Level I of the CFA® Exam

Mock Questions with Answers - Mock Exam 2023 #4 - First

Session (Ethical and Professional Standards, Quantitative
Methods, Economics & Financial Statement Analysis)

Offered by AnalystPrep

Last Updated: Sep 5, 2023

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Q.1 Singh, an analyst at Delta Advisory Firm, has prepared a regression analysis comparing the price
of gold to the average cost of purchases of finished gold jewelry of a retailer of fine jewelry and
watches. T he regression results are shown in Exhibit 1 below.

Exhibit 1: 1983-2013 Annual Data

(31 Observations)

Variable Coefficient SE of Coefficient

Intercept 11.06 7.29
Cost of gold 2.897 0.615
*SEE=117.8

Singh commented “We may have a problem with parameter instability if the relationship between
gold prices and jewelry costs has changed over the past 30 years.” Baker computes the test statistic
and concluded that “We fail to reject the null hypothesis that the slope coefficient is equal to 4.0 at
the 5% significance level.” Are Singh (Statement 1) and Baker (Statement 2) correct or incorrect
regarding the usefulness of regression results described in Exhibit 1 and the value of the slope
coefficient? Use the excerpt of the t-table below.

df p = 0.10 p = 0.05 p = 0.025 p = 0.01 p = 0.005

⋮
25 1.316 1.708 2.060 2.485 2.787
26 1.315 1.706 2.056 2.479 2.779
27 1.314 1.703 2.052 2.473 2.771
28 1.313 1.701 2.048 2.467 2.763
29 1.311 1.699 2.045 2.462 2.756
30 1.310 1.697 2.042 2.457 2.750
⋮

A. Both Singh and Baker: Correct.

B. Both Singh and Baker: Incorrect.

C. Singh: Incorrect; Baker: Correct.

Both Singh and Baker's statements are correct. T he data for regression analysis pertains to a period

of more than 30 years, and during this period, the relationship between gold prices and jewelry costs

could have changed. T his would create parameter instability a regression limitation.

Test statistic is given by:

^ −b
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 ^
b 1 − b1 2.987 − 4.0
= = −1.793
S^ 0.615
b1

T he critical value (t-value at 29 dfs and alpha = 0.025) is 2.045.

Our test statistic lies within the non-rejection region (±2.045). We, therefore, have insufficient

evidence to reject the null hypothesis that the slope coefficient is equal to 4.

CFA Level 1, Vol ume 1, Readi ng 7 – Introducti on to Li near Regressi on, LOS 7f:

formul ate a nul l and an al ternati ve hypothesi s about a popul ati on val ue of a regressi on

coeffi ci ent, and determi ne whether the nul l hypothesi s i s rej ected at a gi ven l evel of

si gni fi cance.

Q.2 Yard Inc. maintains a defined contribution plan permitting employees to make annual
contributions of $35,000 into the plan. To generate the required annual contribution, several of
Yard’s employees invest $35,000 per year in an exchange-traded fund that will pay an annual return of
8% for the next 35 years. If the plan generates its promised return, the amount of money each
employee will have for retirement after making the last payment is closest to:

A. $ 0.8 million.

B. $6.0 million.

C. $6.5 million.

T he correct answer is B.

N = 35;I/Y = 8;NPV = 0; PMT = −35, 000;

CPT =>;FV = 6, 031, 088.13

CFA Level 1, Vol ume 1, Readi ng 6 – The Ti me Val ue of Money, LOS 6e: Cal cul ate and

i nterpret the future val ue (FV) and present val ue (PV) of a si ngl e sum of money, an

ordi nary annui ty, an annui ty due, a perpetui ty (PV onl y), and a seri es of unequal cash

fl ows.

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Q.3 Lifeline Inc. is a manufacturer of swimming safety gear. Lifeline intends to expand production by
purchasing and converting vacant property for factory use. Total purchase costs will amount to
$350,000. Lifeline will make a down payment of $50,000 and intends to finance the remainder using a
20-year loan with quarterly payments. T he bank has quoted an interest rate of 6% with quarterly
compounding, and the first loan payment is due one year from the present day. Each quarterly
payment paid by Lifeline Inc. to its bank is closest to:

A. $4,568

B. $6,464

C. $7,542

T he Correct Answer is B.

Using the BAII Plus Pro calculator:

N= 20 × 4 = 80;I/Y = 64 = 1.5;PV = 300,000; FV = 0; CPT =>;PMT = −6, 464.50

CFA Level 1, Vol ume 1, Readi ng 1– The Ti me Val ue of Money, LOS 1e: Cal cul ate and

i nterpret the future val ue (FV) and present val ue (PV) of a si ngl e sum of money, an

ordi nary annui ty, an annui ty due, perpetui ty (PV onl y), and a seri es of unequal cash

fl ows.

Q.4 Martin Kallos is an equity market analyst who forecasts that the market price of Nathan Inc.’s
stock will increase over the next quarter. Kallos predicts that the market price will increase by 2%
in the first month with a probability of 0.35, followed by 3% with a probability of 0.15, over the
remaining three months. T he second price increase will only occur if the first materializes.T he
probability that the stock price will increase by 3%, given that it has increased by 2%, is closest to:

A. 0.052

B. 0.350

C. 0.429

T he correct answer is C.

If the price increases by 3%, it is certain that the price has already increased by 2%. T herefore, P

(Price increases by 2%|Price increases by 3%) = 1.

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T he joint probability of the occurrence of both events is expressed as:

P(Prices increases by 3% and price increases by 2%) = P (Price increases by 2%|Price increases by 3%)P(Price

P(Price increases by 3% and price increases by 2%) = 1(0.15) = 0.15

T he joint probability can also be expressed as:

P(Prices increases by 3% and price increases by 2%) = P (Price increases by 3%|Price increases by 2%)P(Price

Price increases by 3%
0.15 = P( )(0.35)
Price increases by 2%

Price increases by 3%
=( ) = 0.4286
Price increases by 2%

A i s i ncorrect. It assumes the following calculations:

P(Price increases by 3\%, and price increases by 2%) = 0.15 × 0.35 = 0.052

B i s i ncorrect. It equates the market price will increase by 2% in the first month.

CFA Level 1, Vol ume 1, Readi ng 3- Probabi l i ty Concepts, LOS 3d: cal cul ate and

i nterpret an updated probabi l i ty usi ng Bayes’ formul a.

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Q.5 Which of the following assumptions most likely underlies technical analysis?

A. Market trends and patterns reflect rational human behavior.

B. Impact on market pricing is based on the collective sentiment of traders.

C. T rends and patterns are often unpredictable, giving an opportunity to earn abnormal
returns.

T he Correct Answer is B.

A key tenet of technical analysis is that the market reflects varied participants' collective knowledge

and sentiment and the amount of buying and selling in a particular security. T herefore, only those

buying and/or selling security will have an impact on price.

A i s i ncorrect. Technicians assume that market trends and patterns reflect irrational human

behavior.

C i s i ncorrect. Technicians believe that market trends and patterns tend to repeat themselves and

are somewhat predictable.

CFA Level 1, Vol ume 1, Readi ng 6 – Hypothesi s Testi ng, LOS 6a: Defi ne a hypothesi s,

descri be the steps of hypothesi s testi ng, and descri be and i nterpret the choi ce of the

nul l and al ternati ve hypotheses.

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Q.6 Recordia is a German seller of smart music players. Recordia’s monthly supply of music players
is given by the equation:

Qssp = −50.5 + 28.5P sp − 4.5W

where Qssp is the number of smart music players sold, P sp is the price of players sold in euros, and
W is the wage rate in euros paid by smart music player sellers to laborers. T he per-unit price of a
smart music player is €225 and the wage is €13.50. T here are currently five sellers producing smart
music players identical to Recordia. Based on the data provided, the slope of the aggregate market
supply curve is closest to:

A. 0.007

B. 0.014

C. 0.051

T he correct answer is A.

T he slope of the supply curve is the coefficient on Qsp in the inverse supply function. T he inverse

supply function is calculated below.

Holding W constant at 13.50 and inserting it in the supply function provided, the value of P sp needs to

be determined.

Qssp = 5[−50.5 + 28.5P sp − 4.5(13.5)] = −556.25 + 142.5P sp

Inverting the supply function, P s p = 3.904 + 0.007Qssp

CFA Level 1, Vol ume 2, Readi ng 10 – Aggregate Output, Pri ces, and Economi c Growth,

LOS 10g: expl ai n the aggregate suppl y curve i n the short and l ong run.

Q.7 T he table below illustrates economic data concerning Giyata (local currency, GT ), a developing
country in Africa:

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 (in million GT)
Domestic business investment in capital goods 45.7
Domestic business investment in inventories 23.6
Exports 12.2
Domestic business investment in owner-occupied housing (Imputed value) 21.0
Government spending on final goods and services 28.8
Transfer payments 8.9
Imports 10.5
Net tax revenue collections 14.2

T he GDP for Giyata, based on the expenditure approach, is closest to (in GT millions):

A. 99.8

B. 120.8

C. 143.9

T he correct answer is A.

All figures are in GT millions.

GDP = Consumer spending on final goods and services + Gross domestic private investment
+ Government spending on final goods and services + (Exports − Imports)

GDP = 45.7 + 23.6 + 28.8 + 21 + (12.2 − 10.5) = 120.8

T he gross domestic private investment includes business investment in capital goods and inventory

investment.

T ransfer payments are not included in government spending on final goods and services because they

are a monetary transfer by the government of tax revenue back to individuals with no corresponding

receipt of goods and services.

A i s i ncorrect. It assumes the following calculations:

GDP = 45.7 + 23.6 + 28.8 + (12.2 − 10.5) = 99.8

C i s i ncorrect. It includes the values for net tax revenue and transfer of payments in the

calculation as follows:

GDP = 45.7 + 23.6 + 28.8 + 21 + (12.2 − 10.5) + 8.9 + 14.2 = 143.9

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CFA Level 1, Vol ume 2, Readi ng 9 – Aggregate Output, Pri ces, and Economi c Growth,

LOS 9a: cal cul ate and expl ai n gross domesti c product (GDP) usi ng expendi ture and

i ncome approaches.

Q.8 A CFA candidate is asked two questions. T he probability that she gets the first question correct
is 0.4, and the probability that she gets the second question correct is 0.5. Given that the probability
that she gets both questions correct is 0.2, the probability that she gets either the first or the second
question correct is closest to;

A. 0.4

B. 0.7

C. 0.9

T he Correct Answer is B.

Let A = {gets first question right} and B = {gets second question right}

T herefore, P(A) = 0.4,P(B) = 0.5, and P(A ∩ B) = 0.2

We want to determine P(A ∪ B);

T he addition rule states that P(A ∪ B) = P(A) + P(B)– P(A ∩ B);

Hence, P(A ∪ B) = 0.4 + 0.5 − 0.2 = 0.7

A i s i ncorrect. It denotes the probability of the CFA candidate getting the first question correct.

C i s i ncorrect. It results from the following calculation;

P(A ∪ B) = P(A) + P(B)= 0.4+0.5=0.9

CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3e: Demonstrate the

appl i cati on of the mul ti pl i cati on and addi ti on rul es for probabi l i ty.

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Q.9 Veronica Rose borrowed $5,000 from Contra Bank. T he terms and conditions of the loan are
given in the following table:

Loan Short term

Amount $ 5 , 000
Tenure 3 years
Payment 3 equal payments
Rate 3%
Prepayment penalty $0

However, Rose decides to make a payment of $2,000 at the end of the 1st year. T he amount of each
payment required for the remaining 2 years to pay off the remains of the loan are closest to:

A. $1,646.22

B. $1,676.22

C. $1,686.22

T he correct answer is B.

