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ExamWise volume 1 CFA 2008 level i certification


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ExamWise®
Volume 1
CFA 2008 Level I Certification
With Preliminary Reading Assignments The
Candidates Question And Answer Workbook For
Chartered Financial Analyst


Authors
Jane Vessey, CFA
M. Afdal Pamilih, CFA
David Stewart
Published by  
 

TotalRecall Publications, Inc.  
1103 Middlecreek 
Friendswood, TX 77546 
281‐992‐3131 
 

 


    

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This book is dedicated to our fantastic children Adam and Julia who we love very much.  

Jane Vessey & M. Afdal Pamilih
 
 
 
 
This Study Guide is dedicated to the widow(er)s and orphans of the “Silent Spring”.  Those who have 
sacrificed  loved  ones  to  the  obscurity  of  quiet  study  and  endured  weekend  sacrifice  above  and 
beyond  the  call  of  continuing  education.    On  the  alter  of  a  profession’s  highest  accreditation  these 
unsung heroes have sacrificed time with their spouse, shopping with Mom, and pitch and catch with 
Dad.    These  patient  supporters  have  endured  tense  attitudes,  unfinished  chores,  extra  duties,  and 
received the respect and appreciation of all who have studied throughout the “Silent Spring”. 
In particular, never ending thanks to: 
Carol Lee, Mary Elizabeth, Sophia Victoria, David Todd II 

David Stewart

 


    

ExamWise®
Volume 1
CFA 2008 Level I Certification
With
Preliminary Reading Assignments
The Candidates Question And Answer Workbook
For Chartered Financial Analyst
BY
Authors
Jane Vessey, CFA
M. Afdal Pamilih, CFA
David Stewart
Jane Vessey
Jane  Vessey  manages  a  training  company  in  the  United  Kingdom  specializing  in  financial  analysis 
and  investment.    She  is  a  visiting  lecturer  at  Cass  Business  School  teaching  classes  in  asset 
management and valuation. She also teaches a CFA®   revision course at ISMA (the business school at 
Reading  University)  and  is  an  associate  at  a  leading  London  financial  training  company  where  she 
teaches  courses  covering  investment  management  and  related  topics.    She  has  developed  online 
training programs for students taking the CFA examinations and teaches CFA courses for UKSIP (the 
UK Society of Investment Professionals).  
Jane  graduated  in  Mathematics  from  Oxford  University,  United  Kingdom,  and  is  a  CFA  charter 
holder.  She has some eighteen years experience working in the investment industry,  starting out as 
an equity analyst before becoming an investment manager.  She was based in London and Tokyo and 
took responsibility for managing equity portfolios invested in the Japanese and other Asian markets. 
In 1990, Jane moved to Indonesia and established and ran an investment management operation on 
behalf  of  Mees  Pierson.    She  took  responsibility  for  all  areas  of  the  business,  including  investment, 
operations, marketing and administration.  While in Asia, Jane was involved in providing training to 
capital market participants and state officials and teaching in courses provided by local universities. 

 


    

M. Afdal Pamilih
Afdal  has  18  yearsʹ  experience  working  in  the  finance  industry.  He  started  his  career  with  J.P. 
Morgan,  and  then  with  County  NatWest  Government  Securities,  in  New  York  specializing  in  the 
development  of  quantitative  products  for  foreign  exchange  and  fixed  income  markets.  After 
returning  to  Indonesia  in  1989  he  was  responsible  for  the  development  of  investment  services  and 
subsequently treasury management for leading banks in Jakarta.  
Afdal has developed web‐based training programs for the CFA examinations and has wide teaching 
experience,    including  instructing  at  the  School  of  Management,  University  of  Surrey,  United 
Kingdom. 
He  obtained  a  MSc  in  Mathematics  from  the  University  of  Texas  at  Arlington  and  holds  the 
Chartered Financial Analyst (ʺCFAʺ) qualification. 
 
 
 
 

David Stewart:
David Stewart has extensive experience in venture capital and business structural reorganizations. As 
president  of  a  private  client  broker  dealer  firm,  he  has  business  valuation  and  project  valuation 
experience on the venture capital side and portfolio management on the asset management side. His 
analysis,  commentary,  books,  and  study  guides  have  appeared  in  the  financial  management, 
securities, and exam prep industries.  
David  has  collaborated  with  experts  in  the  field  to  produce  the  2001  through  2006  editions  of  this 
study guide. His extensive research into the CFA exam program and past exam histories, field work, 
and  consistent  review  of  CFA  Institute  information  allows  him  and  his  co‐authors  to  deliver  high 
quality and up to date information. 

