CFA Level 1 v1.0 (CFA Level 1)

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Total 3966 questions

Mirabelle is an experienced analyst who has worked for the investment research arm of Clifford & Clifford, Inc. for the past 7 years. Recently, TransOmega retained Clifford & Clifford to conduct a study on possible takeover candidates in the aviation industry. Mirabelle has been given the project and two assistants to conduct the research. During their review, Mirabelle's assistants located a research report created recently by Donaldson, a freelance analyst. Mirabelle found the report thorough, though she did not agree with many of Donaldson's conclusions. She carried out further inquiry along those lines and modified the report with new conclusions. She showed the completed report, with proper attributions to Donaldson in places where she had used his results, to a senior partner, John Cliff of
Clifford & Clifford. The report was approved and released to TransOmega. In this case,

  • A. both Mirabelle and John Cliff violated the standards.
  • B. only Mirabelle violated the plagiarism standard by using Donaldson's report.
  • C. only John Cliff violated the Standard of Reasonable Care (IVA.1) by not adequately monitoring Mirabelle.
  • D. neither Mirabelle nor John Cliff violated any of the standards.

Answer : D

Since proper care was taken at all steps, no violation has occurred. The use of Donaldson's report is acceptable as long as proper acknowledgments are given.

According to the AIMR-PPS when presenting results, annual returns for all years must be presented. Performance for periods of less than one year

  • A. must be treated as all of the other performance results.
  • B. must not be included in the presentation.
  • C. must not be annualized.
  • D. must be prorated and appropriate disclosures made. C

Answer : Explanation

Annual returns for all years must be presented. Performance for periods of less than one year must not be annualized. This is a requirement for presentation of results.

________ accounting is mandatory for fixed-income securities.

  • A. Accrual
  • B. Cash
  • C. Flexible
  • D. Equal
  • E. Risk-free
  • F. Total A

Answer : Explanation

Accrual accounting must be used for fixed-income securities and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and numerator.

Joseph Silk is a veteran money manager with Aakanksha, Inc., a hedge fund that caters to high net-worth individuals. His friend, Gribbin, recently incorporated a private business and invited Joseph to be on its board of directors. Gribbin's business is in the paper industry and does not directly or indirectly affect Aakanksha's client base. Joseph accepted the board membership with the understanding that he would participate in Gribbin's business only over the weekends. He considered this a private venture and did not inform Aakanksha's Compliance officer. In not doing so, Joseph has

  • A. violated Standard III (C) - Disclosure of Conflicts to Employer.
  • B. not violated any standards since there is no conflicts of interest between his two professional obligations.
  • C. violated Standard IV (A.3) - Independence and Objectivity.
  • D. violated Standard IV (B.1) - Fiduciary Duties.

Answer : A

While Gribbin's business is not in any competition with Aakanksha, Joe's position as a director creates an appearance of conflicts of interest since he will have a say in many decisions of the business, including investments in securities. Hence, before accepting any such position, Joe must discuss the situation with the compliance department at Aakanksha to evaluate the potential conflicts of interest. While Joe is not precluded from being on an outside Board, not getting this cleared with his current employer represents a violation of Standard III (C) - Disclosure of Conflicts to Employer.

Which of the following is/are required by AIMR-PPS with regards to calculation of returns?
I. Total return - realized and unrealized gains plus income - should be used.
II. Returns must be based on arithmetic mean calculations.
III. Accrual accounting must be used for fixed-income securities.

  • A. I, II and III
  • B. I only
  • C. I and III only
  • D. II and III only C

Answer : Explanation

The PPS require that calculations be based on time-weighted (geometric) returns. Accrual accounting must be used for fixed-income and other securities that accrue income. The performance measurement must be based on total returns.

What is the effective date for compliance with the AIMR-PPS for U.S. and Canadian investments?

  • A. January 1, 1995
  • B. January 1, 1992
  • C. January 1, 1993
  • D. January 1, 1994

Answer : C

From January 1, 1993, going forward, all of the firm's actual discretionary fee-paying nontaxable portfolios solely invested in U.S. and/or Canadian investments
("North American Portfolios") must be presented in composites that adhere to the Standards.

