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FinQuiz.com CFA Level I 1st Mock Exam December, 2017 Revision 1

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CFA Level I Mock Exam 1 – Solutions (AM)!

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FinQuiz.com – 1st Mock Exam 2017 (AM Session)

Questions

Topic

Minutes

1-18

Ethical and Professional Standards

27

19-32

Quantitative Methods

21

33-44

Economics

18

45-68

Financial Reporting and Analysis

36

69-76

Corporate Finance

12

77-88

Equity Investments

18

89-94

Derivative Investments

9

95-106

Fixed Income Investments

18

107-112

Alternative Investments

9

113-120

Portfolio Management

12

Total

180

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CFA Level I Mock Exam 1 – Solutions (AM)!

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Questions 1 to 18 relate to Ethics 1.

Ethical decision making framework: A. includes multiple phases each of which has multiple components. B. helps a decision maker to see the situation from self-focused perspective without harming the stakeholders. C. precludes decision makers to seek guidance from someone who is not affected by the same situational influences. Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS f A is correct. Ethical decision making process includes multiple phases, each of which has multiple components. The process is often iterative and decision-maker moves between different phases. B is incorrect. Ethical decision making framework helps a decision-maker to see the situation from multiple standpoints and pay attention to the effects that may be less evident from short-term self-focused perspectives. C is incorrect. The second phase of the ethical decision-making framework ‘Consider’ supports the decision-maker to seek additional guidance, in order to view the situation from different perspective, specially from someone who is not affected by the same situational influences and behavioral biases.

2.

Jamaica works as a portfolio manager at Diva Investments. One of her clients offers her 20% profit sharing on earning a minimum of 18% gross return. According to CFA Institute standards, Jamaica: A. can accept the offer after obtaining the written consent from her employer. B. can accept the offer only if same return is generated for all of her her clients. C. cannot accept because the offer may compromise her independence & objectivity. Correct Answer: A Reference: CFA Level I, Volume 1, Study Session 1, Reading 3, Los c. Option A is correct. According to Standard IV (B)-Additional Compensation Arrangements members/candidates must obtain permission for additional compensation/benefits from employer. Written consent includes any form of communication that can be documented.

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CFA Level I Mock Exam 1 – Solutions (AM)!

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3.

Patrick Wayne works as a research analyst at an investment management firm in San Diego, California. Wayne has been asked to issue a research report on Chemicals Energy Group (CEG), a large firm operating in the chemicals industry. The firm will pay Wayne a flat fee plus a bonus if any new investors buy the stock of the company after reading Wayne’s report. Wayne just issued the report and did not disclose the compensation arrangement to his clients. Wayne is least likely in violation of which one of the following Standards of Professional Conduct? A. Professionalism B. Conflicts of Interest C. Duties to Employers Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS c Wayne is in violation of the standard related to professionalism. Wayne is an issuer-paid analyst who is paid a flat fee plus a bonus if anyone buys the stock of CEG. This fee structure clearly impairs Wayne’s independence and objectivity, Standard I (B), since he would be more inclined to issue a buy recommendation. Also, Wayne is in violation of Standard I(C), Misrepresentation, by not disclosing this arrangement to his clients. Wayne is also in violation of Standard VI (A), Disclosure of Conflicts. Wayne is least likely in violation of Standard IV, Duties to Employers.

4.

Which of the following is least likely a required procedure for compliance with Standard III, Duties to Clients? A. Making investment decisions in the context of the total portfolio B. Voting proxies in an informed and responsible manner C. Developing written trade allocation procedures Correct Answer: C Reference: CFA Level I, Volume 1, Study Session 1, Reading 3, Los c. Standard III, Duties to Clients, states that members and candidates must make investment decisions in the context of the total portfolio and vote proxies in an informed manner. Option C is a recommended procedure for compliance with Standard III (B), Fair Dealing.

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5.

Madeline Elliot works at Adept Money Managers (AMM), a portfolio management firm in the U.S. Elliot is not satisfied with her current job, which seems to her as monotonous and non-challenging. She is planning to apply for a job at a new investment advisory firm. After her successful job interview at the new firm, Elliot copied some financial models and computer spreadsheets she developed during her employment at AMM for use at the new firm. Did Elliot violate the Standard IV, Duties to Employers? A. No, because such material is not the property of the firm. B. No, because she planned to take material that she developed during her employment C. Yes, because departing employees cannot not take employer’s property without permission. Correct Answer: C Reference: CFA Level I, Volume 1, Study Session 1, Reading 3. Elliot has violated the Standard IV, Duties to Employers, because departing employees may not take employer’s property, which includes books, records, models, reports, and other materials, even those the member or candidate prepared himself.

6.