 


    

About the Book:
ExamWise  Volume  1  For  CFA  Level  I  Concept  Check  Q&A  Workbook  With  Preliminary  Reading 
Assignments is designed to give you plenty of practice questions to test your readiness for the CFA 
exam.  It  offers  400+  concept  check  questions  based  18  exam  study  sessions  that  cover  the  Learning 
Outcome Statements and their associated CFA Assigned Readings. For additional practice, there is an 
accompanying free download test engine that generates multiple mock exams similar in design and 
difficulty to the real CFA exam. The questions and explanations have references to the page number 
in the related Reading and to the related LOS. 
Use this workbook to test your understanding of the basic concepts covered in the CFA Readings and 
identify your strengths and weaknesses. Then you can move on to more advanced study materials to 
sharpen your weakest knowledge areas.  
This book is divided into Study Sessions (1 – 18) that cover the 76 Learning Outcome Statements and 
the  associated  Assigned  Readings.  Appendix  A  (Exhibits  1  –  4),  is  a  collection  of  exhibits  and  flow 
charts  for  condensed  reference  and  review,  including  examples  of  accounting  statements,  puts  and 
calls, PE breakdown, and financial ratios.   

The 18 2008 CFA Level I Study Sessions breakout is as follows:
Ethical and Professional Standards
1.

Study Session 1: Ethical and Professional Standards 

Investment Tools
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

Study Session 2. Quantitative Methods: Basic Concepts 
Study Session 3. Quantitative Methods: Application 
Study Session 4. Economics: Microeconomic Analysis 
Study Session 5. Economics: Market Structure and Macroeconomic Analysis  
Study Session 6. Economics: Monetary and Fiscal Economics 
Study Session 7. Financial Statement Analysis: Introduction  
Study Session 8. Financial Statement Analysis: Income Statement, Balance Sheet, Cash 
Study Session 9. Financial Statement Analysis: Inventories, Assets, Taxes, and Debt  
Study Session 10. Financial Statement Analysis: Techniques, Apps, & International 
Study Session 11. Corporate Finance 

Portfolio Management
12. Study Session 12. Portfolio Management 

Asset Valuation
13.
14.
15.
16.
17.
18.

Study Session 13. Analysis of Equity Investments: Securities Markets 
Study Session 14. Analysis of Equity Investments: Industry and Company Analysis 
Study Session 15. Analysis of Fixed Income Investments: Basic Concepts 
Study Session 16. Analysis of Fixed Income Investments: Analysis and Valuation 
Study Session 17. Derivative Investments 
Study Session 18. Alternative Investments Equity Investments: Securities Markets 

 


    

Online Information:
1. What is CFA Institute
http://www.cfainstitute.org/aboutus/index.html
2. CFA Program:

http://www.cfainstitute.org/cfaprogram

3. The Code of Ethics (Full Text)

http://www.cfainstitute.org/centre/ethics/code/

The Standards of Professional Conduct
Standard I: Fundamental Responsibilities
Standard II: Relationships with and Responsibilities to the Profession
Standard III: Relationships with and Responsibilities to the Employer
Standard IV: Relationships with and Responsibilities to Clients and Prospects
Standard V: Relationships with and Responsibilities to the Public
4. Why The CFA Designation Matters to You: Individual Investor FAQ
http://www.cfainstitute.org/aboutus/investors/articles/cfamatters.html
5. Soft Dollar Standards

http://www.cfainstitute.org/centre/ethics/softdollar/

6. CFA Institute-PPSTM AIMR Performance Presentation Standards
http://www.cfapubs.org/doi/ref/10.2469/faj.v57.n2.2433
7. Global Investment Performance Standards

http://www.cfainstitute.org/centre/ips/

Click the picture and link to a free CFA Candidates online glossary.

 


    

List of Chapters
Study Session 01:
Ethical and Professional Standards:
Study session 02:
Quantitative Methods:
Study Session 03:
Quantitative Methods:
Study Session 4:
Introduction
Study Session 04:
Economics:
Study Session 05:
Economics:
Study Session 06:
Economics:
Study Session 7:
Introduction
Study Session 07:
Financial Statement Analysis:
Study Session 08:
Financial Statement Analysis:
Study Session 09:
Financial Statement Analysis:
Study Session 10:
Financial Statement Analysis:
Study Session 11:
Corporate Finance:
Study Session 12:
Portfolio Management:
Study Session 13:
Equity Investments:
Study Session 14:
Equity Investments:
Study Session 15:
Fixed Income Investments:
Study Session 16:
Fixed Income Investments:
Study Session 17:
Derivative Investments:
Study Session 18:
Alternative Investments:
Terminology:
Appendix A:
Download Instructions

14
34
60
84
112
136
160
184
198
222
248
274
300
330
354
378
402
426
450
474
501
503
526

With the purchase of this book you get FREE Author Collaberation:

Now that you have purchased this product you have access to the Instructors/Authors that authored 
this book. Send you questions to us and we will answer them for you.  
 