T he payments required to be made by Rose so that the loan is completely paid off in three years can

be computed as under:

N = 3;I/Y = 3;FV = 0; PV = 5000;

CPT − >;PMT = $1, 767.65

T he amortization schedule of the loan is as follows:

Year Amount Rate Payment Interest Principal payment Principal Left

1 $ 5, 000.00 3% $ 1, 767.65 $ 150.00 $ 1, 617.65 $ 3, 382.35
2 $ 3, 382.35 3% $ 1, 767.65 $ 101.47 $ 1, 666.18 $ 1, 716.17
3 $ 1, 716.17 3% $ 1, 767.65 $ 51.49 $ 1, 716.17 0.00

However, since Rose has made a payment of $2,000 at the end of the 1st year:

Year Amount Rate Payment Interest Principal payment Principal Left

1 $ 5 , 000.00 3% $ 2 , 000.00 $ 150.00 $ 1 , 850.00 $ 3 , 150.00

At the end of the 1st year, Rose needs to pay $3,150 in two years. T he payment required to pay the

remains of the loan of $3,150 can be computed using the BAII Plus Pro calculator as follows:

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N = 2;I/Y = 3;FV = 0; PV = 3150

CPT − >;PMT = $1, 646.22

CFA Level 1, Vol ume 1, Readi ng 1– The Ti me Val ue of Money, LOS 1f: Demonstrate usi ng

a ti mel i ne i n model i ng and sol vi ng ti me val ue of money probl ems.

Q.10 Which of the following can most appropriately be categorized as continuous random variables?

I. Stock indices
II. T he weight of 20 CFA candidates
III. Biannual share dividends received over 10 years.
IV. T he time it takes to prepare for the CFA Level 1 exam
V. T he annual number of CFA exam candidates in the last 10 years

A. I and IV.

B. I, II and IV.

C. I, II, III, and V.

T he Correct Answer is B.

A continuous random variable is a variable that has infinite possible outcomes, even though lower and

upper bounds exist. It differs from a discrete random variable, which takes on only a countable

number of values.

For example, between 2433 and 2434, the S&P 500 index can take on 2433.00, 3433.23, 2433.89,

2433.07, etc.

On the other hand, the number of CFA candidates can only take on an integer/whole number value in

any given year.

CFA Level 1, Vol ume 1, Readi ng 4 – Common Probabi l i ty Di stri buti ons, LOS 4a: defi ne a

probabi l i ty di stri buti on and di sti ngui sh between di screte and conti nuous random

vari abl es and thei r probabi l i ty functi ons.

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Q.11 An investor consults an investment manager to advise him regarding a certain portfolio that
would give him at least a 7% return on his investment (threshold return). T he investment manager
presents three portfolios exhibited in the following table:

Portfolio A Portfolio B Portfolio C

Expected Return 19 % 23 % 36 %
Standard Deviation 14 % 26 % 39 %

Using the Safety-First ratio assumption, the portfolio that is the most suitable for the investor is:

A. Portfolio A.

B. Portfolio B.

C. Portfolio C.

T he correct answer is A.

As provided in the following table, the Safety-First ratio of Portfolio A is the highest so it has the

lowest probability of the portfolio returns falling below the

investor's threshold level of 7%. T he probability of N(-0.8571) is calculated using the cumulative

probabilities table.

Portfolio A Portfolio B Portfolio C

Expected Return 19 % 23 % 36 %
Standard Deviation 14 % 26 % 39 %
0. 19−0. 07 0. 23−0. 07 0. 36−0. 07
Safety First ratio 0. 14 = 0.8571 0. 26 = 0.6253 0. 39 = 0.7435

CFA Level 1, Vol ume 1, Readi ng 4 –Common Probabi l i ty Di stri buti ons, LOS 4k : Defi ne

shortfal l ri sk , cal cul ate the safety fi rst rati o, and sel ect an opti mum portfol i o usi ng

Roy's safety-fi rst cri teri on.

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Q.12 Suppose there is a 65% probability that the Gross Domestic Product (GDP) of T rivia Land will
grow this year. If the GDP grows, there is a 75% probability that the GDP will be $5.5 trillion and a
25% probability that the GDP will be $5.1 trillion. On the other hand, there is a 35% probability that
the GDP will fall, and if it falls, there is a 55% probability that the GDP will be $4.7 trillion and only a
45% probability that the GDP will be $4.0 trillion. Using the given assumptions, estimate the
unconditional probability that the expected GDP will be $4.0 trillion.

A. 15.75%

B. 35%

C. 45%

T he Correct Answer is A.

T here is only a 45% probability that the expected GDP will be $4.0 trillion, given that the GDP will

fall.

T herefore, the unconditional probability of GDP being $4.0 trillion = 35% × 45% = 0.1575.

B i s i ncorrect. It represents the probability that the GDP will fall.

C i s i ncorrect. It represents the probability that the GDP will be $4.0 trillion, given that the GDP

will fall.

CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3g: Cal cul ate and

i nterpret an uncondi ti onal probabi l i ty usi ng the total probabi l i ty rul e.

Q.13 A renowned economist has calculated that the Canadian economy will be in one of 3 possible
states in the coming year: Boom, Normal, or Slow. T he following table gives the returns of stocks A
and B under each economic state:

State Probability Return Return for

(state) for stock A stock B
Boom 40 % 12 % 18 %
Normal 35 % 10 % 15 %
Slow 25 % 8% 12 %

Compute the covariance of the returns for stocks A and B.

A. 0.0001734

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 B. 0.0003765

C. 0.103

T he correct answer is B.

First, you have to determine the expected return for every stock:

E(R A) = 0.4 × 0.12 + 0.35 × 0.1 + 0.25 × 0.08 = 0.103

E(R B) = 0.4 × 0.18 + 0.35 × 0.15 + 0.25 × 0.12 = 0.1545

T hen,

Cov(A, B) = ∑(P(s) × [R A − E(R A)] × [R B − E(R B )])

Boom = 0.4 × [0.12– 0.103] × [0.18– 0.1545] = 0.0001734

Normal = 0.35 × [0.1– 0.103] × [0.15– 0.1545] = 0.000004725

Slow = 0.25 × [0.08– 0.103] × [0.12– 0.1545] = 0.0001984

Cov(A,B) = 0.0001734 + 0.000004725 + 0.0001984 = 0.0003765

A i s i ncorrect. It indicates the covariance for the returns in Boom State only.

C i s i ncorrect. It's the resulting expected returns of Stock A.

CFA Level 1, Vol ume 1, Study Sessi on 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3k :

Cal cul ate and i nterpret the expected val ue, vari ance, standard devi ati on, covari ances,

and correl ati ons of portfol i o returns.

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Q.14 Zeng is developing a regression model to predict stock market returns using the GDP growth
rate. He considers quarterly returns of the S&P 500 (S&P) as a proxy for stock market returns and
quarterly changes in GDP as GDP growth rate (GDP Growth). T he linear regression model is as
follows:

S&P = β0 + β1(GDP Growth) + ϵ

Zeng develops the following regression statistics based on the last 10 years of quarterly data
pertaining to the S&P 500 and GDP.

Exhibit 1: Regression Statistics

Coefficient Standard Error
Intercept 0.5125 0.0366
Slope 3.8426 0.0534

T he most appropriate interpretation of the slope coefficient is:

A. 3.8426% change in GDP growth rate per one per cent change in S&P 500.

B. 3.8426 units of change in GDP growth rate per unit change in S&P 500 return.

C. 3.8426 units of change in S&P 500 return per unit change in GDP growth rate.

T he correct answer is C.

T he slope coefficient is 3.8426. In other words, the dependent variable will change by 3.8426 units

for every one unit change in the independent variable. Here, the dependent variable is S&P 500

returns, and the independent variable is the GDP growth rate. Hence, S&P 500 return will change by

3.8426 units for every one unit change in GDP growth rate.

CFA Level 1, Vol ume 1, Readi ng 7 – Introducti on to Li near Regressi on, LOS 7b: Descri be

the l east squares cri teri on, how i t i s used to esti mate regressi on coeffi ci ents, and

thei r i nterpretati on.

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Q.15 T wo stocks, X and Y, correlate 0.50. Stock Y's return has a standard deviation of 0.26. Given
that the covariance between X and Y is 0.005, the variance of returns for stock X is closest to;

A. 0.00148

B. 0.0385

C. 0.1300

T he correct answer is A.

Correlation between X and Y,

Cov(X,Y)
Corr(X,Y) =
(σX × σY )

0.005
0.50 =
(σX × 0.26)

0.13σX = 0.005

σX = 0.0385

V(X) = 0.03852 = 0.00148

CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3k : Cal cul ate and

i nterpret the expected val ue, vari ance, standard devi ati on, covari ances, and

correl ati ons of portfol i o returns.

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Q.16 Holding wages and labor constant, what will be the impact on the aggregate supply curve of
Canada if the government decides to increase corporate income taxes and decrease the maximum
labor hours per day?

A. Decrease in the aggregate supply.

B. Increase in the aggregate supply.

C. Both decisions have different impacts on aggregate supply.

The Correct Answer i s A.

An increase in taxes will increase the input prices. T hus, producers will produce less output.

A decrease in labor hours (holding wages and labor constant) will decrease productivity, decreasing

aggregate supply.

B i s i ncorrect. An increase in corporate taxes will increase input prices. At the same time, a

decrease in labor hours will lead to a decrease in productivity, resulting in a decrease and not an

increase in aggregate supply.

C i s i ncorrect. Both decisions have an overall decrease in aggregate supply.

Level 1, Vol ume 2, Readi ng 10 – Aggregate Output, Pri ces, and Economi c Growth, LOS

10l : Anal yze the effect of combi ned changes i n aggregate suppl y and demand on the

economy.

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Q.17 Which of the following measures would most likely be necessary for a country with a ''high
capital per labor'' to increase the growth in its GDP?

A. Increased capital.

B. Increased labor supply.

C. Increased growth in technology.

T he correct answer is C.

In developed countries where capital per labor is high, an economy will experience diminishing

marginal productivity. For these countries, economists argue that growth in GDP can only be

achieved by growth in technology.

CFA Level 1, Vol ume 2, Readi ng 10 – Aggregate Output, Pri ces, and Economi c Growth,

LOS 10o: di sti ngui sh between i nput growth and total factor producti vi ty growth as

economi c growth components.

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Q.18 Lance Hope is a portfolio manager selecting global stocks for his clients’ portfolios. Hope will
purchase stocks from five companies shortlisted out of the sixteen being analyzed. T he possible
combinations of five country stocks Hope can create are closest to:

A. 4,368

B. 5,174

C. 5,241

T he correct answer is A.

T he applicable formula in this scenario will be the combination formula as follows:

n!
nCr =
(n − r)!r!
16!
=
(16 − 5)!5!
= 4,368

CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3n: Identi fy the most

appropri ate method to sol ve a parti cul ar counti ng probl em and anal yze counti ng

probl ems usi ng factori al , combi nati on, and permutati on concepts.

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Q.19 T he most appropriate requirement of the Central Limit T heorem is that it:

A. requires a finite population variance.

B. requires the population to be normally distributed.

C. asserts that, for small sample sizes, the distribution of sample mean will be approximately
normal.

T he correct answer is A.

T he Central Limit T heorem requires the population variance to be finite and asserts that if the

sample size is large, the distribution of the sample mean will be approximately normal.

B and C are i ncorrect. T he assertions made by the Central Limit T heorem are not restricted to a

normally distributed population.

CFA Level 1, Vol ume 1, Readi ng 6 – Sampl i ng and Esti mati on, LOS 6d: expl ai n the

central l i mi t theorem and i ts i mportance;

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Q.20 If the income effect dominates the substitution effect, the impact of higher interest rates on
the level of savings is most likely :

A. Neutral.

B. Positive.

C. Negative.

The Correct Answer i s C.

Suppose the income effect dominates the substitution effect. In that case, higher interest rates will

suggest fewer savings are required to attain a given sum of money for the future, resulting in

individuals substituting present consumption for future consumption. In this event, it is possible to

observe higher interest rates resulting in lower savings.

A i s i ncorrect. When the level of savings is neutral, both the income and substitution effect is not

impacted by the high interest rates.

B i s i ncorrect. T he income effect overwhelms the substitution effect such that an increase in the

price of the good results in greater demand for the good, resulting in a positively sloped demand

curve.

