CFA Institute

CODE: CFA-Level-I
Exam Name: CFA Level I Chartered Financial Analyst

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Question: 1
Stripe Green is an equity analyst who is offered a freelance project to write a research report by Square
Bus. Which of the following is the correct choice for Stripe with regards to compensation?

A. Accept a fee that pays him higher if gives a buy recommendation to Square Bus.
B. Accept a flat fee that is not based on whether he recommends Square Bus or not in the research
report.
C. Accept a fee that pays him proportional to the number of equity Square Bus sells while using the
report for advertising.

Answer: B

Question: 2
Which of the following is false for GIPS composites?

A. Composites are defined based on a common investment objective or strategy.

B. Nondiscretionary accounts must all be in the same composite.
C. Actual, fee-paying, discretionary portfolios must be included in at least one composite.

Answer: B

Question: 3
PS Partners, a money management firm, uses different brokers for it trading. Most brokerage work is
given to NP Ltd. The commissions charged by NP are higher than many other competitors, nor is its
execution any better. NP pays for over half of PS's advertising expenses.

A. PS has violated Standard III (A) Loyalty, Prudence, and Care by not obtaining the best brokerage for
their clients.
B. PS has violated Standard III (B) Fair Dealing by not obtaining the best brokerage for their clients.
C. PS has violated Standard III (C) Suitability by not obtaining the best brokerage for their clients.

Answer: A

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Question: 4
James Johnson runs a high income fund and concentrates mostly on utilities. A friend who works for a
start-up pharma firm gives Johnson a tip that the FDA has approved a drug for the pharma firm. Based
on the tip Johnson immediately purchases the pharma firm's stock for his high income fund. The pharma
firm does not pay dividends, nor does it expect to pay dividends in the near future. Which of the
following Standards has Johnson violated?

A. Standard II (A) Material Nonpublic Information only

B. Standard III (C) Suitability only
C. Standard II (A) Material Nonpublic Information, Standard
III (C) Suitability, and Standard
V (A) Diligence and Reasonable Basis

Answer: C

Question: 5
Mike Peng is a portfolio manager who frequently lunches at the Downtown Grill which is also patronized
by many other finance professionals. A week back he overheard two traders discuss GS Enterprises
which they felt was going to be target of an yet undisclosed takeover. Wishing to purchase stock before
the takeover was revealed and price went up, immediately after lunch Peng placed orders for the stock
to be purchased on his personal account. He followed this by purchasing the stock for his clients
accounts. Which of the following Standards has Peng violated?

A. Only V (A): Diligence and Reasonable Basis

B. Both III (A): Loyalty, Prudence, and Care and V (A): Dilig and Reasonable Basis
C. Only III (A): Loyalty, Prudence, and Care

Answer: B

Question: 6
Mark Sanchez and Felix Rodriguez both have passed CFA Level II and work for KD Partners. They have
registered for the Level III exam to be held in December 2010. Sanchez's business card reads 'CFA Level
II' after his name. Rodriguez's introduces himself to prospective clients as 'I am Felix Rodriguez, a 2010
Level III CFA candidate.' Who is violating Standard VII (B): Reference to CFA Institute, the CFA
Designation, and the CFA Program?

A. Sanchez

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B. Both Sanchez and Rodriguez
C. Rodriguez

Answer: A

Question: 7
Madeline Hall is in charge of marketing materials for her firm. Due to a typographical error (typo), a
brochure sent to clients overstates the returns on money managed by the firm as 7.92% rather than
6.92%. Which one of the following action(s) is (are) the most appropriate for Hall to keep her in
compliance of the Standards?

A. Inform clients to who the brochure has been sent out about the error and correct the error in future
brochures.
B. Pay an extra 1% return from the firm's own funds to clients who received the brochure.
C. No action is needed as the error was unintentional.