 


Table of Contents   IX 

Table of Contents
About the Book:........................................................................................................................... VI
Online Information:..................................................................................................................... VII

Study Session 01:

Ethical and Professional Standards:

14

Reading 1: Code of Ethics and Standards of Professional Conduct ..........................................14
Reading 2: “Guidance” for Standards I–VII.................................................................................14
Reading 3: Introduction to the Global Investment Performance Standards (GIPS) ...................14
Reading 4: Global Investment Performance Standards (GIPS) .................................................14

Study session 02:

Quantitative Methods:

34

Basic Concepts ................................................................................................................................34
Reading 5: The Time Value of Money ........................................................................................34
Reading 6: Discounted Cash Flow Applications .........................................................................34
Reading 7: Statistical Concepts and Market Returns .................................................................34
Reading 8: Probability Concepts.................................................................................................34

Study Session 03:

Quantitative Methods:

60

Application .......................................................................................................................................60
Reading 9: Common Probability Distributions ............................................................................60
Reading 10: Sampling and Estimation........................................................................................60
Reading 11: Hypothesis Testing .................................................................................................60
Reading 12: Technical Analysis ..................................................................................................60

Study Session 4:

Introduction

84

Introductory Readings......................................................................................................................84
Supply, Demand, and the Market Process CH 5.............................................................................84
Introduction..................................................................................................................................84
Consumer choice and the Law of Demand.................................................................................85
Producer choice and the Law of Supply .....................................................................................85
Price changes and demand and supply......................................................................................86
Shifts in demand .........................................................................................................................87
Shifts in supply ............................................................................................................................88
Impact of changes in demand and supply ..................................................................................88
Supply and Demand: Applications and Extensions CH 4................................................................90
Introduction..................................................................................................................................90
Resources ...................................................................................................................................90
Elasticity and the incidence of tax ...............................................................................................91
Taking the Nation’s Economic Pulse CH 7 ......................................................................................92

 


X   Table of Contents 
Introduction ................................................................................................................................. 92
Gross domestic product.............................................................................................................. 92
Working with Our Basic Aggregate Demand/ Aggregate Supply Model CH 10.............................. 96
Introduction ................................................................................................................................. 96
Aggregate demand ..................................................................................................................... 96
Keynesian Foundations of Modern Macroeconomics CH 11........................................................ 100
Introduction ............................................................................................................................... 100
Keynesian economics............................................................................................................... 100
Introductory Readings Concept Check Questions ............................................................... 104
Introductory Readings Concept Check Answers.................................................................. 108

Study Session 04:

Economics:

112

Microeconomic Analysis................................................................................................................ 112
Reading 13: Elasticity ............................................................................................................... 112
Reading 14: Efficiency and Equity............................................................................................ 112
Reading 15: Markets in Action.................................................................................................. 112
Reading 16: Organizing Production.......................................................................................... 112
Reading 17: Output and Costs ................................................................................................. 112

Study Session 05:

Economics:

136

Market Structure and Macroeconomic Analysis............................................................................ 136
Reading 18: Perfect Competition.............................................................................................. 136
Reading 19: Monopoly.............................................................................................................. 136
Reading 20: Monopolistic Competition and Oligopoly.............................................................. 136
Reading 21: Demand and Supply in Factor Markets................................................................ 136
Reading 22: Monitoring Cycles, Jobs, and the Price Level ...................................................... 136
Reading 23: Aggregate Supply and Aggregate Demand ......................................................... 136

Study Session 06:

Economics:

160

Monetary and Fiscal Economics ................................................................................................... 160
Reading 24: Money, Banks, and the Federal Reserve............................................................. 160
Reading 25: Money, Interest, Real GDP, and the Price Level ................................................. 160
Reading 26: Inflation................................................................................................................. 160
Reading 27: Fiscal Policy ......................................................................................................... 160
Reading 28: Monetary Policy.................................................................................................... 160

Study Session 7:

Introduction

184

Introductory Readings ................................................................................................................... 184
Measuring Business Income ......................................................................................................... 184
Introduction ............................................................................................................................... 184

 


Table of Contents   XI 
Accounting methods..................................................................................................................184
Financial Reporting and Analysis ..................................................................................................185
Introduction................................................................................................................................185
Balance Sheet ...........................................................................................................................185
Income statement......................................................................................................................186
Inventories .....................................................................................................................................187
Introduction................................................................................................................................187
Inventory....................................................................................................................................187
Inventory cost ............................................................................................................................187
Effect of inventory accounting method......................................................................................188
Current Liabilities and the Time Value of Money...........................................................................190
Introduction................................................................................................................................190
Liabilities....................................................................................................................................190
Contributed Capital ........................................................................................................................191
Introduction................................................................................................................................191
Contributed capital ....................................................................................................................191
Accounting for dividends ...........................................................................................................191
Common stock ..........................................................................................................................191
Preferred stock ..........................................................................................................................191
Stock issuance ..........................................................................................................................192
Treasury stock...........................................................................................................................192
The Corporate Income Statement and the Statement of Stockholders’ Equity .............................192
Introduction................................................................................................................................192
Retained earnings .....................................................................................................................192
Accounting for stock dividends and stock splits........................................................................192
Introduction
Concept Check Questions................................................................................193
Introduction
Concept Check Answers ..................................................................................195