CFA Level 1, Vol ume 2, Readi ng 8 – Topi cs i n Demand and Suppl y Anal ysi s, LOS 8b:

compare substi tuti on and i ncome effects.

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Q.21 A decrease in the price of a good is followed by a decrease in consumption if:

A. T he good is normal.

B. T he income effect dominates the substitution effect and the good is inferior.

C. Positive income effect dominates the substitution effect and the good is Giffen.

T he correct answer is B.

A decrease in the price of goods will result in the consumer reducing its purchases if the good is

inferior and the income effect dominates the substitution effect. Although a price decrease will

cause a consumer to buy more, the effect is mitigated due to the income effect; the consumer will

want to purchase less of that good as income rises.

A i s i ncorrect. Normal goods refer to goods that are consumed in greater quantities as income

increases.

C i s i ncorrect. In the case of Giffen goods, a price decrease will decrease consumption if the price

decrease is strong enough and negative to overpower the substitution effect.

CFA Level 1, Vol ume 2, Readi ng 8 – Topi cs i n Demand and Suppl y Anal ysi s, LOS 8b:

compare substi tuti on and i ncome effects.

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Q.22 To boost economic growth, the ratio of government spending to tax collection revenue in
Belarus has exceeded 1.0 for the past two years. T his trend is expected to continue for the
foreseeable future. For the aggregate income to equal aggregate expenditure, the country should
most likely:

A. T he country should run a trade surplus.

B. T he country should increase foreign borrowings.

C. T he private sector should increase domestic investment.

T he Correct Answer is B.

When a country runs a fiscal deficit, G – T > 0, the private sector must save more than it invests S –

I > 0, the country should run a trade deficit (X – M < 0) with a corresponding inflow of foreign

saving, or both.

A i s i ncorrect. When a country runs a trade surplus, it lends to foreigners or buys assets from

foreigners, reflecting the financing needed by foreigners running trade deficits that Belarus should

not implement since its spending exceeds the revenue collection.

C i s i ncorrect. Government deficits may have no net impact because the private sector may offset

fiscal deficits by increasing savings in anticipation of increased taxes.

CFA Level 1, Vol ume 2, Readi ng 12 – Monetary and Fi scal Pol i cy, LOS 12r: expl ai n the

i mpl ementati on of fi scal pol i cy and di ffi cul ti es of i mpl ementati on.

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Q.23 In the year 2013, the quantity of money on hand in a country, in local currency units, amounted
to 450 million. During the year, the average number of times the local currency changed hands was
equal to 58. T he country’s GDP, in real terms, amounted to 300 million.If money neutrality holds and
all else is held constant, an increase in the supply of money by 2% will most likely :

A. Decrease velocity to 56.86.

B. Increase price level to 88.74.

C. Increase real output to $306 million.

T he correct answer is B.

Based on the quantity theory of money, if money neutrality holds, then an increase in the money

supply (M) will not affect Y, real output, or the speed with which money changes hands, V. However,

it would cause the aggregate price level to rise. To determine the level to which price level rises,

the following equation is used:

M× V= P× Y

(450,000, 000×; 58)

P(before increase in money supply) =
300, 000, 000
= 87.00

P(after increase in money supply) = 87 × 1.02

= 88.74

CFA Level 1, Vol ume 2, Readi ng 14 – Internati onal Trade and Capi tal Fl ows, LOS 14d:

Expl ai n the Ri cardi an and Heck scher–Ohl i n trade model s and comparati ve advantage

source(s) i n each model .

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Q.24 A citizen of Lithuania is operating a printing business in T urkey where he earns €5,000/year. In
which of the following will his earnings most likely be measured?

A. GNP of T urkey.

B. GDP of Lithuania.

C. GNP of Lithuania.

T he Correct Answer is C.

Gross national product (GNP) measures the market value of all final goods and services produced by

factors of production (such as labor and capital) supplied by residents of the country, regardless of

whether such production takes place within the country or outside of the country. In this case, the

earnings will be included in the GNP of Lithuania.

A i s i ncorrect. Gross national product (GNP) measures the market value of all final goods and

services produced by factors of production (such as labor and capital) supplied by citizens of a

country, regardless of whether such production takes place within the country or outside of the

country thus in this scenario, the GNP of Lithuania is applicable and not T urkey.

B i s i ncorrect. GDP is more widely used to measure economic activity occurring within the

country, affecting employment, growth, and investment.

CFA Level 1, Vol ume 2, Readi ng 14 – Internati onal Trade and Capi tal Fl ows, LOS 14a:

Compare gross domesti c and nati onal products.

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Q.25 A corn farmer operating in a perfectly competitive market faces a price of $2.25 per bushel
and elects to produce 150,000 bushels. From that information, we can most appropriately infer that:

A. his average cost is less than $2.25 per bushel.

B. his marginal cost is less than his competitors and less than $2.25 per bushel.

C. his marginal cost, average cost, and marginal revenue equal his competitors at $2.25 per
bushel.

T he Correct Answer is C.

In a perfectly competitive industry, all producers are price takers. T heir individual production

decisions do not affect the price since they are small in comparison to the market. All will be

operating at the minimum average cost and choose output levels to equal marginal revenue and

marginal cost. T herefore, all will operate such that marginal revenue, marginal cost, price, and

average cost are equal.

A and B are i ncorrect. A firm in a perfectly competitive market must accept whatever price the

market dictates. T he marginal cost schedule of a company in a perfectly competitive market

determines its supply function.

CFA Level 1, Vol ume 2, Readi ng 9 – The Fi rm and Mark et Structures, LOS 9a: Descri be

characteri sti cs of perfect competi ti on, monopol i sti c competi ti on, ol i gopol y, and pure

monopol y.

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Q.26 A fiscal policy may not be able to stabilize aggregate demand completely, most likely because:

I. Relevant data often appears well after a policy decision needs to be made.
II. T here is uncertainty about where the economy will be heading independent of policy
changes.
III. Private sector behavior may change as discretionary fiscal adjustments are announced

A. Only I.

B. I and III.

C. I, II and III.

T he correct answer is C.

T he fiscal policy may not stabilize aggregate demand completely, as policymakers may not know how

the economy functions. For instance, it may take several months for a policymaker to realize an

economy is slowing because data may appear with a considerable lag.

Secondly, there is uncertainty about where the economy will be heading independent of policy

changes.

T hirdly, when fiscal adjustments are announced, private sector behavior may change, leading to rises

in consumption or investment, both of which will reinforce the effects of a rise in government

expenditure.

CFA Level 1, Vol ume 2, Readi ng 12 – Monetary and Fi scal Pol i cy, LOS 12s: determi ne

whether a fi scal pol i cy i s expansi onary or contracti onary.

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Q.27 For the last 5 quarters, an analyst has gathered the PE ratios of a Gem Co., a high-tech firm, as
92, 104, 89, 101, and 97, respectively each quarter. What is the average P/E ratio the trader should
note for Gem Co. over these 5 quarters?

A. 86.60

B. 96.28

C. 76.35

T he correct answer is B.

T he average P/E ratio should be calculated by the harmonic mean.

5
Harmonic mean for Gem Co. shares = = 96.28
( 92
1+ 1 +1 + 1 + 1)
104 89 101 97

T he harmonic mean is the preferable method for averaging multiples, such as the price-earnings

ratio (P/E), in which price is in the numerator. If these ratios are averaged using an arithmetic mean

(a common error), high data points are given greater weights than low data points. T he harmonic

mean, on the other hand, gives equal weight to each data point.

CFA Level 1, Vol ume 1, Readi ng 2 –Organi zi ng, Vi sual i zi ng and Descri bi ng Data, LOS

2h: eval uate al ternati ve defi ni ti ons of mean to address an i nvestment probl em.

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Q.28 Which of the following countries would least likely be classified as an Autarky?

A. A country seeking political self-sufficiency with little trade.

B. A country’s state-owned enterprises control strategic industries.

C. A country with mutually beneficial trade relationships and harmonization.

A multilateral country is one that participates in mutually beneficial trade relationships and extensive

rules harmonization. Singapore is a good example and cannot be classified as an Autarky. Instead,

Singapore would be described as a multilateral country.

A i s i ncorrect. Autarky describes countries seeking political self-sufficiency with little or no

external trade or finance. North Korea is an example of Autarky.

B i s i ncorrect. In autarkic countries, state-owned enterprises control strategic domestic

industries. Venezuela is a good example that can be described as an Autarky.

Level 1, Vol ume 2, Readi ng 13 – Introducti on to Geopol i ti cs, LOS 13b: Descri be

geopol i ti cs and i ts rel ati onshi p wi th gl obal i zati on.

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Q.29 An investor is interested in earning a risk-free profit on 100 United Arab Emirates Dirham
(DUB). He finds out that the DUB/CAD exchange rate is 0.4, and the futures exchange rate DUB/CAD
one year from today is 0.45. Given that the risk-free interest rate in Canada is 5%, and the risk-free
rate in the United Arab Emirates is only 2%, the amount of risk-free profit earned in terms of DUB is
closest to:

A. 12.500

B. 16.125

C. 18.125

T he correct answer is B.

100
100 DUB invested = = 250 CAD invested
0.4

Interest earned = 250 CAD × 5% = 12.5 CAD

T hus,

Total amount = 250 CAD + 12.5 CAD = 262.5 CAD

262.5 CAD converts into(250 × 0.45) = 118.125 DUB in the future

Interests earned in Dubai would be 2% × 100 DUB = 2DUB

T herefore,

Profit = 118.125 DUB − 100 DUB − 2 DUB = 16.125 DUB

CFA Level 1, Vol ume 2, Readi ng 15 – Currency Exchange Rates, LOS 15f: Expl ai n the

arbi trage rel ati onshi p between spot, forward, and i nterest rates.

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Q.30 Russia can produce, at maximum capacity, 30 million liters of beer and 6 million liters of vodka,
while Ukraine can produce 35 million liters of beer and 21 million liters of vodka. Which of the
following statements is/are most accurate?

I. Ukraine has an absolute advantage in the production of both products.

II. Ukraine has a comparative advantage in the production of beer.
III. Ukraine has a comparative advantage in the production of vodka.

A. I and II.

B. I and III.

C. II and III.

T he correct answer is B.

Absolute advantage goes to the more productive country. In this case, Ukraine has the absolute

advantage in producing both products.

Comparative advantage goes to the low opportunity cost producer. T he opportunity cost of beer in

Ukraine and Russia is respectively 21/35 and 6/30. Since the opportunity cost of Russia is lower

(6/30 < 21/35), it has a comparative advantage in the production of beer.

T he opportunity cost of vodka in Ukraine and Russia is respectively 35/21 and 30/6. T herefore,

Ukraine has a comparative advantage in the production of vodka.

CFA Level 1, Vol ume 2, Readi ng 14 – Internati onal Trade and Capi tal Fl ows, LOS 14c:

Di sti ngui sh between comparati ve advantage and absol ute advantage.

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Q.31 What is the most likely effect of a contractionary monetary policy at the same time as an
expansionary fiscal policy?

A. Aggregate demand increases, while interest rates increase.

B. Inconclusive effect on aggregate demand, and interest rates increase.

C. Inconclusive effect on aggregate demand, and interest rates decrease.

Interest rates will increase due to the contractionary monetary policy.

Government spending will increase aggregate demand, but interest rates will decrease. T herefore,

the effect on aggregate demand is inconclusive and depends on the elasticity of demand for interest

rate-sensitive purchases.

A i s i ncorrect. AggreGate demand increases due to Government spending hence inconclusive.

C i s i ncorrect. T here will be an inconclusive aggregate demand, but the overall interest rate will

decrease.

CFA Level 1, Vol ume 2, Readi ng 12 – Monetary and Fi scal Pol i cy, LOS 12t: expl ai n

monetary and fi scal pol i cy i nteracti on.

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Q.32 Which of the following measures of price index excludes energy and food items from the basket
for calculation purposes?

