2011 Level I Mock Exam: Morning Session


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2011 Level I Mock Exam: Morning Session
The morning session of the 2011 Level I Chartered Financial Analyst® Mock Examination has 120 questions. To best simulate the exam day experience, candidates are advised to allocate an average of 1.5 minutes per question for a total of 180 minutes (3 hours) for this session of the exam.

Questions 1-18 19-32 33-44 45-68 69-78 79-90 91-96 97-108 109-114 115-120

Topic Ethical and Professional Standards Quantitative Methods Economics Financial Statement Analysis Corporate Finance Equity Investments Derivative Investments Fixed Income Investments Alternative Investments Portfolio Management Total:

Minutes 27 21 18 36 15 18 9 18 9 9 180

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 1 through 18 relate to Ethical and Professional Standards.
1. Gabrielle Gabbe, CFA has been accused of professional misconduct by one of her competitors. The allegations concern Gabbe's personal bankruptcy filing ten years ago when she was a college student and had a large amount of medical bills she could not pay. By not disclosing the bankruptcy filing to her clients, did Gabbe most likely violate any CFA Institute Standards of Professional Conduct?
A. No. B. Yes, related to Misconduct. C. Yes, related to Misrepresentation.
Answer = A
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 38-40, 46-47 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
A is correct as a personal bankruptcy does not necessarily constitute a violation of Standard I (D). If the circumstances of the bankruptcy involved fraudulent or deceitful business conduct then failing to disclose it may constitute a violation of the Standards.
2. Bryan Barrett, CFA has an investment advisory service providing advice on gold and other commodities to several large retail banks. Barrett advertises his services in widely read publications to broaden his business to include retail clients. Because the client base for the institutions that Barrett serves is large, he is comfortable stating in the ads that thousands of his clients have benefited from his advice. Does Barrett's advertisement most likely violate any CFA Institute Standards of Professional Conduct?
A. No. B. Yes, related to Misrepresentation. C. Yes, related to Communication with Clients.
Answer = B
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 38-40 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

B is correct because Barrett's client base is made up of a small number of large institutions so stating in the advertisement that his client base is a larger number is a misrepresentation and a violation of Standard I(C). In addition, since the advertisement focuses only on the benefits and does not mention the potential risks of these investments it is also potentially misleading to clients.
3. While at a bar in the financial district after work, Ellen Miffitt, CFA overhears several employees of a competitor discuss how they will manipulate down the price of a thinly traded micro cap stock's price over the next few days. Miffitt's clients have large positions of this stock so when she arrives at work the next day she immediately sells all of these holdings. Because she has determined that the micro cap stock was suitable for all of her accounts at its previously higher price, Miffitt buys back her client's original exposure at the end of the week at the new, lower price. Which CFA Institute Standards of Professional Conduct did Miffitt least likely violate?
A. Market Manipulation B. Preservation of Confidentiality C. Material Non Public Information
Answer = B
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 49-52, 59-60, 88 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
B is correct as Miffitt has not violated the confidentiality Standard which involves information about former, current, and prospective clients.
4. Diana Fairbanks, CFA is married to an auditor who is employed at a large accounting firm. When her husband mentions a computer firm he audits will receive a qualified opinion she thinks nothing of it. Later that week when she reviews a new client account she notices there are substantial holdings of this computer firm. When she does a thorough Internet search for news on the company, she does not find anything about its most recent audit or any other adverse information. Which of the following actions concerning the computer stock should Fairbanks most likely take to avoid violating the CFA Institute Standards of Professional Conduct?
A. Take no investment action. B. Complete a thorough and diligent analysis of the company and then sell the stock. C. Sell the stock immediately as she has a reasonable basis for taking this investment
action.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Answer = A
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 49-52 Study Session 1-2-c Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
A is correct as the information concerning the qualified opinion is non-public and if it is material she would be in violation of Standard II(A) if she took investment action based on the information. She should also make reasonable efforts to achieve public dissemination of the information.
5. Sherry Buckner, CFA manages equity accounts for government entities whose portfolios are conservative and risk averse. Since the objective of her clients is to maximize returns with the lowest possible risk, Buckner considers adding to their holdings a new, thinlytraded, leveraged derivative product which she believes has the potential for high returns. To make her investment decision, Buckner relies upon comprehensive research from an investment bank that has a solid reputation for top quality research. After her review of that research, Buckner positions her accounts so that each has a 10% allocation to the derivative product. Did Buckner most likely violate any CFA Institute Standards of Professional Conduct by purchasing the derivative for her clients?
A. No. B. Yes, related to Suitability. C. Yes, related to Loyalty, Prudence and Care.
Answer = B
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 78-81 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
B is correct as Buckner is in violation of Standard III (C) since she did not consider issues such as the limited liquidity or any potential leverage of this new product when she invested a substantial percentage of her client's portfolios in these instruments.
6. Teresa Staal, CFA is an investment officer in a bank trust department. She manages money for celebrities and public figures, including an influential local politician. She receives a request from the politician’s political party headquarters to disclose his stock
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