Samuel Cross works at an agricultural firm based in the U.S. During lunch in the firm’s cafeteria, Cross overheard the CEO talking about the regulatory approval of a new product to be launched by the firm in a month. Cross quickly called his broker, Judy Garcia, updated her with details of CEO’s comments and advised her to buy the stock of the firm for his account. Garcia also buys some stock for her own portfolio. Are Cross and Garcia most likely in violation of the Code and Standards? A. Yes B. Only Garcia is in violation C. Only Cross is in violation Correct Answer: A Reference: CFA Level I, Volume 1, Study Session 1, Reading 3, Los c.

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Both Cross and Garcia are in violation of Standard II, Integrity of Capital Markets. Cross has violated the Standard because he communicated material nonpublic information about the firm to Garcia. Garcia has violated the Standard by initiating the transaction to buy the stock for Cross and herself based on the material non-public information. 7.

Ace Associates is a hedge fund management firm generating above-average fund performance for the past several years. Jeremy Lewis, a self-employed portfolio manager who is seeking to allocate hedge funds to all of his client accounts, contacted Grace Singh, the fund’s senior manager. Lewis’s client base ranges from those with imminent liquidity needs to wealthy entrepreneurs with insignificant portfolio funding requirements. Singh signs an agreement with Lewis whereby Ace’s management fee will be reduced for his clients in exchange for the management of her personal account. Lewis does not disclose the arrangement to his clients because they are expected to benefit. Which of the following Standards of Professional Conduct is least likely being violated? A. Suitability B. Referral fees C. Misrepresentation Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS b There is no evidence to indicate that the standard relating to misrepresentation has been violated. Lewis is in violation of the standard relating to suitability by allocating an illiquid asset class (hedge funds) to the accounts of clients with imminent liquidity needs. By not disclosing details of the arrangement between Lewis and Singh (charging lower fees in exchange for portfolio management services), the portfolio manager is in violation of the standard relating to referral fees. This standard requires members and candidates to disclose any compensation, benefit or consideration received from or paid to others for the recommendation of products and services.

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8.

Paul Murray is preparing a report on the stock of a credit rating agency with two other research analysts. Based on his independent discussion with the agency’s executives as well as study of economic reports and surveys, Murray forecasts the agency’s client base to shrink and deems a ‘sell’ rating as appropriate. However, his colleagues disagree stating that Murray’s recommendation is too extreme and that a ‘hold’ rating is more appropriate based on their in-depth historical industry analysis of the impact of a shrinking client base on corporate performance. In order to comply with the CFA Institute Standards of Professional Conduct, Murray’s best course of action is to: A. continue to identify his name with the research report. B. request for the removal of his name from the research report. C. not issue the report with his recommendation as it is based on material nonpublic information. Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS c Murray’s best course of action is to continue to have his name identified with the report. This is because the recommendation derived from his colleagues has a reasonable and adequate basis and he has no reason to doubt its independence and objectivity. Therefore, he does not need to disassociate himself from the report. Murray’s recommendation is based on the mosaic theory. He is using nonmaterial nonpublic information along with information from public sources to derive his recommendation.

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CFA Level I Mock Exam 1 – Solutions (AM)!

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9.

Which of the following statements with respect to situational influences is least likely correct? A. Overestimating the morality of our own behavior especially in unfamiliar situations is an important situational influence. B. Situational influences create the tendency of accepting long-term risks and/or costs as a result of focusing on personal motives. C. The influence of colleagues and the employer on an individual’s thinking and behavior is an extremely powerful situational influence. Correct Answer: A Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS b A is correct. The overestimation of the morality of one’s own behavior particularly in unfamiliar situations is an outcome of overconfidence bias. C is incorrect. Loyalty to employer and/or colleagues is a powerful situational influence. An individual’s colleagues and his or her employer can influence his/her thinking and behavior in negative and positive ways. B is incorrect. Situational influences such as large financial rewards and/or prestige can motivate individuals to act in their own short-term self-interests, ignoring possible short-term risks or consequences to themselves as well as longterm risks or consequences for both themselves and others.

10. Jason Lee is senior portfolio manager at Motto Trust, an asset advisory firm. To enhance his tax management skills, Lee has been invited to attend a tax conference which is sponsored by a tax advisory firm owned by one of his clients. The client has offered to fully pay for transportation to the conference but Lee declines and instead opts for his own arrangement. Lee informs his supervisor of the conference invitation received before departing. At the conclusion of the conference, the senior manager of the tax advisory firm 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 violated any CFA Institute Standards of Professional Conduct? A. No. B. Only with respect to attending the conference. C. Only with respect to accepting the golf club invitation. Correct Answer: A

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CFA Level I Mock Exam 1 – Solutions (AM)!