A. Core inflation.

B. Headline inflation.

C. Wholesale price index.

The Correct Answer i s A.

Core inflation refers to the price index that excludes energy and food items from the basket for

calculation purposes because food and energy prices are deemed too volatile.

B and C are i ncorrect. Both headline inflation and the wholesale price index include energy and

food items for calculation purposes.

CFA Level 1, Vol ume 2, Study Sessi on 3, Readi ng 11 – Understandi ng Busi ness Cycl es,

LOS 11e: Interpret a set of economi c i ndi cators and descri be thei r uses and

l i mi tati ons.

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Q.33 In which of the following exchange rate strategies can a country make an explicit commitment
to exchange its domestic currency for a specified foreign currency at a fixed rate?

A. Target zone.

B. Monetary union.

C. Currency board arrangement.

T he correct answer is C.

In a currency board arrangement, a country makes an explicit commitment to exchange its domestic

currency for a specified foreign currency at a fixed rate.

A i s i ncorrect. An exchange rate target zone is a scheme intended to limit the flexibility of an

exchange rate without going as far as fixing or pegging the value of one currency against another. It is

a band, or zone, of values for the exchange rate around a central or target rate.

B i s i ncorrect. Monetary union allows for operationalizing a common currency between the

member states; thus, no exchange of both domestic and foreign currencies are involved.

CFA Level 1, Vol ume 2, Readi ng 15 – Currency Exchange Rates, LOS15i : descri be

exchange rate regi mes.

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Q.34 Selena Roberts manages an equity fund allocated to U.S. and Canadian equities in the
proportions 45% and 55% respectively. T he expected returns and covariance matrix between the
two equities are illustrated in the table below:

U.S. Canadian
Equity E(R) = 15% E(R) = 25%
Covariance Matrix
U.S. Canadian
U.S. 200 125
Canadian 125 350

T he correlation between the two stocks is closest to:

A. 0

B. 0.05

C. 0.47

T he correct answer is C.

Cov(Returns U.S., Returns CAD)

Corr(Returns U.S., Returns CAD) =
[σ(Returns U.S.) × σ(Returns CAD)]
125
= = 0.47
(200)0. 5(350)0. 5

CFA Level 1, Vol ume 1, Readi ng 3 – Probabi l i ty Concepts, LOS 3k : Cal cul ate and

i nterpret the expected val ue, vari ance, standard devi ati on, covari ances, and

correl ati ons of portfol i o returns.

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Q.35 Everest Bank is analyzing D-Corp to measure its ability to pay off a long-term debt that D-Corp
has recently applied for. Which of the following analyses will serve this purpose?

A. Solvency analysis.

B. Liquidity analysis.

C. Profitability analysis.

T he correct answer is A.

T he solvency analysis is used to measure the ability of a company to meet its long-term obligations.

B i s i ncorrect. Liquidity analysis focuses on cash flows and measures a company’s ability to meet

its short-term obligations.

C i s i ncorrect. Profit analysis involves dissecting the reported profit figure of a business to

determine the actual extent of its profitability.

CFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21b: Cl assi fy,

cal cul ate, and i nterpret acti vi ty, l i qui di ty, sol vency, profi tabi l i ty, and val uati on

rati os.

Q.36 One year ago, Malzhem Inc. bought a corporate bond for $1,000 and classified it as available for
sale. It collected $50 in coupons, and the bond is now worth $1,040. On its balance sheet, Malzhem
Inc. should show for this bond a value of:

A. $1,000

B. $1,040

C. $1,090

T he correct answer is B.

Available-for-sale securities should be shown at their fair value on the balance sheet. Only held-to-

maturity securities should be shown at amortized costs on the balance sheet.

CFA Level 1, Vol ume 3, Readi ng 19 – Understandi ng Bal ance Sheets, LOS 19e: Descri be

di fferent types of assets and l i abi l i ti es and the measurement bases of each.

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Q.37 A firm following IFRS reports its inventory with a carrying value of $450,000. If the net
realizable value of inventory is $500,000, then the amount of the gain/loss on write-down of
inventory assuming there is no previous inventory write-down is closest to:

A. $0 .

B. A 50,000 gain.

C. A $50,000 loss.

T he correct answer is A.

Under IFRS, the inventory value is written down if the carrying value of inventory is greater than

the net realizable value (NRV) (or the selling price minus the selling cost). Since the carrying value

of inventory is less than the NRV, the inventory will not be written down, and no loss will be

recognized.

B i s i ncorrect. US GAAP defines market value as the current replacement cost but with upper and

lower limits; the recorded value cannot exceed NRV and is lower than NRV less a normal profit

margin.

C i s i ncorrect. T he loss in value is reflected in the income statement when the net realizable value

or market value (under US GAAP, in certain cases) of a company’s inventory falls below its carrying

amount. In that case, the company must write down the value of the inventory.

CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22g: Descri be i nventory

measurement at the l ower cost and net real i zabl e val ue.

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Q.38 You have been given the following data regarding a textile firm reporting under US GAAP:
On December 31st , 2016: Free cash flow for the firm (FCFF): $5 million
Debt to equity ratio: 2:3
Total assets: $12.5 million
Capital expenditures: $ 2 million
Net borrowing: $ 1.5 million
Tax rate: 25%
Interest rate expense: $ 3 million
From the given data, Free Cash Flow to Equity (FCFE) is closest to:

A. $2.75 million.

B. $4.25 million.

C. $5.00 million.

T he correct answer is B.

Recall that:

FCFF = CFO + Int(1 – Tax rate) – FCInv

⇒ 5 = CFO + 3(1 − 0.25) − 2
∴ CFO = 4.75

T herefore,

FCFE = CFO − Fixed capital investment + Net borrowings = 4.75 − 2 + 1.5 = $4.25 million.

A i s i ncorrect. It relates to the difference between CFO and the fixed capital investment.

C i s i ncorrect. It indicates the value of FCFF.

CFA Level 1, Vol ume 3, Readi ng 20 – Understandi ng Cash Fl ow Statements, LOS 20i :

cal cul ate and i nterpret free cash fl ow to the fi rm, free cash fl ow to equi ty, and

performance and coverage cash fl ow rati os.

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Q.39 Which of the following is the SEC form required for firms in the United States of America to
file before the sale of new securities to the public?

A. Form S-1.

B. Form 10-Q.

C. Form DEF 14A.

T he Securities and Exchange Commission (SEC) requires US firms to file Form S-1, the registration

statement required before selling securities to the public.

B i s i ncorrect. SEC Form 10-Q is a comprehensive report of financial performance that must be

submitted quarterly by all public companies to the Securities and Exchange Commission (SEC). In the

10-Q, firms must disclose relevant information regarding their finances due to their business

operations. T he 10-Q is generally an unaudited report.

C i s i ncorrect. SEC Form DEF 14A, also known as a "definitive proxy statement," is a required

filing when a shareholder vote is required. T he Form DEF 14A outlines the list of items up for a vote

by shareholders, such as hiring new directors or other business decisions.

CFA Level 1, Vol ume 3, Readi ng 26 – Fi nanci al Reporti ng Qual i ty, LOS 26f: Descri be

mechani sms that di sci pl i ne fi nanci al reporti ng qual i ty and the potenti al l i mi tati ons

of those mechani sms.

Q.40 A company’s common size balance sheet as of 31st December 2019 is shown below:

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 Asset s Percent
Cash and Cash Equivalents 45.1
Stock Inventories 0.9
Marketable Securities 8 8
Total Current Assets 54
Goodwill 41
Net PPE 2.6
Other Long-Term Assets 2.4
Total Assets 100
Liabilities and Shareholders’ Equity
Short term debts 2.8
Customer deposits and unearned revenue 17.2
Total Current Liabilities 20.0
Long Term Debts 19.1
Other Long-term Liabilities 10.9
Total Liabilities 50.0
Total Shareholders’ Equity 50.0
Total Liabilities and Shareholders’ Equity 100.0

If the industry has a debt to equity ratio of 50% and a long-term debt to equity ratio of 40%, the
above Company most l i k el y:

A. Is an electric utility company.

B. Has acquired a great deal of companies in the past.

C. Has a higher long-term debt to equity and debt to equity ratio than that of the industry.

T he correct answer is B.

T he above Company's goodwill is 41%. 41% of the total assets of the Company are attributable to the

Company’s goodwill. It shows that the Company has made significant acquisitions because goodwill is

recognized only through acquisitions.

A i s i ncorrect. An electric company would have had a higher percentage of net PPE. T he above

Company's net PPE is only 2.6% of the total assets, and its long-term assets are only 2.4% of the

total assets.

C i s i ncorrect. T he above company has a cash balance of 45.1%. Its debt to equity ratio is

calculated as follows:

19.1 + 2.5
= 43.8%
50

Its long term debt to equity ratio is as follows:

19.1
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 19.1
= 38.2%
50

Both ratios are below the industry average of 50% and 40%, respectively.

CFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21h:cal cul ate

and i nterpret l i qui di ty and sol vency rati os.

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Q.41 A research analyst at Shark Investment Management is conducting a DuPont analysis for a firm
whose financial data for the year 2016 is provided in the following table:

Revenue 1 , 450 , 000

COGS 550 , 000
Gross Profit 900 , 000
SG&A 160 , 000
Wages Exp. 140 , 000
EBITDA 600 , 000
Dep. Exp. 220 , 000
Operating Profit 380 , 000
Interest Payment 170 , 000
EBT 210 , 000
Taxes 63 , 000
Net Income 147 , 000
Total Assets 3 , 400 , 000
Total Debt 1 , 500 , 000

Considering that the data provided is accurate, the firm's tax burden is closest to:

A. 0.3

B. 0.7

C. 0.11

T he correct answer is B.

Net Income $147,000

Tax Burden = = = 0.7
EBT $210, 000

CFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21d:

Demonstrate the appl i cati on of DuPont anal ysi s of return on equi ty and cal cul ate and

i nterpret effects of changes i n i ts components.

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Q.42 T T urks Printers is a printer retailer that sells printers to large corporations as per the below
data;

Beginning Inventory 50 Printers at $100 each

Purchased on January 1st 100 Printers at $110 each
Purchased on March 1st 20 Printers at $130 each

Assuming that T urks uses the FIFO inventory method, the cost of goods sold (COGS) if T urks sell
130 printers to Hyper Corp. in April is closest to;

A. $13,000

B. $13,800

C. $14,600

T he correct answer is B.

FIFO uses the beginning inventory to calculate the COGS.

FIFO COGS = 50 × $100 + 80 × 110 = 13, 800

CFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng Income Statements, LOS 18d:

Descri be general pri nci pl es of expenses recogni ti on, speci fi c expenses recogni ti on

appl i cati ons, and i mpl i cati ons of expenses recogni ti on choi ces for fi nanci al anal ysi s.

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Q.43 Quick Fit is a chain of fitness centers across Malta that does not comply with generally
accepted financial reporting standards from that jurisdiction. Still, it claims to follow the Accepted
Accounting Principles of T urkey. Due to the inefficiency and ignorance of the government, it is
standard practice in Malta not to adhere to local reporting standards. However, the firm is
consistently profitable as it has a monopoly in many remote areas of Malta. T he firm has consistently
earned profit margins of 8% over the last 15 years. Based on the provided assumptions, which of the
following most accurately describes the quality of financial reporting and the quality of earnings of
Quick Fit?

A. Low financial reporting quality and low quality of earnings.

B. High financial reporting quality and low quality of earnings.

C. Low financial reporting quality and indeterminate quality of earnings.

T he correct answer is C.

Since Quick Fit does not adhere to generally accepted accounting principles of the local jurisdiction,

the firm has low financial reporting quality. Adhering to accounting principles that are not followed in

the specific jurisdiction of the firm or the principles that are not generally accepted, accounting

principles do not improve the reporting quality. T he firm has high earnings quality, as it has earned

sustainable and adequate earnings for the past 15 years. However, the quality of earnings and the

quality of financial reporting are interrelated. Low-quality financial reporting may indicate that the

firm in question could falsify its reported numbers. As such, the quality of earnings is indeterminate

from the information provided in the question.