Study Session 07:

Financial Statement Analysis:

198

An Introduction...............................................................................................................................198
Reading 29: Financial Statement Analysis: An Introduction .....................................................198
Reading 30: Financial Reporting Mechanics ............................................................................198
Reading 31: Financial Reporting Standards .............................................................................198

Study Session 08:

Financial Statement Analysis:

222

The Income Statement, Balance Sheet, and Cash Flow Statement .............................................222
Reading 32: Understanding the Income Statement ..................................................................222
Reading 33: Understanding the Balance Sheet........................................................................222

 


XII   Table of Contents 
Reading 34: Understanding the Cash Flow Statement ............................................................ 222

Study Session 09:

Financial Statement Analysis:

248

Inventories, Long-Term Assets, Deferred Taxes, and On- and Off-Balance Sheet Debt ............. 248
Reading 35: Analysis of Inventories ......................................................................................... 248
Reading 36: Analysis of Long-Lived Assets: ............................................................................ 248
Part I—The Capitalization Decision.......................................................................................... 248
Reading 37: Analysis of Long-Lived Assets: ............................................................................ 248
Part II—Analysis of Depreciation and Impairment.................................................................... 248
Reading 38: Analysis of Income Taxes .................................................................................... 248
Reading 39: Analysis of Financing Liabilities ........................................................................... 248
Reading 40: Leases and Off-Balance-Sheet Debt ................................................................... 248

Study Session 10:

Financial Statement Analysis:

274

Techniques, Applications, and International Standards Convergence ......................................... 274
Reading 41: Financial Analysis Techniques............................................................................. 274
Reading 42: Financial Statement Analysis: Applications ......................................................... 274
Reading 43: International Standards Convergence ................................................................. 274

Study Session 11:

Corporate Finance:

300

Reading 44: Capital Budgeting ................................................................................................. 300
Reading 45: Cost of Capital...................................................................................................... 300
Reading 46: Working Capital Management.............................................................................. 300
Reading 47: Financial Statement Analysis ............................................................................... 300
Reading 48: The Corporate Governance of Listed Companies: .............................................. 300
A Manual for Investors.............................................................................................................. 300

Study Session 12:

Portfolio Management:

330

Reading 49: The Asset Allocation Decision.............................................................................. 330
Reading 50: An Introduction to Portfolio Management............................................................. 330
Reading 51: An Introduction to Asset Pricing Models .............................................................. 330

Study Session 13:

Equity Investments:

354

Securities Markets ......................................................................................................................... 354
Reading 52: Organization and Functioning of Securities Markets ........................................... 354
Reading 53: Security-Market Indexes ...................................................................................... 354
Reading 54: Efficient Capital Markets ...................................................................................... 354
Reading 55: Market Efficiency and Anomalies ......................................................................... 354

Study Session 14:

Equity Investments:

378

Industry and Company Analysis.................................................................................................... 378
Reading 56: An Introduction to Security Valuation: Part I ........................................................ 378

 


Table of Contents   XIII 
Reading 57: Industry Analysis...................................................................................................378
Reading 58: Equity: Concepts and Techniques........................................................................378
Reading 59: Company Analysis and Stock Valuation...............................................................378
Reading 60: An Introduction to Security Valuation: Part II........................................................378
Reading 61: Introduction to Price Multiples ..............................................................................378

Study Session 15:

Fixed Income Investments:

402

Basic Concepts ..............................................................................................................................402
Reading 62: Features of Debt Securities ..................................................................................402
Reading 63: Risks Associated with Investing in Bonds ............................................................402
Reading 64: Overview of Bond Sectors and Instruments .........................................................402
Reading 65: Understanding Yield Spreads...............................................................................402
Reading 66: Monetary Policy in an Environment of Global Financial Markets .........................402

Study Session 16:

Fixed Income Investments:

426

Analysis and Valuation...................................................................................................................426
Reading 67: Introduction to the Valuation of Debt Securities ...................................................426
Reading 68: Yield Measures, Spot Rates, and Forward Rates ................................................426
Reading 69: Introduction to the Measurement of Interest Rate Risk ........................................426

Study Session 17:

Derivative Investments:

450

Reading 70: Derivative Markets and Instruments .....................................................................450
Reading 71: Forward Markets and Contracts ...........................................................................450
Reading 72: Futures Markets and Contracts ............................................................................450
Reading 73: Option Markets and Contracts..............................................................................450
Reading 74: Swap Markets and Contracts ...............................................................................450
Reading 75: Risk Management Applications of Option Strategies ...........................................450

Study Session 18:

Alternative Investments:

474

Reading 76: Alternative Investments ........................................................................................474

Terminology:
Appendix A:
Download Instructions

501
503
526

 

 


14   Study Session 01:  

Study Session 01: Ethical and Professional
Standards:
 
The  readings  in  this  study  session  present  a  framework  for  ethical  conduct  in  the  investment 
profession by focusing on the CFA Institute Code of Ethics and Standards of Professional Conduct as 
well as the Global Investment Performance Standards (GIPS®). 
The principles and guidance presented in the CFA Institute Standards of Practice Handbook (SOPH) 
form  the  basis  for  the  CFA  Institute  self‐regulatory  program  to  maintain  the  highest  professional 
standards  among  investment  practitioners.  “Guidance”  in  the  SOPH  addresses  the  practical 
application of the Code of Ethics and Standards of Professional Conduct. The guidance reviews the 
purpose  and  scope  of  each  standard,  presents  recommended  procedures  for  compliance,  and 
provides examples of the standard in practice. 
The  Global  Investment  Performance  Standards  (GIPS)  facilitate  efficient  comparison  of  investment 
performance  across  investment  managers  and  country  borders  by  prescribing  methodology  and 
standards  that  are  consistent  with  a  clear  and  honest  presentation  of  returns.  Having  a  global 
standard for reporting investment performance minimizes the potential for ambiguous or misleading 
presentations. 
 

Reading 1: Code of Ethics and Standards of Professional Conduct 
Reading 2: “Guidance” for Standards I–VII 
Reading 3: Introduction to the Global Investment Performance Standards (GIPS) 
Reading 4: Global Investment Performance Standards (GIPS) 
 
 

 


Ethical and Professional Standards   1 
1.  Jason Vasco, CFA, is the director for a major Talia‐owned investment management firm branch in 
Rasen. Talia is known as the world’s centre of investment management with securities laws stricter 
than  the  CFA  Institute  Code  and  Standards,  and  Vasco  is  governed  by  Talia’s  laws.  In  Rasen,  an 
emerging  market,  the  local  securities  laws  and  regulations  are  lenient.  They  are  very  vague  in  the 
definition of insider trading and have no provision regulating soft‐dollars. Which of the following is 
most accurate? 
A. 

Vasco must comply with Talia’s law.  

B. 
Vasco only has to comply with Rasen’s law and therefore can take the fullest advantage 
of soft‐dollar arrangements. 
C.  Vasco should not worry about Rasen’s law, it is an early stage emerging market and the 
law enforcement will be lax, if any at all. 
D.  As a CFA Institute member, Vasco must only comply with the Code and Standards 
regarding insider trading and soft‐dollar arrangements. 
 
 
 
2.  As an expression of gratitude, Tracy Blanc, CFA, a portfolio manager, is invited to spend a three‐
week vacation valued at $10,000 with her spouse in a luxurious resort owned by a wealthy private 
client after she skillfully protected the value of the client’s capital during a severe market downturn. 
The private client is a fee‐paying client of Blanc’s firm. According to Standard IV(B) – Disclosure of 
Additional Compensation Arrangements: 
A. 

Blanc must refuse the invitation as it may jeopardize her investment judgment. 

B. 
Blanc is recommended to donate the monetary value of the vacation to a charity of her 
choice. 
C.  Blanc may accept such an invitation as long as she reports it in writing to her employer 
and gains their approval. 
D.  Blanc may accept the invitation if she reports it in writing to CFA Institute citing the full 
monetary value of the vacation. 
 

 


2   Study Session 01:  
1.  Jason Vasco, CFA, is the director for a major Talia‐owned investment management firm branch in 
Rasen. Talia is known as the world’s centre of investment management with securities laws stricter 
than  the  CFA  Institute  Code  and  Standards,  and  Vasco  is  governed  by  Talia’s  laws.  In  Rasen,  an 
emerging  market,  the  local  securities  laws  and  regulations  are  lenient.  They  are  very  vague  in  the 
definition of insider trading and have no provision regulating soft‐dollars. Which of the following is 
most accurate? 
A.
Vasco must comply with Talia’s law.
B.
Vasco only has to comply with Rasen’s law and therefore can take the fullest advantage of softdollar arrangements.
C.
Vasco should not worry about Rasen’s law, it is an early stage emerging market and the law
enforcement will be lax, if any at all.
D.
As a CFA Institute member, Vasco must only comply with the Code and Standards regarding
insider trading and soft-dollar arrangements.
Correct Answer: 



LOS: Reading 2‐b 

Standard I (A) stipulates that in foreign jurisdictions members must comply with the stricter of the
applicable laws and the Code of Standards, in this case Talia’s law is the strictest.
Reference: CFA® Program Curriculum, Volume 1, pp. 15‐17. 
 