Answer: A

Question: 8
Landon Wilson runs an equity fund. GQT Enterprises is facing a hosting takeover, and approaches Wilson
to purchase its stock and vote in favor of existing management. In return GQT promises Wilson non-
public material information in the future. Wilson declines the offer of any future non-public material
information. Wilson also researchers GQT stock and concludes it is underpriced and suitable for his
clients. He purchases a large block of GQT stock and votes in favor of existing management. The success
of the hostile takeover would have resulted in further gains for GQT stockholders. Which of the
following action(s) of King violates Standard III (A) Loyalty, Prudence and Care?

A. Voting in favor of existing management.

B. Purchase of large block of GQT stock.
C. No violation.

Answer: A

Question: 9
Amelia Scott works for an investment management firm in New York. She is posted in country Turnipia
for a short term assignment where she manages investments by Sergio Cabrera. Turnipia law requires

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that an investment managers disclose his or her client's investment details to the client's employers on
request. Cabrera's employer asks Scott to provide details about Cabrera's investments. Scott examines
Cabrera's account and concludes that he has not done anything illegal. What is the proper course of
action for Scott?

A. Disclose Cabrera's investments.

B. Not disclose Cabrera's investments and resign from managing his account.
C. Not disclose Cabrera's investments while continuing to manage his account.

Answer: A

Question: 10
Grace Carter supervises analysts at the firm AFD Brokers. A team led by Carter analyzes DFA Corp.,
evaluating the industry, future demand and cost trends. A lot of the conversations between the team
occur in the hallways where they are overheard by AFD salespeople. Carter's team arrive at a conclusion
that DFA is undervalued and prepare a report for AFD clients recommending the purchase of DFA stock.
Before the report is distributed, based on the conversations of Carter's team that they have overheard,
the salespeople purchase AFD stock. Which of the following is correct with respect to the Standards?

A. Carter has violated responsibilities of supervisors, and the salespeople have violated restrictions on
use of non-public material information.
B. Only the salespeople have violated restrictions on use of non-public material information.
C. Only Carter has violated responsibilities of supervisors.

Answer: A

Question: 11
Isabelle Perez runs a value fund that invests mainly in domestic consumer goods firms with high book to
market ratio. Around the middle of the quarter, Perez comes across a couple of newsletters that claim
value will do poorly over the next few quarters. Based on this, Perez changes her investments to low
book to market energy firms. She informs her clients of the change a month later in her quarterly report.

A. Perez has not committed any violation.

B. Perez has only violated the requirements of diligence and reasonable basis.
C. Perez has violated the requirements of diligence and reasonable basis and the requirements
for communication with prospective clients.

Answer: C

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Question: 12
Ket Garo, CFA tells his employer that he was chosen by faculty in his undergraduate to represent his
college in a national asset management competition. In reality, Garo was not selected and did not
participate in the competition. Which Standards has Garo most likely violated?

A. Duties to Employers
B. Professional Misconduct
C. Duties to Clients

Answer: B

Question: 13
Sophia Wright is the investment manager for several institutional clients. Wright directs trades on behalf
of her clients to BAQ Securities. In return BAQ pays for a yearly vacation for Wright and provides Wright
with equity research that she uses for making investment decisions for her clients. Wright does not
disclose this arrangement to her clients. BAQ also does not provide the best price and execution. Wright
has violated:

A. No violations if the equity research leads to positive returns for clients.

B. No violations if the yearly vacations are inexpensive.
C. Standard III (A) Loyalty, Prudence and Care.

Answer: C

Question: 14
Isabella Walker offers credit guidance to purchasers of corporate bonds. Her firm has a large inventory
of bonds of TPQ Corp. which is facing financial difficulties. The sales department of her firm asks her to
recommend TPQ bonds to her clients. After analyzing the bonds Walker concludes that they are
underpriced,even after accounting for TPQ's financial difficulties. Walker next contacts her clients and
recommends they purchase TPQ's bonds. Walker has:

A. violated only Standard I (B) Independence and Objectivity.

B. not violated the Standards.
C. violated Standard I (B) Independence and Objectivity and Standard III (C) Suitability.

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 Answer: B

Question: 15
Ravi Reddy is an investment analyst with HC International, which owns stock of CC Ltd. Reddy's share of
any profits made by HC from sale of CC stock is 15%. Reddy writes a favorable research report on CC
after extensive research on CC, the industry it is in, and its competitors. Reddy does not disclose HC's
ownership of CC's stock or his share of HC's profits.