Standard II (C) - Prohibition against Plagiarism - addresses all of the following forms of communication, except:

  • A. internet communications
  • B. oral presentations
  • C. electronic data transfer
  • D. written presentations
  • E. audio/visual presentations
  • F. none of these answers
  • G. group meetings

Answer : F

Standard II (C) does not concern the form of communication of information to clients, prospects, employees, or the general public. Rather, it concerns the need to acknowledge the source of information used by the member to avoid the appearance of plagiarism.

Sterling Drachma is a senior investment consultant currently researching a few high-risk internet stock companies which recently started trading on NASDAQ.
Sterling manages 5 large and private investment accounts for which he has discretionary investment authority. Sterling is about 3 years away from retirement and his retirement portfolio is managed by Franc Escudo. Sterling has concluded from his research that two of the internet stocks he has been following are great buys and instructs Franc to divert part of the retirement investments into these stocks. Franc executes the orders as soon as he receives them. Sterling then instructs his brokers to buy the stocks for the two discretionary accounts that he knows are inclined toward high-risk investments. He does not buy any for the remaining three accounts since those are income-oriented, low-risk accounts. In this sequence of events, which of the following is/are true?
I. Franc has violated Standard IV (B.1) - Fiduciary Duties - by investing retirement account funds in the high-risk stocks.
II. Sterling has violated Standard IV (B.3) - Fair Dealing - by not treating all his accounts equally.
III. Sterling has violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement account before trading for his client accounts.

  • A. I, II and III
  • B. I and III only
  • C. II and III only
  • D. III only

Answer : D

Franc is managing a personal portfolio and as such must execute the orders of his client. The fact that it is a retirement account makes no difference in this situation. Franc would be in violation if he was managing a pension portfolio or a personal trust portfolio and the investments were deemed in violation of plan directives. Franc, however, should try to understand Sterling's motives in the redeployment of funds since this could prevent his client from what could be reckless investment. Sterling, for his part, as definitely violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement account before trading for his client accounts. Personal transactions should never take precedence over client and employer transactions. He has, however, not violated Standard IV (B.3) - Fair
Dealing - by not treating all his accounts equally. Standard IV (B.3) requires a fair treatment of all clients, not an equal treatment precisely because different accounts have different investment needs and risk appetites. The internet stocks should only be bought for accounts for which they are a suitable investment.

Jorgenson is a senior bond analyst with Morgan Co., a large investment banking firm. Over the past quarter, Morgan's corporate bond department has been betting on the credit spreads in the market narrowing and in anticipation, has invested a large amount of capital in the bonds of two firms, High Tech and Unfortunately, the credit spreads have not displayed much activity and as the quarter end is approaching, the department wants to unload the bonds. For this, it puts pressure on Jorgenson to push the bonds on some of his larger clients. Jorgenson believes that both the bonds are good investments since
High tech and Amerizone have been doing very well and their prospects look rosy. So he goes ahead and convinces his clients to purchase as much as a third of
Morgan's bond holdings in these companies. Morgan has

  • A. not violated the AIMR code of ethics.
  • B. violated Standard IV (A.1) - Reasonable Basis and Representations.
  • C. violated Standard IV (B.7) - Disclosure of conflicts to Clients and Prospects.
  • D. violated Standard IV (A.3) - Independence and Objectivity.

Answer : A

There is no evidence that Jorgenson has bowed to any external pressure in recommending the bonds to his clients. If his analysis indicates, in his judgment, that a security is a good investment and suits the needs of a client, then he should recommend it, regardless of whether there is any external pressure for or against that course of action.

