now since they believed the local bank would report lower earnings next quarter, which would allow them to pay less. Jones wants to increase the likelihood of structuring a merger quickly. Which of the following would most likely be a violation of the Code and Standards?

Jones could place an order to buy 2,000 shares of the bank in his personal account with ABC (or four times the average weekly volume).

Jones heads a research department of a large firm and some analyst at the firm are CFAs. If Jones delegates some supervisory responsibilities, which statement best describes the responsibilities under the Code and Standards?

Jones retains supervisory responsibility for all subordinates despite delegation of some duties.

Jones has been working from home on weekends and occasionally saves correspondence with clients and completed work on her home computer. Soon after, Jones is terminated in a downsizing. While looking for a job, she uses the files saved on her home PC to request letters of recommendation from former clients. She also provides to prospective clients some of the generic overall performance reports as examples of her abilities.

Jones violated the Code and Standards because she did not receive permission from her former employer to keep or use the files after her employment ended.

Jones is a portfolio manager for a REIT mutual fund. Her firm clearly describes in the fund's prospectus its soft dollar policies. Jones decides that entering the CFA program will enhance her investment decision making skills and decides to use the fund's soft dollar account to pay for the CFA registration and exam fees. Which of the following statements is most likely correct?

Jones violated the Code and Standards because the CFA program does not meet the definition of research allowed to be purchased with brokerage commissions.

Jones is upset after failing the CFA Level II exam. He is unhappy with the material he purchased from a CFA review course. He posts the following on the providers discussion board. "I am dissatisfied with your firm's Level Ii review material. I found the exam difficult and myself unprepared for specific questions using your product. How could your service provide such limited resources on the topics of inventory and taxes when the exam had so many questions in this area? I will not recommend your product."

Jones violated the Code and Standards by providing specific information on topics tested on the exam.

Which of the following is true?

Members and candidates are obligated in all situations to disclose to clients their practices in the use of client brokerage commissions.

Which of the following will help to ensure the fair treatment of brokerage firm clients when a new investment recommendation is made?

Minimizing the time between the decision and the dissemination of a recommendation.

Jones provides investment advice to a private university's endowment investment committee. Jones has the fund's financial information and planned expenditures. A friend of Jones and prominent alumnus calls Jones and asks for the financial information to help close a deal on a large contribution. The trustees are not available, and the alumnus needs the information this afternoon. Based on the CFA standards, Jones should

Not send the information to preserve confidentiality.

Unless otherwise stated in the question, all individuals in the ethics questions are CFA Institute members or candidates in the CFA Program, and therefore are subject to the CFA Code of Ethics and Standards of Professional Conduct (the "Code" or "Standards")

OK

Smith is a portfolio manager. A client tells informs Smith that he/she will compensate Smith beyond the compensation of the firm on the basis of the capital appreciation of the portfolio each year. Smith should:

Obtain permission from the employer prior to accepting the compensation.

Pat works for a local asset management firm. A broker provides proprietary research through client brokerage arrangements is offering a new trading service. The broke is offering low fee, execution only trades to compliment its traditional full service, execution and research trades. To entice Pat to send more business their way, the broker will apply the commissions paid on the new service toward satisfying the brokerage commitment of the prior full service arrangements. Pat has always been satisfied with the execution provided on full service trades, and the new low fee trades are comparable to the fees other brokers currently used for other accounts that prohibit soft dollar arrangements.

Pat can trade for his accounts that prohibit soft dollar arrangements under the new low fee trading scheme.

ABC company is planning on a secondary stock offering and has hired a new investment management firm. The management firm's sell side analyst currently has a "sell" recommendation on the stock. The head of investment banking asks the head of brokerage to have the analyst change the recommendation from "sell" to "buy". According to the Standards, the head of brokerage would be permitted to:

Place the company on a restricted list and give only factual information about the company.

Baker is a private wealth manager interviewing for a new research analyst for her firm. One of the candidates, Smith, is an analyst with a local investment bank. During the interview, Smith mentions a current merger in which his firm is acting as an adviser. Baker has heard rumors of the merger, but no information has been officially released to the public. Which of the following actions by Baker is least likely a violation of the Code and Standards?

Placing the securities of both firms involved in the merger on the firm's restricted trading list

Smith is on the board of directors of a local non-profit which is beginning a fund raising campaign. Smith believes that many of his/her clients make charitable donations. The next week in Smith's newsletter to clients there is a small section discussing the non-profit, the fund raising campaign and Smith's position on the board.

Smith did not violate the Code and Standards.

Smith and Jones just started their own investment advisory firm and both are registered to take the CFA Level III exam. Smith places the following on her business card: Judy Smith, CFA Level II. Jones does not place anything about the CFA designation on his business card, but the firm materials state that Jones participates in the CFA Program and has completed Levels I and II. According to the standards:

Smith has violated the Standards, but not Jones.

Smith works for an investment firm and Jones is a new client. After spending a few minutes getting acquainted, Smith explains to Jones that he/she has found an undervalued company with large potential gains and recommends the purchase. Smith violated the Standards in doing so. What should Smith have done differently?

Smith should have determined Jones' needs, objectives, and tolerance for risk before making the recommendation.

ABC Investments acquires a new, very large account with two concentrated positions on May 25. The firm's policy is to add new accounts for purposes of performance calculations after the first full month of management. Smith is responsible for calculating the firm's performance returns. Before the end of the month, Smith notices that one of the significant holdings in the new account is acquired causing the value of the portfolio to double. Because of this holding, Smith decides to account for the new account in the performance calculation as of the date of acquisition, thereby improving the published returns for the firm.

Smith violated the Code and Standards because the inclusion of the new account produces an inaccurate calculation of the monthly results according to the firm's stated policies.

Smith works for a brokerage firm as well as a sell side analyst. Smith estimates that ABC Company will increase its dividend $1.50/share next year contingent on Congress passing a new tax break. The local representative indicates that passage of the bill is quite possible, but there are concerns from some members over funding of the tax break given the current budget deficit. Smith writes "We expect ABC stock to rise to $80.00/share by the end of the year because the dividend will increase by $1.50/share, and investors should realize a 15% gain. According to the Standards:

Smith violated the Standards because he failed to separate opinion from fact

Smith is hired by ABC Company to manage its pension fund. Smith's duty of loyalty, prudence and care is owed to:

The participants and beneficiaries of ABC's pension fund.

Jones is the research analyst for ABC Company. Jones believes ABC's new products are weak, so the stock should be rated a weak "buy". At lunch Jones overhears a highly respected analyst at another firm offer opinions on ABC that conflict with his weak "buy". Upon returning from lunch, Jones does extensive research and realized his initial opinion was wrong and then issues a strong "buy" on ABC to the public. Jones:

Violated the Standards because Jones did not have a reasonable and adequate basis for his recommendation.

Which of the following statements is correct under the Code and Standards?

Written consent from the employer is necessary to permit independent practice that could result in compensation in competition with the member's employer.

Smith is an Analyst with XYZ Brokerage, and plans to issue a buy recommendation on ABC Company. Which of the following situations is most likely to represent a conflict of interest for Smith that would have to be disclosed?

XYZ holds in its own accounts a substantial amount of ABC common stock

Smith tells a new client, "I may not have a long term track record, but I'm sure you will be pleased with my recommendations. In the three years I have been in the business, my equity oriented clients have averaged 26% per year". The statement is true, but Smith only has a few clients and one client took a position in a penny stock (contrary to Smith's advice) and realized a substantial gain. Without that one investment, the average gain would have been 8%. Has Smith violated the Standards?

Yes, because the statement misrepresents Smith's track record.