holdings. The request indicates local law requires the disclosure. What steps should Staal most likely take to ensure she does not violate any CFA Institute Standards of Professional Conduct?
A. Provide the information and inform her client. B. Send the requested documents and inform her supervisor. C. Check with her firm's compliance department to determine her legal responsibilities.
Answer = C
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 88-89 Study Session 1-2-c Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
C is correct. In order to avoid violating Standard III (E) Staal should determine if applicable securities regulations require disclosing the records before she provides the confidential information concerning her client's investments.
7. Sergio Morales, CFA believes he has found evidence his supervisor is engaged in fraudulent activity concerning a client's account. When Morales confronts his supervisor, he is told the client is fully aware of the issue. Later that day, Morales contacts the client and upon disclosing his evidence, is told he should mind his own business. Concerned his job is at risk, Morales provides his evidence, along with copies of the client's most recent account statements, to a government whistle blower program. Morales is least likely to have violated which of the following CFA Institute Standards of Professional Conduct?
A. Duties to Clients B. Duties to Employers C. Communication with Clients
Answer = C
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 63-64, 90-93, 116-118 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
C is correct because this Standard has not been violated. Even though he talked to the client, the communication did not relate to the investment process. He has violated his duties to clients by disclosing confidential information to the government whistle blower
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

program. He has also violated a duty to his employer as contradicting employer instructions are not permitted unless the member is acting to protect the integrity of capital markets and the interests of clients.
8. Leng Bo, CFA is a bond portfolio manager for individual investors. Last year, a client whose portfolio is limited to investment-grade bonds approved Bo's purchase of a below investment grade bond. Because yields in the high grade fixed income markets declined, Bo subsequently decides to enhance this client's portfolio by investing in several additional bonds with ratings one or two notches below investment grade. The investment strategy implemented by Bo most likely violated which of the following CFA Institute Standards of Professional Conduct?
A. Suitability B. Communications with Clients C. Independence and Objectivity
Answer = A
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 78-80 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
A is correct because the client only approved the purchase of one below investment grade bond while the portfolio manager has purchased several additional bonds below investment grade without client approval in violation of Standard III (C).
9. Sisse Brimberg, CFA is responsible for performance presentations at her investment firm. The presentation that Sisse uses states her firm:
1. deducts all fees and taxes; 2. uses actual and simulated performance results; 3. bases the performance on a representative individual account.
Based on the above information, which of the following is the most appropriate recommendation to help Brimberg meet the CFA Institute Standards of Professional Conduct in her performance presentations? She should present performance based on:
A. a gross of fee basis. B. actual not simulated results. C. a weighted composite for all similar portfolios.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Answer = C
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 85-86 Study Session 1-2-c Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
C is correct because in order to meet their obligations under Standard III (D), members should present the performance of the weighted composite of similar portfolios rather than using a single representative or all accounts, so this is the best selection of the options provided.
10. Eileen Fisher, CFA has been a supervisory analyst at SL Advisors for the past ten years. Recently, one of her analysts was found to be in violation of the CFA Institute Standards of Professional Conduct. Fisher has placed limits on the analyst's activities and is now monitoring all of his investment activities. Although SL did not have any compliance procedures up to this point, to avoid future violations, Fischer has put in place procedures exceeding industry standards. Did Fisher most likely violate any CFA Institute Standards of Professional Conduct?
A. Yes. B. No, because she has taken steps to ensure the violations will not be repeated by the
analyst. C. No, because she is taking steps to implement compliance procedures that are more
than adequate.
Answer = A
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 101-103 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
A is correct because under standard IV(C) a member should exercise reasonable supervision by establishing and implementing compliance procedures in place prior to the possibility of any violation occurring, which has not been done in this case.
11. Joyce La Valle, CFA is a portfolio manager at a global bank. La Valle has been told she should use a specific vendor for equity investment research that has been approved by the bank's headquarters. Because La Valle is located in a different country than the bank's headquarters, she is uncomfortable with the validity of the research provided by this
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