Emmy Noether is a senior division manager at Harding & Harding, a money management firm. Emmy is quite fastidious about following the rules of the investment industry and has established specific procedures and guidelines designed to prevent any violations. Recently, it surfaced that one of the employees reporting to
Emmy, William Bathwater, had been secretly using inside information on a computer maker to generate profits in his portfolio. William had been extremely clever at hiding these profits and only a serendipitous audit by the Compliance Department revealed the pattern. Emmy, in her capacity as William's supervisor, has:

  • A. has not violated any standard in the AIMR code of ethics.
  • B. none of these answers.
  • C. violated Standard III (E) - Responsibilities of Supervisors - by failing to check William's behavior.
  • D. violated Standard III (B) - Duty to the Employer - by failing to check William's behavior.

Answer : A

Under Standard III (E) - Responsibilities of Supervisors, members must take reasonable care to ensure that their subordinates do not violate any laws or the code of conduct. This includes designing effective procedures to deter fraudulent activity. However, no amount of scrutiny can prevent the cleverest of frauds. What is expected of the members is that they be diligent enough in carrying out their duties. In the present case, given the facts, Emmy cannot be faulted for William's criminal activity since she hasn't been found to be negligent in any way. Hence, she has not violated Standard III (E) - Responsibilities of Supervisors nor any other standards.

NL is a country with no securities laws. LS is a country that has securities laws that are less strict than the AIMR code of ethics while MS has securities laws that are stricter than the code of ethics. Which of the following is/are true?
I. A member who lives in NL must always follow the AIMR code.
II. A member who lives in MS is governed by the AIMR code.
III. A member lives in NL but does business in MS. If MS laws apply to her business transactions, she must follow the AIMR code.
IV. A member lives in LS and does business in NL. He must always follow the AIMR code.

  • A. II and IV only
  • B. I and IV only
  • C. I, II, III and IV
  • D. II and III only

Answer : B

An AIMR member must always adhere to the code of ethics, unless the laws governing his/her behavior are stricter, in which case, the stricter laws must be followed. A member governed by MS must always follow the MS laws since they are stricter. Standard I.

Because it is not the preferred method recommended by the PPS, the use of ________ valuation needs to be disclosed.

  • A. new-date
  • B. settlement-date
  • C. trade-date
  • D. old-date
  • E. survivor-date B

Answer : Explanation

Trade-date valuation is recommended when calculating performance, although settlement-date valuation is acceptable if disclosed.

A critical part of Standard IV (A.2) is to distinguish between:

  • A. research reports and investment memoranda.
  • B. insider trading and appropriate trading.
  • C. CFA charterholders and non-CFA charterholders.
  • D. none of these answers.
  • E. employees and independent contractors.
  • F. industry and company analysis.
  • G. the buy side and the sell side.
  • H. facts and opinions. H

Answer : Explanation

Standard IV (A.2) - Research Reports states the responsibility of AIMR members, CFA charterholders and candidates to include in each research report those key facts that are instrumental to the investment recommendation presented in the report. A critical part of this requirement is to distinguish clearly between opinions and facts.

When a manager is responsible for the portfolios of pension plans or trusts, the duty of loyalty is owed to the ________.

  • A. beneficiaries
  • B. none of these answers
  • C. stockholders of the firm
  • D. investing public
  • E. entity who hires the manager
  • F. corporation
  • G. board of directors
  • H. manager's supervisor(s)

Answer : A

The first step in fulfilling a fiduciary duty is to determine what the responsibility is and to who it is owed. Members should take particular care in determining the identity of the "client" to whom the duty of loyalty is owed. In the context of an investment manager managing the portfolios of pension plans or trusts, the client is not the person or entity who hires the manager but, rather, the beneficiaries of the plan or trust. The duty of loyalty is owed to the beneficiaries.

Brokers who knowingly or recklessly engage in excessive trading in customers' accounts are known to be ________.

  • A. over-selling
  • B. mixing
  • C. churning
  • D. none of these answers
  • E. shingling

Answer : C

Brokers and dealers are held to a higher standard of care than the average person. They are liable for knowingly or recklessly engaging in excessive trading in customers' accounts, (churning); for accepting funds when they are insolvent, for manipulating the market and for fraud under the shingle theory.

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Total 3966 questions