CFA Level 1, Vol ume 3, Readi ng 26 – Fi nanci al Reporti ng Qual i ty, LOS 26a: compare

and contrast fi nanci al reporti ng qual i ty wi th the qual i ty of reported resul ts

(i ncl udi ng qual i ty of earni ngs, cash fl ow, and bal ance sheet i tems).

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Q.44 Baku Mart, a chain of hypermarkets, reported a net income of $400,000 and paid cash dividends
of $260,000 to preferred stockholders for 2016. At the beginning of 2016, Baku had 8,000 shares of
common stock outstanding, but the firm issued 3,000 new shares on November 1st, 2016. Given this
information, the basic EPS of Baku Mart is closest to:

A. $8.26

B. $16.47

C. $22.00

T he correct answer is B.

To calculate basic EPS, we need to subtract the preferred dividend from the net income and divide

the result by the weighted average shares of common stock.

(Net Income − Preferred Dividend)

Basic EPS =
Weighted avg. shares of common stock

[(8, 000 × 12) + (3000 × 2)]

Weighted average shares of common stock =
12
= 8, 500

(400,000 − 260,000)
Basic EPS =
8, 500
= $16.47

CFA Level 1, Vol ume 3, Readi ng 18– Understandi ng Income Statements, LOS 18g:

Descri be how earni ngs per share are cal cul ated and cal cul ate and i nterpret a

company’s earni ngs per share (both basi c and di l uted earni ngs per share) for both

si mpl e and compl ex capi tal structures.

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Q.45 A company reported the following transactions during April 2017:

1. Purchase of 800 units at $75/unit on April 2nd, 2017

2. Purchase of 470 units at $82/unit on April 10th, 2017

3. Purchase of 230 units at $78/unit on April 16th, 2017

If the company sold 550 units during the month, the cost of goods sold (COGS), using the weighted
average cost method, is closest to:

A. $41,250

B. $42,700

C. $44,180

T he correct answer is B.

[($800 × 75) + ($470 × 82) + ($230 × 78)]

Average cost per unit (WAC) =
1, 500
= $77.65

COGS = $77.65 × 550

= $42, 707.50

CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22c: Cal cul ate and compare the

cost of sal es, gross profi t, and endi ng i nventory usi ng di fferent i nventory val uati on

methods and usi ng perpetual and peri odi c i nventory systems.

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Q.46 T he changes in deferred taxes for a company, due to a change in tax rate from 45% to 35% in a
specific jurisdiction, are provided in the following table:

Change in deferred tax liabilities (DTL) $ 14 , 000

Change in deferred tax assets (DTA) $ 3 , 500
Tax payable $ 15 , 000
Pretax income $ 100 , 000

Given the information, the effective tax rate for the firm is closest to

A. 10.50%

B. 25.50%

C. 32.50%

T he correct answer is B.

Income tax expense

Effective tax rate =
Pretax income

Income tax expense = Tax payable + Change in DT L − Change in DTA

= $15, 000 + $14, 000 − $3, 500
= $25, 500

$25, 500
Effective tax rate = = 25.5%
$100, 000

CFA Level 1, Vol ume 3, Readi ng 24 – Income Taxes, LOS 24i : Anal yze di scl osures

rel ati ng to deferred tax i tems and the effecti ve tax rate reconci l i ati on and expl ai n how

i nformati on i ncl uded i n these di scl osures affects a company’s fi nanci al statements

and fi nanci al rati os.

47
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Q.47 T he following are the details of a firm’s long-lived asset:

Carrying value: $30,000

Undiscounted future cash flows: $31,000
Discounted future cash flows: $29,000
Fair value less selling cost: $28,000

How would the company report the value of this asset under IFRS as well as under US GAAP?

A. Under IFRS: $29,000; Under US GAAP: $28,000.

B. Under IFRS: $30,000; Under US GAAP: $30,000.

C. Under IFRS: Reduce the value to $29,000 and record an impairment of $1,000 as an
expense; Under US GAAP: $30,000.

T he correct answer is C.

T he asset will be impaired under IFRS. However, no impairment would be needed under US GAAP, as

undiscounted future cash flows exceed the carrying value.

CFA Level 1, Vol ume 3, Readi ng 23 – Long-l i ved Assets, LOS 23i : Expl ai n the

i mpai rment of property, pl ant, equi pment, and i ntangi bl e assets.

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Q.48 Which of the following may be considered a warning sign indicating manipulation of financial
statements by an analyst?

I. Excessive non-recurring costs classified in the income statement.

II. Net profit of 2% in the first three quarters, followed by net profit of 17% in the 4th quarter
III. T he number of days of sales outstanding was 15 days. T he corresponding figure for the
industry was 75 days. T he company is engaged in providing engineering consultancy services.
T he customers generally pay after the company's design has been approved by the
customer's construction team, which takes roughly 2-3 months.

A. III.

B. I and II.

C. I, II and III.

T he correct answer is C.

All three cases may have a considerable impact on the conclusion that the analyst draws about the

company. When looking at a company's financial statements, analysts should pay close attention to

revenue, inventories, capitalization policies and deferred costs, and the relationship between cash

flow and net income. Other potential warnings signs may include a big difference between the

depreciation method and estimated useful life of the company, fourth-quarter surprises, and one-time

sales included in revenue.

CFA Level 1, Vol ume 3, Readi ng 26 – Fi nanci al Reporti ng Qual i ty, LOS 26i : descri be

accounti ng warni ng si gns and methods for detecti ng mani pul ati on of i nformati on i n

fi nanci al reports.

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Q.49 Gino Corp.'s inventory has been bought for $8 million by ACA Inc. and is predicted to be sold
for $18 million. Both firms report under IFRS, and the net realizable value of the inventory is
assumed to be $9 million. On the balance sheet of ACA Inc., inventories should most likely be shown
at:

A. $8 million.

B. $9 million.

C. $10 million.

T he correct answer is A.

Inventories should be shown at the lowest number between the cost of the inventories ($8 million)

and the net realizable value ($9 million).

CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22g: Descri be i nventory

measurement at the l ower cost and net real i zabl e val ue.

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Q.50 A firm recently adjusted its capital structure, and some balance sheet accounts are given in the
following table:

Account 2018 2017

Dividends payable $ 69 , 000 $ 24 , 000
Bonds $ 160 , 000 $ 90 , 000
Comm. Shares $ 250 , 000 $ 300 , 000

Assuming that the company declared dividends of $100,000 in late 2018 (not included in the financial
statements), the net effect of the dividends for the calculation of cash flow from financing activities
in 2018 is closest to:

A. -$145,000

B. -$55,000

C. $45,000

T he correct answer is B.

Cash dividend paid = Beginning dividend payable + Dividend declared - Ending Dividend Payable
= 24, 000 + 100, 000 − 69, 000 = 55, 000.

T he amount would be negative because dividends is an outflow.

CFA Level 1, Vol ume 3, Readi ng 20– Understandi ng Cash Fl ow Statements, LOS 20f:

descri be the steps i n the preparati on of di rect and i ndi rect cash fl ow statements,

i ncl udi ng how cash fl ows can be computed usi ng i ncome statement and bal ance sheet

data;

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Q.51 Which of the following accounting activities will LEAST likely result in a deferred tax liability?

A. Taxes payable are lower than income tax expense.

B. An asset’s tax base is lower than its carrying value.

C. A firm expenses software development costs on its income statement but capitalizes
software development costs for tax purposes.

T he correct answer is C.

If the firm expenses the costs on its income statement, the pretax income will be lower than the

taxable income for tax purposes where the software development cost is not expensed but

capitalized. Since the taxable income is greater than the pretax income, a deferred tax asset will be

created.

Options A and B will create deferred tax liabilities.

A and B are i ncorrect. T hey will create deferred tax liabilities.

CFA Level 1, Vol ume 3, Readi ng 24 – Income Taxes, LOS 24b: expl ai n how deferred tax

l i abi l i ti es and assets are created and the factors that determi ne how a company’s

deferred tax l i abi l i ti es and assets shoul d be treated for the purposes of fi nanci al

anal ysi s.

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Q.52 Mansion LLC has a spare machine that is not used currently in the production of goods due to
the shortage of demand. T he machine will most likely be classified as:

A. Investments.

B. Property, plant, and equipment (PPE).

C. None of the above.

T he correct answer is B.

An investment property is purchased to earn rental income, interest income, or capital appreciation.

In this case, the machinery is to be used in the production of goods. However, due to the shortage of

demand, it is currently unutilized. It will not change the nature of the machinery and, thus, it would

still be classified as property, plant, and equipment (PPE).

CFA Level 1, Vol ume 3, Readi ng 19 – Understandi ng bal ance sheets, LOS 19e: Descri be

di fferent types of assets and l i abi l i ti es and the measurement bases of each.

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Q.53 Armen Inc. and Bristol Corp. are market leaders in the construction industry. Some financial
information regarding the two firms is given in the following table:

Armen Inc. Bristol Corp.

Revenue 6, 000, 000 8, 000, 000
Gross profit 3, 400, 000 5, 500, 000
EBIT 2, 100, 000 2, 700, 000
Net income 1, 500, 000 1, 800, 000
Total debt 6, 400, 000 7, 200, 000
Dividend per share 1 2
Share price 25 22
Number of shares outstanding 500, 000 600, 000

Assuming that each firm's market capitalization is approximately equal to the firm’s total equity,
Armen Inc.’s return on equity ratio is closest to:

A. 12.0%

B. 13.6%

C. 25.6%

T he correct answer is A.

For the calculation of the return on equity ratio, it is important to determine the value of total

equity. In this case:

Total equity = Share price × No. of Shares outstanding

= $25 × 500, 000
= $12.5 million

Net income
Return on equity =
Total equity
$1.5 million
=
$12.5 million
= 0.12

CFA Level 1, Vol ume 3, Study Sessi on 6, Readi ng 20 – Fi nanci al Anal ysi s Techni ques,

LOS 20e: Cal cul ate and i nterpret rati os used i n equi ty anal ysi s and credi t anal ysi s.

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Q.54 A firm reported the following for the year 2015:

Gross sale $532, 783

Cost of goods sold $128, 908
Accumulated depreciation at $19, 000
the beginning of the year
Accumulated depreciation $37, 000
at the end of the year
Other operating expenses $208, 829
Dividends declared $76, 000
Accumulated depreciation at the $10, 000
beginning of the year on machinery sold

Machinery was purchased for $25,000 in 2010 and sold for $8,000 on the first day of the current
year. T he company's net income for the year 2015 is closest to:

A. $84,046

B. $160,046

C. $188,046

T he correct answer is B.

Net income = Sales − COGS

− Other expenses (Depreciation, Other operating expenses, and Loss on sale of machinery)

Depreciation = Change in balance of accumulated depreciation + Depreciation charged on machinery sold

= ($37, 000 − $19, 000) + $10, 000
= $28, 000

Loss on sale of machinery = Cost − Depreciation until date − Sales value

= $25, 000 − $10, 000 − $8, 000
= $7, 000

Net Income = Sales − COGS − Other expenses (Depreciation, other operating expenses and Loss on sale of mach
= $532, 783 − $128, 908 − $28, 000 − $7, 000 − $208, 829
= $160, 046

CCFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng i ncome statements, LOS 18d:

Descri be general pri nci pl es of expense recogni ti on, speci fi c expense recogni ti on

appl i cati ons, and i mpl i cati ons of expense recogni ti on choi ces for fi nanci al anal ysi s.

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Q.55 T he following data had been taken from Diamond Limited’s financial statements:

Revenue $600, 000

Cash sales 40% of credit sales
Average trade receivables $60, 000

If the number of days in a year is to be assumed as 360, the approximate days of sales outstanding
(DSO) is closest to:?

A. 36

B. 50

C. 60

T he correct answer is B.

