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CFA Level I. Mock Exam II Questions and Answers Graded A+
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CFA Level I. Mock Exam II
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CFA Level I. Mock Exam IIJustin Matthews, CFA, is CFO of a bank and serves on the bank's investment
committee. The majority of the committee has voted to invest in medium-term euro debt.
Matthew feels very strongly that this is a poor strategy and that trends in both the
exchange rate and in euro interest rates over the next year will result in large losses on
the position.
According to the Code and Standards, Matthew should: - answer document his
difference of opinion with the committee.
Standard V(A) Diligence and Reasonable Basis states that if a consensus opinion has a
reasonable basis, a member or candidate who disagrees with it does not have to
disassociate from it but should document the difference of opinion.
Kim Vance, CFA, tells a prospective client, "Over the three years I have been in the
business, my equity-oriented accounts have had a mean return of more than 20% a
year." The statement is accurate, but the mean return was influenced by the account of
one client realizing a large gain on a position in a small-cap company he took based on
his own research.
Without this account, the average gain would have been 18% per year. Has Vance
violated CFAI Standards of Professional Conduct? - answerYes, because the statement
misrepresents Vance's performance.
This is a violation of Standard III(D) Performance Presentation
Joseph Drake, CFA, an investment advisor at Best Wealth Managers, has identified a
growth stock that he believes has the potential to provide excellent returns over the next
five years. He includes this stock on a "recommended list" that he sends to all of his
clients. Drake includes recent earnings, his estimates of future earnings, and a note that
more information is available on request.
Drake has: - answerNOT violated the Standards.
It is not a violation of the Standards to present a recommended list of securities, some
of which may not be suitable for some clients. It is permitted to present investment
recommendation in capsule form as long as clients are informed that more information
about the securities is available on request.
Brian Farley, CFA, is an investment manager with one client, a $75 million university
endowment fund. A representative of the endowment fund calls Farley and places a
"sell" order on a portfolio holding whose management has just reduced its earnings
, guidance for the coming year. Farley also owns the security and, because the new
guidance is public information, places simultaneous "sell" orders for both the client
account and his personal account.
According to the Standards on fair dealing and priority of transactions, Farley is in
violation of: - answerFarley is in violation of Standard VI(B) Priority of Transactions.
Client transactions must take PRECEDENCE over members' or candidates' trades.
Gabe Klement, CFA, an analyst for HB Investments, is responsible for the valuation
model for an IPO. Without his knowledge, others at HB adjusted the inputs to the model
to increase the estimated value of the shares, and the offering is oversubscribed.
Complying with local securities laws, Klement purchases shares of the IPO for his
personal account and allocates the remaining shares to client accounts on a pro rata
basis.
With regard to the Standard on knowledge of the law, the analyst: - answerviolated the
Standard by purchasing the shares of the IPO but not by allowing the IPO valuation to
be published. Gave violated both Standard I(A) and Standard VI(B) Priority of
Transactions as Standard VI(B) does NOT permit the purchasing of IPO shares.
Standard I(A) Knowledge of the Law requires candidates and members comply with all
applicable rules and regulations, including the CFAI Standards of Practice.
Charmaine Townsend, CFA, has been managing equity portfolios for clients using a
model that identifies growth companies selling at reasonable multiples. With economic
growth slowing for the foreseeable future, she has decided to change to a securities
selection model that emphasizes dividend income and low valuation.
To comply with the Code and Standards, Townsend should most appropriately: -
answerPromptly notify her clients of the change.
Standard V(B) Communication with Clients and Prospective Clients requires prompt
disclosure of any change that might significantly affect the manager's investment
processes. The disclosure need not be in writing.
Wells Investments implements a new procedure for unsolicited trade requests that an
advisor believes are inconsistent with the client's IPS:
+ If the trade will have only a minimal impact on the client's portfolio, first advise the
client in what way the trade deviates from the IPS, and then request the client's
approval for the trade.
+ If the trade will have a material impact on the risk and return characteristics of the
client's portfolio, discuss with the client that this trade will require change in the IPS.
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