 
2.  As an expression of gratitude, Tracy Blanc, CFA, a portfolio manager, is invited to spend a three‐
week vacation valued at $10,000 with her spouse in a luxurious resort owned by a wealthy private 
client after she skillfully protected the value of the client’s capital during a severe market downturn. 
The private client is a fee‐paying client of Blanc’s firm. According to Standard IV(B) – Disclosure of 
Additional Compensation Arrangements: 
A.
Blanc must refuse the invitation as it may jeopardize her investment judgment.
B.
Blanc is recommended to donate the monetary value of the vacation to a charity of her choice.
C.
Blanc may accept such an invitation as long as she reports it in writing to her employer and gains
their approval.
D.
Blanc may accept the invitation if she reports it in writing to CFA Institute citing the full monetary
value of the vacation.
Correct Answer: 

C ...................................................................................................... Reading 2‐b 

Blanc needs to report in writing the additional compensation so her supervisor and the firm can assess
whether it is potentially a conflict of interest. If there is no objection she is free to accept the invitation.
Reference: CFA® Program Curriculum, Volume 1, pp. 75‐76. 

 


Ethical and Professional Standards   3 
3.  Kevin  Dudman,  CFA,  has  just  been  offered  an  exciting  new  position  with  Walton  Asset 
Management and decides that he will resign from his current position with Trust Asset Management. 
Before he resigns he decides to ensure that he uses some of the skills and materials he has developed 
at Trust Asset Management. He is least likely to violate the Code and Standards, if he takes:  
A.
stock market analysis prepared by Dudman when he was working at Trust Asset
Management.
B.
internal contact information on Trust Asset Management‘s major clients which is available
from other eternal sources.
C.
computer models developed to identify mispriced securities developed by Dudman and a
colleague at Trust Asset Management.
D.
experience in pricing unlisted securities which he gained while attending training courses
which were paid for by Trust Asset Management.
 
 
 
4.  Joseph  Morgon,  CFA,  is  a  research  analyst  covering  the  Bourgogne  Vineyard  Corporation. 
Morgon’s parents bought $50 worth of Bourgogne Vineyard Corporation shares for his two‐year old 
son on his birthday. Under Standard VI(A), Disclosure of Conflicts, Morgon: 
A.

must file a report with the SEC.

B.

must sell the shares immediately.

C.

must disclose the ownership of the shares by a member of his immediate family.

D.
does not need to disclose the fact that his son owns the shares of Bourgogne Vineyard
Corporation.

 


4   Study Session 01:  
3.  Kevin  Dudman,  CFA,  has  just  been  offered  an  exciting  new  position  with  Walton  Asset 
Management and decides that he will resign from his current position with Trust Asset Management. 
Before he resigns he decides to ensure that he uses some of the skills and materials he has developed 
at Trust Asset Management. He is least likely to violate the Code and Standards, if he takes:  
A.
stock market analysis prepared by Dudman when he was working at Trust Asset Management.
B.
internal contact information on Trust Asset Management‘s major clients which is available from
other eternal sources.
C.
computer models developed to identify mispriced securities developed by Dudman and a colleague
at Trust Asset Management.
D.
experience in pricing unlisted securities which he gained while attending training courses which
were paid for by Trust Asset Management.
Correct Answer: 

D ........................................................................................... LOS: Reading  2‐b 

Models and research which he worked on when employed by Trust Asset Management belong to Trust
Asset Management. Client contact details should not be taken from his employer, although he is not
prohibited from collecting client information from outside sources. However skills and experience gained
at Trust Asset Management can be used in his new job, so D is the correct answer.
Reference: CFA® Program Curriculum, Volume 1, pp. 69‐74. 
 
 
 
4.  Joseph  Morgon,  CFA,  is  a  research  analyst  covering  the  Bourgogne  Vineyard  Corporation. 
Morgon’s parents bought $50 worth of Bourgogne Vineyard Corporation shares for his two‐year old 
son on his birthday. Under Standard VI(A), Disclosure of Conflicts, Morgon: 
A.
B.
C.
D.

must file a report with the SEC.
must sell the shares immediately.
must disclose the ownership of the shares by a member of his immediate family.
does not need to disclose the fact that his son owns the shares of Bourgogne Vineyard Corporation.