Revenue × 100 $600,000 × 100

Credit Sales = = = $428, 571
140 140

360 × Average receivables360 × $60, 000

Days of sales outstanding = = = 50 days.
Credit sales $428, 571

CFA Level 1, Vol ume 3, Readi ng 21 – Fi nanci al Anal ysi s Techni ques, LOS 21b: Cl assi fy,

cal cul ate, and i nterpret acti vi ty, l i qui di ty, sol vency, profi tabi l i ty, and val uati on

rati os.

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Q.56 T wix Chemicals is a company involved in manufacturing active pharmaceutical ingredients. T he
firm has a storage tank for methanol, that is transferred to the production floor through a pipe.
Management believes that last-in, first-out (LIFO) is a better method for valuing the inventory of
methanol. Under which of the following situations can methanol be valued using the last-in, first-out
(LIFO) method?

A. In all cases.

B. If the company reports under IFRS.

C. If the company reports under US GAAP.

T he correct answer is C.

IFRSs prohibit the use of last-in, first-out (LIFO), a method for inventory valuation.

T herefore, it can only be adopted if the company reports under US GAAP.

IFRSs prohibit the use of last-in, first-out (LIFO), a method for inventory valuation.

T herefore, it can only be adopted if the company reports under US GAAP.

A i s i ncorrect. T he LIFO method is only applicable under US GAAP and not under IFRS.

B i s i ncorrect. T he IFRS does not approve the use of the LIFO method of inventory valuation.

CFA Level 1, Vol ume 3, Readi ng 22 – Inventori es, LOS 22b: Descri be di fferent i nventory

val uati on methods (cost formul as).

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Q.57 Flavo Inc. reports under IFRS and has outstanding bonds with carrying value amounting to $150
million with 5 years to maturity. T he company decides to redeem the bonds at the call price of $156
million. T he correct accounting treatment for the loss on redemption is:

A. $6 million to be adjusted from opening retained earnings.

B. $6 million to be recorded as a loss on the extinguishment of debt.

C. $6 million to be recorded as a deferred expenditure in the balance sheet. T his will be

amortized over 5 years.

T he correct answer is B.

In bond redemptions, bonds payable is reduced by the carrying amount of the redeemed bonds. T he

difference between the cash required to redeem the bonds and the carrying amount of the bonds is a

gain or loss on the extinguishment of debt.

CFA Level 1, Vol ume 3, Readi ng 18 – Understandi ng Income Statements, LOS 18a:

Descri be the components of the i ncome statement and al ternati ve presentati on formats

of that statement.

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Q.58 Which of the following statements is most accurate regarding the treatment of bond liabilities
under IFRS and US GAAP?

A. Under IFRS and US GAAP, the effective interest rate method of amortizing the discount or
premium is required.

B. Under IFRS, the straight-line method of amortizing is required, and under US GAAP, only
the effective interest rate method of amortizing the discount or premium is allowed.

C. Under IFRS, the effective interest rate method of amortizing the discount or premium is
required, but under US GAAP, both the effective interest rate method and the straight-line
method for amortizing the discount or premium are allowed.

T he correct answer is C.

When the bond is issued at a discount or a premium, the discount amount is amortized and added to

the bond liability. If the bond is issued at a premium, the amount of amortized premium is subtracted

from the bond liability on the balance sheet.

A and B are i ncorrect. T he treatment of amortized discounts and liabilities differ in both

accounting standards. Under IFRS, the effective interest rate method of amortizing the discount or

premium is required. At the same time, US GAAP allows both the effective interest rate method and

the straight-line method for amortizing the discount or premium.

CFA Level 1, Vol ume 3, Readi ng 25 – Non-Current (Long-Term) Li abi l i ti es, LOS 25a:

Determi ne the i ni ti al recogni ti on, i ni ti al measurement, and subsequent measurement

of bonds.

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Q.59 FINA Inc. is a construction company operating in the U.S. It is working on a long-term project
whose outcome cannot be reliably measured. Assuming that FINA follows US GAAP, the most
appropriate revenue recognition method(s) for the project is:

A. T he completed-contract method.

B. T he percentage of completion method.

C. T he percentage of completion method or the completed contract method.

T he correct answer is A.

T he completed-contract method is the most appropriate method for long-term projects whose

outcome cannot be reliably estimated.

B i s i ncorrect. T he percentage of completion method is an accounting method in which the

revenues and expenses of long-term contracts are recognized as a percentage of the work completed

during the period.

C i s i ncorrect. T he percentage completion method is not applicable in this scenario, while the

completed contract method is the most appropriate.

CFA Level 1, Vol ume 3, Readi ng 22 – Understandi ng Income Statements, LOS 22b:

descri be general pri nci pl es of revenue recogni ti on and accounti ng standards for

revenue recogni ti on.

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Q.60 An accountant is analyzing the financial reports of an American chocolate firm. T he information
regarding the cost of its ice cream plant is given in the following table:

Book value of the plant $ 400, 000

Accumulated depreciation $ 25, 000
Fair value $ 370, 000
Selling cost $ 15, 000
Value in use $ 360, 000
Expected future cash flow $ 350, 000

If the American firm reports under US GAAP, the new balance sheet value of the asset is closest to:

A. $350,000

B. $360,000

C. $370,000

T he correct answer is .

US GAAP has a two-step process of testing and calculating impairment losses. An asset is impaired if

its carrying value exceeds the asset's undiscounted cash flow stream. If impaired, the asset is

written down to its fair value, and a loss is recognized.

In our example, the carrying value of the asset

$400, 000(Book value) − $25, 000(Acc. Dep.) = $375, 000

Since the carrying value ($375,000) is above the cash flows ($350,000), the asset is impaired and the

impairment loss of $5, 000(Carrying value($375, 000) − Fair value($370, 000)) is recognized.

T he new carrying value of the asset is $370,000.

A and B are i ncorrect. Both represent the expected future cash flows and the value in use,

respectively, not the asset's new balance sheet value.

CFA Level 1, Vol ume 3, Readi ng 23 – Long-l i ved Assets, LOS 23i : Expl ai n the

i mpai rment of property, pl ant, equi pment, and i ntangi bl e assets.

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Q.61 Mark Michler is a financial analyst charged with developing performance projections for T ike
Limited for the financial years 2015 to 2030. He uses a forecasting model developed by his
supervisor to extrapolate historical performance information (from 1990 to 2014) into the future,
make further adjustments, and publish the forecasts in his research report. He includes a small
disclosure at the end of the report, which reads, "All forecasts represent simulations of past
performance." Is Michler most likely in violation of any CFA Institute Standards of Professional
Conduct?

A. No.

B. Yes, he is not permitted to use simulated performance information.

C. Yes, his disclosure does not provide full details on the simulated performance.

T he correct answer is C.

Michler's disclosure violates the CFA Institute Standards of Professional Conduct concerning

performance presentation. Although he has disclosed that forecasts represent simulations of past

performance, he should fully disclose the source of the performance data and the period of the

historical performance.

A i s i ncorrect. Michler has violated the CFA Institute Standards of Professional Conduct

concerning performance presentation.

B i s i ncorrect. As much as Michler uses simulated performance data, he should fully disclose the

data source and the historical performance period.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.62 Jason Lee is the senior portfolio manager at Motto T rust, an asset advisory firm. Lee has been
invited to attend a tax conference sponsored by a tax advisory firm owned by his clients to enhance
his tax management skills. T he client has offered to fully pay for transportation to the conference,
but Lee declines and instead opts for his arrangement. Lee informs his supervisor of the conference
invitation received before departing. After the conference, the tax advisory firm's senior manager
invites Lee to an exclusive golf club, which he accepts. He informs his employer about the invitation
upon returning to work the following day. Has Lee most likely violated any CFA Institute Standards of
Professional Conduct?

A. No.

B. Yes, but only concerning attending the conference.

C. Yes, but only concerning accepting the golf club invitation.

T he Correct Answer is A.

Lee has not violated any CFA Institute Standards of Professional Conduct. By declining the best

client's offer to pay for transportation, he complies with the Standard relating to independence and

objectivity.

B and C are i ncorrect. Lee has not violated any standard by accepting the golf club invitation. He

did inform his employer about his visit after his return. Also, the club invitation was not available

beforehand; informing his employer upon returning to the firm is the best course of action.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.63 Joyce & Monroe (J&M) is an investment bank with a research division. Investment banker Ron
Howard serves J&M and has recently arranged corporate financing for its client, Westdale Limited.
Westdale will be using the financing to expand production to Australia. Several weeks later, J&M's
chief research analyst issues a research report on Westdale wherein he recommends, "Westdale's
decision to expand into Australia is an excellent move because the potential market for its products
should be vast. I am extremely confident that the company will see a remarkable and positive
difference in its earnings over the coming months. Based on this, I recommend a strong BUY."
According to the Standards of Practice Handbook, the analyst's recommendation most likely violates
the Standard concerning:

A. Misrepresentation; he is guaranteeing investment performance.

B. Disclosure of conflicts; he has not disclosed J&M’s relationship with Westdale.

C. Communication with clients and prospects; he has failed to separate opinion from fact.

T he Correct Answer is B.

T he analyst's recommendation does not comply with the Code and Standards, as he has not disclosed

J&M's relationship with Westdale. By arranging corporate financing, J&M's relationship with the

manufacturer will be long-term and should be disclosed in each report sent to clients and prospects.

Failing to do so may give clients the impression that the relationship impairs the analyst's

independent and objective judgment.

A i s i ncorrect. T he analyst does not violate the Standard relating to misrepresentation because he

has not attempted to guarantee investment performance. T he statement, 'I am extremely confident

that the company will see a remarkable and positive difference in its earnings over the coming

months, does not amount to an attempt to make any guarantee(s).

C i s i ncorrect. T he analyst does not violate the Standard relating to communication with clients and

prospects; he has separated opinion from fact. His recommendation is based on an opinion of the

potential market for Westdale's products; using the terms 'should be vast' provides evidence that he

is voicing his opinion.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.64 To comply with the CFA Institute Standards of Professional Conduct relating to duties to
employers, members and candidates are most appropriately required to:

A. Should not enter into an independent business while still employed.

B. T hey are encouraged to recommend that their employers adopt and distribute a code of
ethics.

C. May obtain an assurance from a subordinate who has violated the Codes and Standards that
the wrongdoing will not recur

T he Correct Answer is B.

To comply with the CFA Institute Standards of Professional Conduct relating to duties to employers,

members and candidates are encouraged to recommend that their employers adopt and distribute a

code of ethics to clients.

A i s i ncorrect. T he standards do not preclude individuals from entering into an independent

business practice, which conflicts with the employer's interest, while still employed as long as prior

notification is made.

C i s i ncorrect. In a supervisory capacity, when a member or candidate discovers an employee has

engaged in illegal or unethical activity, (s), he should respond promptly by conducting a thorough

investigation. Simply obtaining assurances that the illegal activity will not reoccur would not be

sufficient.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.65 Following the conclusion of research done on a steel equipment manufacturer, the research
firm releases a one-word ‘sell’ recommendation to all its clients and prospects. It discloses that
‘additional information concerning the recommendation is available from the producer of the report.’
Based on the communication used by the firm, it is most likely :

A. In violation of the Code and Standards because the firm must include the factors that were
used to arrive at the recommendation.

B. In violation of the Code and Standards because the firm must disclose the identified
‘additional information’ as part of the recommendation.

C. Not in violation of the Code and Standards as communication is defined as ‘highly diverse’
by the CFA Institute Standards of Professional Conduct.

T he Correct Answer is A.

According to Standard V (B), Communication with Clients and prospects can range from an in-depth

research report to a one-word 'buy' or 'sell.' T he firm is in violation because it has not included the

factors used to arrive at the recommendation; this will allow clients and prospects to judge the

suitability of a recommendation.

B and C are i ncorrect. However, the firm must follow the brief communication with a written

disclosure that additional information concerning the recommendation is available from the report's

producer. T he firm's disclosure is not in violation of the Standard in this regard.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.66 Which of the following actions is least likely considered a violation of the standard concerning
Loyalty to Employers?