A. I (B): Independence and Objectivity

B. Both I (B): Independence and Objectivity and VI (A): Disclosure of Conflicts
C. VI (A): Disclosure of Conflicts

Answer: B

Question: 16
Rakesh Kumar works as a fund manager for PV InC. but has been offered a job by KS Partners. He has
accepted the offer and will be leaving PV InC. at the end of the month. A week prior to leaving he is
contacted by a prospective client. Kumar does not follow up with the client on behalf of PV, but decides
to wait to pursue the client till he joins KS.

A. Kumar has violated Standard IV: Loyalty by accepting an employment offer from KS while he was still
employed by PV.
B. Kumar has violated Standard IV: Loyalty by depriving his employer the potential benefit from the
prospective client.
C. Kumar has not violated Standard IV: Loyalty if he doesn't take any written records of the prospective
client with him to his new job.

Answer: B

Question: 17
Matthew Savage, CFA is a portfolio manager. Savage serves on the board of GXT Corporation and has
substantial positions in GXT. Savage acquires a new client to whom he does not disclose his GXT board
membership or his obligations as a CFA charterholder. Savage has violated the Standards?

A. Yes, because of failure to disclose his obligations as a CFA charterholder.

B. No

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C. Yes, because of failure to disclose his GXT board membership.

Answer: C

Question: 18
SL Industries has hired MM Analytics owned by Gerry Crawford to publicize the firm. SL pays MM and in
return Crawford sends out spam emails pumping up SL stock. These emails do not disclose the payments
received by MM from SL. Also the emails knowingly overstate profits of SL. Which of the following
standard(s) has Crawford not violated?

A. Standard VI (A) Disclosure of Conflicts

B. Standard III (B) Fair Dealing
C. Standard II (B) Market Manipulation and Standard V (A) Diligence and Reasonable Basis

Answer: B

Question: 19
Carly Shuttle manages money for a client and has over the past five years achieved a return greater than
the benchmark. In appreciation the client gifts Carly an all expenses paid Monaco weekend. Carly
believes that the gift does not create a conflict of interest and does not disclose the gift to her
supervisor.

A. Carly has not violated the Standards.

B. Carly has violated Standard I (B) Independence and Objectivity.
C. Carly has not violated Standards I (B) Independence and Objectivity if after using her judgment she
feels the gift did not compromise her independence.Needs to disclose gift to employer

Answer: B

Question: 20
Rajat Sharma, CFA achieved superior returns as a portfolio manager when he . was KJI Advisors. After
leaving KJI, Sharma joined AER Ltd. In a presentation to AER clients, Sharma uses the returns he
achieved at KJI, without clarifying that the returns were obtainedduring his employment at KiT. Has
Sharma violated the Standards?

A. Yes, Misrepresentation /

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B. No
C. Yes, Communication with Clients and Prospective Clients

Answer: A
Explanation:

It may be tempting to conclude that this is a Communication violation, but it is really

Misrepresentation. The Communication Standard requires:
1. Disclose to clients and prospective clients the basic format and general principles of the investment
processes used to analyze investments, select securities and construct portfolios, and must promptly
disclose any changes that might materially affect those processes.
2. Use reasonable judgment in identifying which factors are important to their investment analyses,
recommendations or actions, and include those factors in communications with clients and prospective
clients.
3. Distinguish between fact and opinion in the presentation of investment analysis and
recommendations. You can see none of the Communication requirements fit the situation
described.

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 CFA Institute
CODE: CFA-Level-I
Exam Name: CFA Level I Chartered Financial Analyst

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