vendor when it applies to her country and would like to use a local vendor on whom she has already conducted due diligence. Which of the following actions concerning the research vendor should La Valle most likely take to avoid violating the CFA Institute Standards of Professional Conduct?
A. Use the local research vendor. B. Use the bank-approved research vendor. C. Use both the local and the bank-approved research vendors.
Answer = A
"Guidance for Standards I-VII CFA Institute 2011 Modular Level I, Vol. 1, pp. 107-109 Study Session 1-2-c Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
A is correct. When a member has reason to suspect that either secondary or third-party research or information comes from a source that lacks a sound basis, the member must not rely on that information as indicated by Standard V(A) Diligence and Reasonable Basis.
12. Colin Gifford, CFA is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients’ accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, “Based upon the next six months earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn's stock will be $22 per share by the end of the year.” Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating any CFA Institute Standards of Professional Conduct would be to:
A. separate fact from opinion. B. include earnings estimates. C. identify limitations of the analysis.
Answer = B
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 116-118 Study Session 1-2-c Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

B is correct because while pro forma analysis may be standard industry practice, it is not required by the Standards. Earnings estimates are opinions and must be clearly identified as such.
13. Yao Tsang, CFA has a large percentage of his net worth invested in the Australian mining company, Outback Mines, which he has held for many years. Tsang is in the process of moving to a new employer where he is responsible for initiating research on mining companies. Shortly after his move, Tsang is asked to complete a research report on Outback. In order to meet the CFA Institute Standards of Professional Conduct concerning his stock holding, which of the following actions is most appropriate for Tsang to take?
A. Disclose his stock holding to his employer and to clients. B. Sell his stock holdings to eliminate any potential conflict of interest. C. Refuse to write the report and ask his employer to assign another analyst to complete
the analysis.
Answer = A
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 123-127 Study Session 1-2-c Recommend practices and procedures designed to prevent violations of the Code of Ethics and Standards of Professional Conduct.
A is correct. Even though the best practice is to avoid conflicts, when conflicts cannot be reasonably avoided, full disclosure should be made as required by Standard VI (A). As the stock in question has been held for many years it may not be practical to sell it due to things like tax consequences. Since the analyst has been hired to initiate coverage of mining companies it is unlikely that another analyst at that firm would be as competent in completing a research report on mining companies.
14. Teresa Avila, CFA is a micro cap investment analyst at a hedge fund. The fund requires Avila to hold any securities she recommends for the fund in her own account as well. Because Avila has such a small account, whenever she trades for her own portfolio she combines the transactions with those of the hedge fund so she is sure to have her account aligned with the fund. Has Avila most likely violated any CFA Institute Standards of Professional Conduct?
A. No. B. Yes, related to Misconduct. C. Yes, related to Priority of Transactions.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Answer = C
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, pp. 131-132 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
C is correct as Standard VI (B) requires that investment transactions for clients and employers have priority over transactions in which members have beneficial ownership. By executing her own accounts transactions with those of the hedge fund the analyst has violated this Standard. Micro cap securities can be thinly traded and easily influenced by changes in the volume of activity so that the analyst may benefit when she combines her transactions with the hedge funds and she should let the fund execute its orders before she makes changes to her account.
15. Ken Kawasaki, CFA shares a building with a number of other professionals who are also involved in the investment management business. Kawasaki makes arrangements with several of these professionals, including accountants and lawyers, to refer clients to each other. There is an expectation that an informal score is kept so that the referrals will equal out over time, so there are no cash payments. Kawasaki never mentions this arrangement to clients or prospective clients. Does Kawasaki's agreement with the other building occupants most likely violate any CFA Institute Standards of Professional Conduct?
A. No. B. Yes, related to referral fees. C. Yes, related to communication with clients.
Answer = B
"Guidance for Standards I-VII CFA Institute" 2011 Modular Level I, Vol. 1, p. 136 Study Session 1-2-b Distinguish between conduct that conforms to the Code and Standards and conduct that violates the Code and Standards.
B is correct because Standard VI(C) requires disclosure of any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Even without cash changing hands the arrangement provides for a quid pro quo referral of clients and should be disclosed.
By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currentlyregistered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

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2011 Level I Mock Exam: Morning Session