Correct Answer: 

D ........................................................................................... LOS: Reading  2‐b 

The share ownership is not likely to be material and therefore will not reasonably affect Morgon’s ability to
make unbiased and objective recommendation according to Standard VI(A) Disclosure of Conflicts.
Reference: CFA® Program Curriculum, Volume 1, pp. 89‐94. 

 


Ethical and Professional Standards   5 
5.  Wimpy  Greenback,  CFA,  is  the  research  analyst  responsible  for  following  Brown  Appliances 
Company.  This  analysis  suggests  the  stock  should be  rated  a  “sell”  because  the  market  outlook  for 
the firm’s new products is bleak compared with that of the closest competition. Greenback lives on 
the  same  street  as  the  CFO  of  Brown  Appliances.  During  a  recent  neighborhood  gathering, 
Greenback’s wife overheard the wife of the Chief Financial Officer of Brown Appliances complaining 
that  her  husband  had  been  working  late  due  to  a  hostile  takeover  threat  from  a  foreign  appliances 
group.  This  fact  has  not  yet  been  made  public  by  Brown  Appliances.  Upon  returning  to  his  office, 
Greenback  released  a  strong  “buy”  recommendation  to  the  public  based  on  this  new  information. 
Greenback: 
A. 

was in full compliance with the Code and Standards. 

B. 
did not violate the Code and Standards because he used mosaic theory to arrive at his 
recommendation. 
C.  violated the Code and Standards by failing to distinguish between facts and opinions in 
his recommendation. 
D.  violated the Code and Standards because he did not have a reasonable and adequate 
basis for his recommendation. 

 


6   Study Session 01:  
5.  Wimpy  Greenback,  CFA,  is  the  research  analyst  responsible  for  following  Brown  Appliances 
Company.  This  analysis  suggests  the  stock  should be  rated  a  “sell”  because  the  market  outlook  for 
the firm’s new products is bleak compared with that of the closest competition. Greenback lives on 
the  same  street  as  the  CFO  of  Brown  Appliances.  During  a  recent  neighborhood  gathering, 
Greenback’s wife overheard the wife of the Chief Financial Officer of Brown Appliances complaining 
that  her  husband  had  been  working  late  due  to  a  hostile  takeover  threat  from  a  foreign  appliances 
group.  This  fact  has  not  yet  been  made  public  by  Brown  Appliances.  Upon  returning  to  his  office, 
Greenback  released  a  strong  “buy”  recommendation  to  the  public  based  on  this  new  information. 
Greenback: 
A.
was in full compliance with the Code and Standards.
B.
did not violate the Code and Standards because he used mosaic theory to arrive at his
recommendation.
C.
violated the Code and Standards by failing to distinguish between facts and opinions in his
recommendation.
D.
violated the Code and Standards because he did not have a reasonable and adequate basis for his
recommendation.
Correct Answer: 

D ........................................................................................... LOS: Reading  2‐b 

Standard V(A) Diligence and Reasonable Basis, states that members must have a reasonable and adequate
basis for a recommendation. Greenback should have reinvestigated the company’s situation and not only
relied on unofficial information. This may well be a misappropriation of material nonpublic information as
stated in Standard V(A) Prohibition against Use of Material Nonpublic Information, if a tender offer to
Brown Appliances follows.
Reference: CFA® Program Curriculum, Volume 1, pp. 80‐84. 

 


Ethical and Professional Standards   7 
6.  The fixed‐income corporate finance department of Golden Brothers, an investment banking firm, 
has  decided  to  compete  for  the  advisory  and  underwriting  bond  offering  of  Kia  Telcom,  a  ‘hot’ 
telecommunications  company.  The  firm’s  equity  brokerage  unit  is  about  to  publish  a  “sell” 
recommendation on Kia Telcom due to an unexpected announcement of cost overruns. The head of 
fixed‐income  investment  banking  has  asked  the  head  of  the  equity  brokerage  unit  to  change  the 
recommendation from “sell” to “buy” before distributing the research report to clients. According to 
the Code and Standards, the best course of action for the equity brokerage unit is to: 
A.  place Kia Telcom on a restricted list and publish only factual information about the 
company. 
B. 
immediately re‐rate the stock to a “buy” since the firm’s overall interest supersedes that 
of the client. 
C.  assign a more senior analyst to decide if the stock deserves a higher rating for the sake of 
objectivity since less senior analysts may err in judgment. 
D.  increase the rating by no more than one increment (in this case, to a “hold” 
recommendation) since little harm is done by being a bit more positive, while the firm’s overall 
interest is served. 
 
 
 
7.  Fiona Griffiths, CFA, is an equity sales manager at a London‐based Tiger Securities branch in an 
emerging market. Initial public offerings are often oversubscribed making it difficult to ensure a fair 
allocation.  Griffiths  understands  the  local  environment  so  she  is  able  to  influence  the  allocation 
process so that she can personally subscribe to the maximum she can afford and then allocate the rest 
to her clients. Her clients never complain because they have almost always profited from investing in 
the  emerging  market  over  the  last  couple  of  years.  Which  of  the  following  describes  Griffiths’ 
situation? 
A.