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Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS c Lee has not violated any CFA Institute Standards of Professional Conduct. By declining the client’s offer to pay for transportation, he is in compliance with the standard relating to independence and objectivity. Furthermore, he has not violated any standard by accepting the golf club invitation. He had informed his employer about his visit after his return. Also, given that knowledge of the club invitation was not available beforehand, informing his employer upon returning to the firm is the best course of action. 11. Which of the following actions represents a violation of the CFA Institute Standards of Professional Conduct concerning misconduct? A. An research analyst violates city traffic laws. B. An employer racially discriminates against candidates during a job selection process. C. An investment manager experiences personal bankruptcy due to poor investment decisions undertaken for his private account. Correct Answer: B Reference: CFA Level I, Volume 1, Study Session 1, Reading 3. Action A does not represent a violation because violating traffic laws will not adversely reflect on the members professional integrity, conduct or reputation. Action B represents a violation of Standard I (D) Misconduct which requires members and candidates not to take any action which reflects fraud, deceit, or dishonesty or adversely reflects on their professional integrity, reputation or competence. By discriminating against potential candidates, an employer may be damaging his/her reputation as a fair employer. Action C does not represent a violation; because, undertaking poor investment decisions for a personal account and any related losses experienced does not suggest that the manager has engaged in a professional misconduct involving fraud, deceit, or dishonesty. 12. Which of the following actions is least likely considered a violation of the standard concerning Loyalty to Employers? A. Soliciting clients prior 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.

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Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS c A member or candidate is not in violation by using skills and experiences gained at the previous place of employment in the workplace. Using a business plan generated for the employer to start a new business is construed as self-dealing which represents a violation of the employer loyalty standard. Soliciting clients prior to the cessation of employment represents a violation of the standards concerning employer loyalty. 13. The criteria used when evaluating secondary or third-party research least likely includes: A. reviewing the assumptions used. B. evaluating the quality of the researcher’s internal controls. C. determining the soundness of the researcher’s established code of ethics. Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS b The criteria used when evaluating secondary or third-party research includes: • • • •

assumptions used; rigor of analysis performed; date/timeliness of the research; and evaluate the objectivity and independence of the recommendations.

14. McMillan appeared in CFA Level 1 exam. Two days later, he discussed with his colleague, the difficulty of the exam, particularly the formulas tested in area of “Financial Reporting and Analysis”. His colleague is neither a candidate of any CFA level nor has any plans in future to appear in the CFA examination. Has McMillan violated any CFA Institute’s Code and Standards? A. No, because discussing the exam afterwards is not a violation. B. No, because his colleague is neither a candidate nor has any plans to appear in the exam. C. Yes, he has violated Standard VII-(A) ‘Conduct as Participants in CFA Institute Programs’. Correct Answer: C

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CFA Level I Mock Exam 1 – Solutions (AM)!

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Reference: CFA Level I, Volume 1, Study Session 1, Reading 3, Los c. According to the Standard VII (A), providing confidential program or exam information to candidates or the public is a violation. 15. In order to prevent misconduct, the Standards of Practice Handbook recommends members and candidates encourage their employers to: A. restrict employee participation in IPOs. B. establish written procedures for reporting violations. C. disseminate a list of potential violations and disciplinary sanctions to all firm employees. Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session 1, Reading 3, LOS c In order to prevent misconduct, members and candidates should encourage their employers to adopt policies which disseminate a list of potential violations to all employees and associated disciplinary sanctions, up to and including dismissal from the firm; this is recommended by the CFA Institute Standard of Professional Conduct concerning misconduct. Restricting employee participation in equity securities and IPOs is a recommended procedure for compliance with respect to the standard concerning independence and objectivity. Encouraging their employers to establish procedures for reporting violations is a recommended procedure for compliance with respect to the standard concerning knowledge of the law. 16. According to the Fundamentals of Compliance section of the Global Investment Performance Standards, total firm assets must: A. not include assets assigned to a sub-advisor. B. include non-discretionary and discretionary assets. C. be included in composites on the basis of their respective book values. Correct Answer: B Reference: CFA Level 1, Volume 1, Study Session 1, Reading 5, LOS d

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According to the Fundamentals of Compliance section, total firm assets must include the fair value of all discretionary and non-discretionary assets managed by the firm. This also includes fee- and non-fee paying portfolios. Total firm assets must also include assets assigned to a sub-advisor provided the firm has discretion over the selection of the sub-advisor. 17. Which of the following statements is least likely correct regarding legal standards? Legal standards: A. are often rule based. B. often fail to provide guidance in an increasingly complex world. C. go beyond ethical standards and help decision makers by providing highly complex imaginary situations. Correct Answer: C Reference: CFA Level 1, Volume 1, Study Session...