A. Soliciting clients before to the cessation of employment.

B. Using a business plan generated for the employer to start a new business.

C. Applying specialized analytical skills gained at the previous employer in the new
workplace.

T he Correct Answer is C.

A member or candidate is not in violation by using skills and experiences gained at the previous place

of employment in the workplace.

A i s i ncorrect. Soliciting clients before the cessation of employment represents a violation of the

standards concerning employer loyalty.

B i s i ncorrect. Using a business plan generated for the employer to start a new business is

construed as self-dealing, violating the employer loyalty standard.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.67 When managing pooled assets to a specific mandate, investment manager(s):

A. are not governed by the suitability standard.

B. must consider the suitability of an investment for clients.

C. need not consider the suitability of an investment for clients.

T he Correct Answer is C.

When managing pooled funds to a stated mandate, investment managers need not consider the

suitability of the investment for those investing in the fund.

A and B are i ncorrect. T he responsibility of determining the suitability of an investment for a

client lies on those members and candidates who have an advisory relationship with clients.

However, the actions of members and candidates as investment managers continue to be governed

by the suitability standard. T hey are required to "make investment decisions and take investment

actions that are consistent with the stated objectives and constraints of the portfolio."

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.68 Dana Irk and Carl Sholes are CFA Level II candidates who have recently sat for the Level II
exam and are awaiting their results. In a discussion between the two candidates, they each
comment:Irk: “T his year, the exam did not feature any questions on currency futures.”Scholes: “I
found the quantitative techniques section particularly difficult this year, as there were long
calculations in many questions.”Which candidate’s statement is most likely in violation of the CFA
Institute Standards of Professional Conduct?

A. Irk.

B. Scholes.

C. Both Irk and Scholes.

T he Correct Answer is C.

Irk's comment violates the Standard concerning conduct as members and candidates in the CFA

program; She is openly discussing a topical area that the exam has not covered this manner and is

sharing confidential exam information.

Scholes' comment is also in violation, as he is disclosing exam information related to long calculations

in quantitative techniques. When expressing a personal opinion, a person is prohibited from

disclosing content-specific information.

A and B are i ncorrect. Both statements by Irk and Scholes violate the CFA Institute Standards of

Professional Conduct.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.69 Which of these agents can most accurately claim compliance with GIPS?

I. Investment management firms managing assets.

II. Plan sponsors not managing assets.
III. Vendors providing investment management software.

A. Agent I.

B. Agent I and II.

C. Agents I, II, III.

T he correct answer is A.

Only an investment management firm that manages assets can claim compliance with the GIPS.

B and C are i ncorrect. Plan sponsors who don't manage assets and vendors providing investment

management software cannot claim GIP compliance.

CFA Level 1, Vol ume 6, Readi ng 72 – Introducti on to the Gl obal Investment Performance

Standards (GIPS), LOS 72b:expl ai n why the GIPS standards were created, what parti es

the GIPS standards appl y to, and who i s benefi tted by the standards;

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Q.70 Hart Lewis, a fund manager at Maritime Inc., runs an emerging market fixed-income hedge fund.
T he latest securities being evaluated by Lewis are African corporate. Due to the inefficiency of the
corporate bond markets in which the issuers operate, security prices have not increased to reflect
the early signs of recovery in the credit markets and economy. Lewis takes advantage of the
information lag and purchases a significant number of corporate bonds for the fund. Bond prices
immediately surge following the fund’s purchase, leaving investors to question whether the firm has
engaged in market manipulation. Has Lewis engaged in market manipulation?

A. No.

B. Yes, his activities have artificially distorted bond prices.

C. Yes, he has engaged in information-based manipulation.

T he Correct Answer is A.

Lewis has not engaged in market manipulation. Standard II (B) - Market Manipulation does not

preclude transactions undertaken on legitimate trading strategies based on perceived market

inefficiencies.

B and C are i ncorrect. Lewis intended to exploit the market inefficiency rather than distort price

and mislead market participants. T herefore, he has not engaged in market manipulation of any kind,

transaction- or information-based manipulation.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.71 Concerning the acceptance of gifts, the CFA Institute:

A. discourages customary business-related entertainment.

B. encourages setting a strict value limit for acceptable gifts.

C. encourages accepting gifts from parties other than clients.

T he Correct Answer is B.

Concerning accepting gifts, the CFA Institute encourages setting a value limit for acceptable gifts

based on local or regional customs.

A i s i ncorrect. Customarily, business-related entertainment is not prohibited if its purpose is not to

influence or reward the member or candidate.

C i s i ncorrect. Additional Compensation and Arrangements stipulate that Members and Candidates

must not accept gifts, benefits, compensation, or consideration that competes with or might

reasonably be expected to create a conflict of interest with their employer's interest unless they

obtain written consent from all parties involved.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.72 Sarah Ali, an investment analyst serving a firm, manages several equity funds in the country of
Lartha. Local laws permit investment analysts to undertake trades for accounts in which they have
beneficial ownership at the same time as their employer. However, client account trades have
transaction priority. Ali has identified Gerard Tech's stock as attractive for her investment portfolio,
the firm’s equity fund, and her client accounts.To claim compliance with the Code and Standards,
after allocating the stock to client accounts, Ali is most likely required to purchase the stock in the
following order:

A. Herself followed by her employer.

B. Her employer followed by herself.

C. Simultaneously for both herself and her employer.

T he Correct Answer is B.

T he CFA Institute Standards of Professional Conduct concerning transaction priority requires client

and employer trades to be given preference to those conducted for an account in which a member or

candidate has beneficial ownership. Local laws are less strict in this regard, as they place

transactions undertaken on behalf of employers and beneficial ownership accounts at par.

A and C are i ncorrect. T he Standard relating to Knowledge of the Law defines applicable law as

the strictest between local laws or regulations and the Code and Standards. Given that the Code and

Standards are stricter concerning transaction priority, Ali can only purchase the stock for her

portfolio after she has acquired it for her firm's equity fund.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS

70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and Standards,

i ncl udi ng the sub-secti ons of each Standard.

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Q.73 Which of the following is least likely included in the code of ethics?

A. Promote the integrity and viability of the global capital markets for the ultimate benefit of
society.

B. Maintain and improve professional competence and strive to maintain and improve the
competence of other investment professionals.

C. Deal fairly and objectively with all clients when providing investment analysis, making
investment recommendations, or taking investment actions.

T he Correct Answer is C.

It forms part of Standard III (C) - Fair dealing (Standard of Conduct).

A and B are i ncorrect. T hey are both included in the Code of Ethics.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS

70b: i denti fy the si x components of the Code of Ethi cs and the seven Standards of

Professi onal Conduct;

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Q.74 Which of the following statements is most likely correct regarding compliance with the GIPS
standards?

A. Obtaining verification is not mandatory.

B. Compliance with the Code of Ethics and Standards of Professional Conduct is mandatory.

C. T he GIPS standards are comprehensive, addressing the unique characteristics of each

asset class.

T he Correct Answer is A.

Although obtaining verification of its claim of compliance is strongly encouraged, it is not mandatory.

B i s i ncorrect. T he GIPS standards do not particularly require firms to adhere to the Code of

Ethics and/or the Standards of Professional Conduct.

C i s i ncorrect. T he GIPS standards do not cover the unique characteristics of each asset class.

CFA Level 1, Vol ume 6, Readi ng 72 – Introducti on to Gl obal Investment Performance

Standards (GIPS), LOS 72e: Descri be the concept of i ndependent veri fi cati on.

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Q.75 Regarding the definition of the firm, which of the following is least likely an aspect of the
definition concerning GIPS Standards requirements?

A. Firms must revise aggregate results over some time.

B. Firms must engage in investments or the managing of capital.

C. Reporting of total firm assets must be the composite of the market value of all assets
being managed by that organization

T he correct answer is A.

GIPS does not require revision of results but rather the reporting of composite results based on a

historical outlook.

B i s i ncorrect. GIPS requires that firms must engage in investments or the management of capital.

C i s i ncorrect. It is a requirement by GIPS that reporting of total firm assets must be the

composite of the market value of all assets being managed by that organization.

CFA Level 1, Vol ume 6, Readi ng 72 – Introducti on to Gl obal Investment Performance

Standards (GIPS), LOS 72e: descri be the fundamental s of compl i ance, i ncl udi ng the

recommendati ons of the GIPS Standards wi th respect to the defi ni ti on of the fi rm and

the fi rm’s defi ni ti on of di screti on;

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Q.76 Josh Packman manages accounts on behalf of several clients on the island of Murmania.
Murmania does not have any policies on the frequency at which clients must be provided with
statements showing the funds and securities in custody. Packman should most likely provide these
statements:

A. at least quarterly.

B. at least semi-annually.

C. at least annually.

T he correct answer is A.

According to Standard III(A) – Loyalty, Prudence, and Care, in the absence of policies on the

frequency at which the clients must be provided with statements, a statement showing the funds and

securities in custody should be provided to the clients at least quarterly.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS

70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and Standards,

i ncl udi ng the sub-secti ons of each Standard.

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Q.77 Logan Perkins, a CFA charter holder, and fund manager is presenting to prospective clients. At
the end of the presentation, he makes the following comment: "I am pleased to inform you about my
historical performance. Funds that I have managed have consistently outperformed the market and
have generated average annual returns of 8% for the last 15 years. T hough I can't predict specific
numbers for the future, I can confidently say that with me at the helm; returns would hover
between 6% and 12%." Logan has most likely:

A. Violated Standard I(C) – Misrepresentation by highlighting his performance over the last 15
years.

B. Violated Standard I(C) – Misrepresentation by quoting a specific range within which future
returns would lie.

C. Not violated Standard I(C) – Misrepresentation, as he correctly mentions that he cannot

predict specific numbers for the future.

T he Correct Answer is B.

According to Standard I(C) – Misrepresentation, members or candidates cannot and should not

guarantee future returns. Indicating a range of returns is also considered a violation.

A i s i ncorrect. Standard, I (C) does not stipulate regulations as far as the performance of a previous

member regarding highlighting their previous achievements.

C i s i ncorrect. He has mentioned returns between 6% and 12% as they don't relate to specific

numbers, which violate Standard I (C).

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.78 A fixed income trader observes that six-month T reasury bills are trading at lower prices than
six-month T reasury ST RIPS. He immediately starts buying and selling T reasury bills and ST RIPS,
respectively, with computer programs. T he trader has most likely :

A. Not violated Standard II(B) – Market Manipulation by carrying out the trades.

B. Violated Standard II(B) – Market Manipulation by carrying out too many trades.

C. Violated Standard II(B) – Market Manipulation by carrying out the trades with the help of a
computer program.

T he Correct Answer is A.

Standard II(B) – Market Manipulation has not been violated. T he trader's actions are aimed at taking

full advantage of market inefficiency. T hus, such transactions cannot be considered to be

manipulating the markets.

B and C are i ncorrect. By trading in the T-bills and ST RIPS, the fixed income trader has not

violated Standard II (B) since there is no proven intention to mislead market participants through

market price distortion or inflation of the trading volumes.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.79 Keith Heath, CFA, works at Knowledge Investors Private Limited as an investment advisor.
Heath used to maintain a website in which he regularly posted about his investment
recommendations. Several years ago, Heath posted a buy recommendation about Yummy Educations
Ltd. Several months later, that company was embroiled in tax-related fraud. Because of a career
change, Heath has not updated his website for quite a while, and a few web pages still show a 'buy
recommendation on the stock of Yummy Educations Limited. Has Heath most likely violated Standard
I (C)?

A. Heath has not violated Standard I(C) – Misrepresentation.

B. Heath has violated Standard I(C) – Misrepresentation by not updating his website regularly.

C. Heath will not violate Standard I(C) – Misrepresentation if he updates his web pages today
with a disclaimer that Yummy Educations Limited is no longer a 'buy' because of tax-related
fraud.

T he Correct Answer is B.

Standard I(C) – Misrepresentation indicates that CFA members must not knowingly misrepresent

information related to investment analysis, recommendations, or professional actions. Moreover,

Standard I(C) specifies that members or candidates must regularly monitor websites maintained by

them. By failing to update his website regularly, he has violated the Standard.