Griffiths is in compliance with the Code and Standards since her clients are satisfied.

B.

Griffiths violates the Code and Standards due to the priority she gives to transactions.

C.

Griffiths violates the Code and Standards since she lacks independence and objectivity.

D.
Griffiths violates the Code and Standards since she does not maintain client,
confidentiality.

 


8   Study Session 01:  
6.  The fixed‐income corporate finance department of Golden Brothers, an investment banking firm, 
has  decided  to  compete  for  the  advisory  and  underwriting  bond  offering  of  Kia  Telcom,  a  ‘hot’ 
telecommunications  company.  The  firm’s  equity  brokerage  unit  is  about  to  publish  a  “sell” 
recommendation on Kia Telcom due to an unexpected announcement of cost overruns. The head of 
fixed‐income  investment  banking  has  asked  the  head  of  the  equity  brokerage  unit  to  change  the 
recommendation from “sell” to “buy” before distributing the research report to clients. According to 
the Code and Standards, the best course of action for the equity brokerage unit is to: 
A.
place Kia Telcom on a restricted list and publish only factual information about the company.
B.
immediately re-rate the stock to a “buy” since the firm’s overall interest supersedes that of the
client.
C.
assign a more senior analyst to decide if the stock deserves a higher rating for the sake of objectivity
since less senior analysts may err in judgment.
D.
increase the rating by no more than one increment (in this case, to a “hold” recommendation) since
little harm is done by being a bit more positive, while the firm’s overall interest is served.
Correct Answer: 

A ............................................................................................LOS: Reading  2‐a 

In this case, any action to accommodate the interest of the investment banking department that may
compromise the independence and objectivity of the brokerage research efforts can violate Standard I(B)
and the Code of Ethics.
Reference: CFA® Program Curriculum, Volume 1, pp. 21‐25. 
 
7.  Fiona Griffiths, CFA, is an equity sales manager at a London‐based Tiger Securities branch in an 
emerging market. Initial public offerings are often oversubscribed making it difficult to ensure a fair 
allocation.  Griffiths  understands  the  local  environment  so  she  is  able  to  influence  the  allocation 
process so that she can personally subscribe to the maximum she can afford and then allocate the rest 
to her clients. Her clients never complain because they have almost always profited from investing in 
the  emerging  market  over  the  last  couple  of  years.  Which  of  the  following  describes  Griffiths’ 
situation? 
A.
B.
C.
D.

Griffiths is in compliance with the Code and Standards since her clients are satisfied.
Griffiths violates the Code and Standards due to the priority she gives to transactions.
Griffiths violates the Code and Standards since she lacks independence and objectivity.
Griffiths violates the Code and Standards since she does not maintain client, confidentiality.

Correct Answer: 

B............................................................................................ LOS: Reading  2‐b 

Griffiths is in violation as Standard VI(B) Priority of Transactions, since she puts her personal investment
ahead of her clients, regardless of whether the clients are pleased with her services.
Reference: CFA® Program Curriculum, Volume 1, pp. 94‐99. 

 


Ethical and Professional Standards   9 
8.  Victoria  Anderson,  CFA,  works  for  Pluto  Capital,  a  newly  established  investment  counseling 
firm.  The  founding  partners  of  Pluto  Capital  came  from  Vulcan  Investments  which  was  recently 
taken over by a large financial services group. Jonathan Beecham, a prospective client of the firm, is 
meeting with Anderson for the first time. Beecham has been a client of Vulcan Investments for years, 
but is now considering switching his account to Pluto Capital because he has been disappointed by 
Vulcan’s  underperformance  following  the  takeover.  At  the  beginning  of  their  meeting,  Anderson 
sympathized  with  his  situation,  then  immediately  explains  to  Beecham  that  she  has  discovered  a 
highly undervalued stock that offers large potential gains. Anderson then promises Beecham that she 
can  buy  the  stock  for  his  account  at  the  current  price  if  he  switches  the  account  within  48  hours. 
Anderson’s  actions  violated  the  Code  and  Standards.  Which  of  the  following  statements  best 
describes the action Anderson should have taken? Anderson should have: 
A.  elaborated on the technical features of Pluto’s standard valuation method used to 
identify the undervaluation. 
B. 
avoided the meeting with Beecham in the first place because the founding partners of 
Pluto came from Vulcan. 
C.  given Beecham a longer time period to take advantage of the offer price when switching 
his account to Pluto. 
D.  determined Beecham’s investment needs, objectives, and tolerance for risk before making 
any investment recommendation. 

 


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