A i s i ncorrect. Heath has violated Standard I (C) by failing to update his website regularly.

C i s i ncorrect. Heath should periodically update the website to avoid violating Standard I (C).

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.80 Grant Ross, CFA, works at Anemas Advisors Limited, an investment management firm. Anemas
Advisors Limited manages several diversified mutual funds, which have consistently beaten the
overall market for the 10 years the firm has been in existence. Currently, the mutual funds managed
by Anemas have a few hundred investors. One month ago, Ross decided to invest in one of these
diversified mutual funds personally but did not disclose his investment to management or investors.
According to the CFA Code and Standards, Ross has most likely:

A. Violated Standard VI(A) – Disclosure of Conflicts.

B. Not violated the CFA Institute Code and Standards.

C. Violated Standard V(B) – Communication with Clients and Prospective Clients.

T he Correct Answer is B.

Standard VI(A) – Disclosure of Conflicts does not require members or candidates to disclose personal

investments in diversified mutual funds unless specifically required by the employer. Hence, Ross

has not violated the Code and Standards.

B i s i ncorrect. Unless the employer specifically requires the disclosure of personal investments,

Ros has not violated CFA Code and Standards.

C i s i ncorrect. Ross has not violated any section of Standard V (B).

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.81 According to the Global Investment Performance Standards (GIPS), a composite is an
aggregation of individual portfolios representing a similar investment mandate, objective, or strategy.
It is the primary vehicle for presenting performance to prospective clients. Which of the following
least likely describes some of the characteristics of a composite?

A. It must include fee-paying portfolios managed in accordance with the same investment
mandate, objective, or strategy.

B. It must include discretionary portfolios managed in accordance with the same investment
mandate, objective, or strategy.

C. It must include discretionary and non-discretionary portfolios managed in accordance with

the same investment mandate, objective, or strategy.

T he Correct Answer is C.

According to the GIPS, composites must include all fee-paying, discretionary, and managed or

historically managed portfolios following the same investment mandate, objective, or strategy.

CFA Level 1, Vol ume 6, Readi ng 72 – Introducti on to the Gl obal Investment Performance

Standards (GIPS), LOS 72c: Expl ai n the purpose of composi tes i n performance

reporti ng.

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Q.82 Jimmy T ucker, CFA, works as an investment advisor at Perfect Investments Private Limited.
T ucker discovers that one of the corporate clients covered by his firm is involved in tax disputes.
T ucker’s firm is reluctant to disseminate an adverse opinion about the client, as it expects new
business from the client. T ucker removes the controversial company from the research universe
and puts it on a restricted list so that the firm disseminates only factual information about the
corporate client. T ucker has most likely :

A. Violated Standard I(B) – Independence and Objectivity by concealing information about the
client.

B. Violated Standard I(B) – Independence and Objectivity by not expressing any opinion about
the corporate client.

C. Not violated Standard I(B) – Independence and Objectivity by not expressing his opinion
about the corporate client.

T he Correct Answer is C.

According to Standard I(B) – Independence and Objectivity, if a firm is unwilling to permit

dissemination of adverse opinions about a corporate client, professionals should encourage the firm

to remove the controversial company from the research universe and put it on a restricted list to

disseminate only factual information about the company.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS

70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and Standards,

i ncl udi ng the sub-secti ons of each Standard.

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Q.83 Kurt Gallagher, CFA, works as a portfolio manager at Excellent Investment Advisors. During a
meeting with a long-term friend, Gallagher receives material information connected with some of his
clients' stock in their portfolios. Keith's most likely course of action is to:

A. Keep the information secret.

B. Not alter his current trades based on the information.

C. T ry to achieve public dissemination of the information.

T he Correct Answer is C.

T he recommended procedure as per Standard II(A) – Material Non-Public Information specifies that

when a member or candidate receives material information, he must first make reasonable efforts to

disseminate the information.

A i s i ncorrect. Information is "material" if its disclosure would affect the price of a security or if a

reasonable investor would want the information before making an investment decision. Information

that is ambiguous as to its likely effect on price may not be considered material.

B i s i ncorrect. Gallagher's responsibility is to determine if the information he has received has

been publicly disseminated before acting or causing his clients to act on it.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.84 Kim Fowler, CFA, is the director of the investment research team at Excellent Investors LLC.
Fowler covers stocks that are illiquid and have low trading volumes. She has access to multiple
sources which provide the price of these illiquid securities. Fowler consistently reports the price
published in ABC T imes. T he latest price published by other sources, including ABC T imes, is given
below:

ABC Times XYZ Magazine MBC Financial Times EDF Business Weekly QWE Times
$ 12.50 $ 11.50 $ 10.65 $ 13.00 $ 11.12

In her latest report, Fowler again publishes the price of the illiquid stock as published in ABC times.
Fowler has most likely :

A. Not violated the Standards.

B. Violated Standard I(C) – Misrepresentation by quoting a higher price.

C. Violated Standard III(B) – Fair Dealing by not fairly dealing with her clients.

T he Correct Answer is A.

Fowler has been consistently reporting the price of an illiquid security as published in ABC T imes.

Standard I(C) – Misrepresentation specifies that in the case of illiquid securities, the source must be

consistent and must not be based solely on the price quoted. Hence, Fowler has not violated Standard

I(C) – Misrepresentation by quoting the price published in ABC T imes.

B i s i ncorrect. T he aspect of misrepresentation is not applicable as far as quoting a higher price is

concerned since prices quoted by ABC T imes are lower than those quoted by EDF Business Weekly.

C i s i ncorrect. Fowler has not violated Standard III(B) since she has developed written trade

allocation procedures—ensure fairness to clients, timely and efficient order execution, and accuracy

of client positions.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.85 Glen Warren, CFA, writes a report to his clients describing a new financial product recently
launched by his investment firm. T he new product is designed to generate great returns in case
market volatility increases. An extract of the report is given below: "T he product will generate great
returns in case of increased market volatility. However, as the trading techniques used to generate
the return are deemed proprietary, they cannot be disclosed in the report." T his extract from the
report is most likely:

A. Not in violation of the Standards.

B. In violation of Standard III(D) – Performance Presentation.

C. In violation of Standard V(B) – Communication with Clients and Prospective Clients.

T he Correct Answer is C.

Standard V(B) – Communication with Clients and Prospective Clients specifies that the basic nature

of the strategy employed to generate returns must be disclosed to prospective clients to be aware of

the risks associated with the trade/product. Not disclosing the general nature of the strategy by

claiming proprietary issues is a violation of the Standard.

A and B are i ncorrect. T he Standard that is violated here relates to communication with clients

and prospective clients, not performance presentation.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.86 Gregory Mayer, CFA, works at Diligent Investors Private Limited. Mayer is a pacifist at heart
and often participates in demonstrations against weapons manufacturing firms. In the country in
which Mayer resides, participating in protests is a criminal act; thus, he has been arrested on
numerous occasions. Mayer has most likely:

A. Not violated Standard I(D) – Misconduct.

B. Violated Standard I(D) – Misconduct by committing a criminal act.

C. Violated Standard I(D) – Misconduct by adversely getting arrested on several occasions.

T he Correct Answer is A.

Standard I(D) – Misconduct specifies that a member or candidate must not be involved in acts of

dishonesty, fraud, etc., which adversely affect his professional reputation, which is not the case for

Mayer.

B and C are i ncorrect. If members participate in civil disobedience to support their personal

beliefs, their actions do not amount to misconduct. T herefore, Mayer has not violated Standard I(D).

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.87 During a CFA Institute Professional Conduct Program (PCP) investigation, Jack Grant is asked to
provide confidential information related to his clients. Which of the following is the most appropriate
statement regarding a Professional Conduct Program (PCP) investigation?

A. Accessing confidential information is not allowed during a PCP investigation.

B. Grant must disclose the confidential information, as it will not be considered a violation of
Standard III(E) – Preservation of Confidentiality.

C. Grant must not disclose the confidential information, as it will be considered a violation of
Standard III(E) – Preservation of Confidentiality.

T he Correct Answer is B.

Standard III(E) – Preservation of Confidentiality specifies instances during which the preservation of

confidentiality is applicable. Disclosing confidential information during a PCP investigation is not

considered a violation of this Standard.

A and C are i ncorrect. Standard III(E) requirements are not intended to prevent members and

candidates from cooperating with a CFA Institute Professional Conduct Program (PCP) investigation.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal

Conduct, LOS 70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and

Standards, i ncl udi ng the sub-secti ons of each Standard.

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Q.88 Marcus Davies, CFA, works at AlgoRythm Investment LLC as an investment advisor. Davies
receives an offer from an educational institution for a part-time paid position as a mathematics
freelance teacher. He accepts the offer and ensures that the teaching assignments will not interfere
with his investment advisory commitments. Davies does not disclose the teaching assignments to his
employer. Marcus Davies has most likely:

A. Violated Standard IV(A) – Loyalty.

B. Not violated Standard IV(A) – Loyalty.

C. Violated Standard VI(A) – Disclosure of Conflicts.

T he Correct Answer is B.

T he part-time position of Marcus Davies does not conflict with his current employer's business.

A i s i ncorrect. Davies has ensured that the new assignments will not interfere with his investment

advisory commitments. Hence, he has not violated Standard IV(A) – Loyalty.

C i s i ncorrect. T he disclosure to the employer is not mandatory in this case.

CFA Level 1, Vol ume 58, Readi ng 71 – Gui dance for Standards I-VII, LOS 71b: i denti fy

conduct that conforms to the Code and Standards and conduct that vi ol ates the Code

and Standards;

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Q.89 Carmen Campbell is the supervisor of the research division of a well-known investment bank.
Jenny Roberts has recently joined the firm as a research analyst and reports to Campbell. Roberts
suggests that Campbell recommend a 'buy' rating on a pharmaceutical company tracked by Roberts
during an informal meeting. She informs her that the company has received final FDA approval for
one of its drugs with an upside potential of $50 million. Campbell approves the research report and
recommends a 'buy rating on the stock. However, it was later discovered that the company had
never received final FDA approval for the drug. Which of the following statements is the most
appropriate

A. Roberts has violated the Standard of Professional Conduct.

B. Campbell has violated the Standard of Professional Conduct.

C. Campbell and Roberts have both violated the Standard of Professional Conduct.

T he correct answer is C.

Jenny Roberts has violated the Standards by not carrying out due diligence and care before

recommending a ‘buy’ rating on the stock. Campbell has also violated the Standards by not exercising

reasonable supervision while approving Roberts’ report.

CFA Level 1, Vol ume 6, Readi ng 70– Code of Ethi cs and Standards of Professi onal , LOS

70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and Standards,

i ncl udi ng the sub-secti ons of each Standard.

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Q.90 Martina Gibbons is a CFA Level II Candidate. During an interview, Gibbons makes the following
two statements: Statement I: "I have completed the first two levels of the CFA exam program."
Statement II: "T he CFA program overstresses areas such as financial analysis, which I believe are
unnecessary at the Level I stage." Which of the following statements most likely represents a
violation of the standards relating to Responsibilities as a CFA Institute Member or CFA Candidate?

A. Statement I.

B. Statement II.

C. Both Statement I and II are a violation.

T he Correct Answer is A.

Statement I represents a violation. Gibbons cannot state that she passed Level II since she is

currently a CFA Level II Candidate.

B and C are i ncorrect. Statement II does not represent a violation of the Standards of

Professional Conduct. T he relevant Standard does not cover expressing opinions regarding the CFA

Program or CFA Institute. Members and candidates are free to disagree and express their

disagreement with CFA Institute on its policies, procedures, or any advocacy position taken by the

organization.

CFA Level 1, Vol ume 6, Readi ng 70 – Code of Ethi cs and Standards of Professi onal , LOS

70c: Expl ai n the ethi cal responsi bi l i ti es requi red by the Code and Standards,

i ncl udi ng the sub-secti ons of each Standard.

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