Morning - 180 Minutes

CFA 101.COM (

CFA Level 1

SAMPLE EXAM 4

Morning - 180 minutes

Ethics - 18 Questions - 27 minutes

Question: 1 - 10627

Nancy Hall, a candidate in the CFA program, is an analyst for a mutual fund. As part of her job, she makes company visits to interview executives. On a recent trip she stayed with her sister instead of at a hotel. In her expenses Hall included a hotel charge of $100, which was less than the amount allowed by her employer. After receiving a check for her expenses, Hall disclosed to her supervisor that she had stayed with her sister instead of at a hotel employer. She also returned the $100 to her employer. According to the AIMR Standards of Professional Conduct, which of the following statements best describes Hall's professional conduct?

A) / Hall did not engage in professional misconduct, because she had not meet all of the requirements to use the CFA designation.
B) / Hall engaged in professional misconduct.
C) / Hall did not engage in professional misconduct, because she eventually disclosed this information and returned the $100 to her employer.
D) / Hall did not engage in professional misconduct, because the amount that she submitted for the hotel was less than that allowed by her employer.

Question: 2 - 10652

Jeff Matton, CFA, recently joined a small brokerage firm as an analyst and reports directly to Sue Palka. No other person in the brokerage firm is a member of AIMR. According to the AIMR Standards of Professional Conduct, which of the following statements about procedures for compliance involving employer notification of the Code and Standards is most correct?

A) / All statements are correct.
B) / Matton should provide written notice to Palka advising her of his obligation to abide by the Code and Standards.
C) / Matton's notice should suggest that her employer adopt the Code and Standards.
D) / Matton's notice should suggest that her employer disseminate the Code and Standards throughout the brokerage firm.

Question: 3 - 10667

The following information concerns two analysts at Mega Securities Company.

• Mega recently hired Ron Anderson, CFA, who was previously an independent investment advisor. Anderson wants to keep his existing clients for himself and obtains written consent from Mega to do so. He has not informed his existing clients about his new position at Mega.
• Brenda Ford, an AIMR member, has been a full-time analyst for Mega for 12 years. She recently started providing investment services, which compete with Mega, to private clients on her own time. Ford obtained oral consent for this arrangement from her direct supervisor at Mega. Ford also disclosed in writing to each of her clients her employment at Mega.

According to the AIMR Standards of Professional Conduct, have Anderson and Ford violated their duty to Mega?

A) / Anderson violated his duty to employer, but Ford has not.
B) / Ford violated her duty to employer, but Anderson has not.
C) / Both Anderson and Ford violated their duty to employer.
D) / Neither Anderson nor Ford violated their duty to employer.

Question: 4 - 10688

Dan Lee, CFA, is a portfolio manager with Jewel Investment Advisors. Doris Black, one of Lee's long-time clients, told Lee the he could use her vacation home in Aspen, Colorado, for a week during skiing season if the return on her portfolio exceeded its benchmark by two percentage points during the next year. Black also agreed to reimburse Lee and his wife for their transportation expenses to Aspen. Lee accepted this arrangement. According to the AIMR Standards of Professional Conduct, what is Lee's obligation, if any, to disclose this arrangement to Jewel?

A) / Lee need not disclose either the arrangement to use Black's vacation home or the reimbursement of expenses.
B) / Lee must disclose in writing the arrangement to use Black's vacation home but not the reimbursement of expenses.
C) / Lee must disclose both the arrangement to use Black's vacation home and the reimbursement of expenses.
D) / Lee must disclose the reimbursement of expenses but not the arrangement to use Black's vacation home.

A Manager has pointed out that his firm has experienced significant expansion over the past few years. Until recently, its Legal Department was responsible for the firm's compliance activities. Now, however, the legal and compliance functions have been separated. A compliance officer has been formally designated and a comprehensive compliance program has been put in place.

Question: 5 - 10700

In order to function effectively, the compliance officer must have the authorities:

A) / to hire and fire personnel.
B) / to hire trading personnel and to supervise operations personnel.
C) / to affect, control, and guide employee behavior and to respond to employee misconduct.
D) / which are consistent with the most senior partner or executive officer in the firm.

Question: 6 - 10700

Which of the following is NOT a likely benefit of an effective functioning compliance program?

A) / An effective program helps create an ethical culture, which in turn helps the firm by lessening crime and reducing the possibility of negative publicity.
B) / An effective program will prevent violations of AIMR Standards relating to fiduciary responsibilities.
C) / Only the presence of an effective program will serve to provide an affirmative defense for the firm in the event of ethical misconduct by employees, thereby serving to mitigate any resulting penalties.
D) / The presence of an effective program will satisfy the requirement for meeting industry standards, and may raise employee morale.

Question: 7 - 10716

Don Wilson and Nadine Chavis, both CFA charterholders, are investment advisors at Uptown Securities. Wilson recommends that one of his clients buys Alpha Company based on research conducted by Uptown. Chavis recommends that one of her clients sells Alpha Company based on research conducted by another brokerage firm for general distribution. Both recommendations are consistent with each client's investment objectives and within the context of their entire portfolios. Neither Wilson nor Chavis has reason to suspect that any information contained in the research reports from these two sources is inaccurate. According to the AIMR Standards of Professional Conduct, do Wilson and Chavis have a reasonable basis for making their investment recommendations?

A) / Neither Wilson nor Chavis has a reasonable basis for their recommendations.
B) / Both Wilson and Chavis have a reasonable basis for their recommendations.
C) / Wilson has a reasonable basis for his recommendation, but Chavis does not.
D) / Chavis has a reasonable basis for his recommendation, but Wilson does not.

Question: 8 - 10727

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. RiverCity presents Calaveccio with a case of wine at Christmas each year. He estimates that the value of the case is about US $90. He does not disclose this fact in the prospectus of the small cap venture fund. This action is:

A) / in violation of the Standard concerning independence and objectivity.
B) / in violation of the Standard concerning disclosure of conflicts to clients and prospects.
C) / not in violation of the Code and Standards.
D) / in violation of the Standard concerning disclosure of additional compensation arrangements.

Question: 9 - 27920

Marshall Hopkins reports data for the Alliance Equity Fund for one year by taking the best year in the past five. He notes this in a footnote at the bottom of the information sheet. This action is:

A) / in accordance with the Code and Standards since he has indicated the basis in a footnote.
B) / a violation of the Standard concerning prohibition against misrepresentation.
C) / a violation of the Standard concerning professional misconduct.
D) / a violation of the Standard concerning performance presentation.

Question: 10 - 27921

Joan Platt, CFA, operates an investment advisory service in New York but maintains an office in Xania. Xania recently establish a stock market, which is not very efficient. None of the Xanian stocks trade in the U.S. market. Xania legally permits the use of material inside information. Platt believes that using inside information would help her compete against other Xanian investment advisors and also help some of her Xanian clients reach their investment objectives. Platt is considering adopting local investment practices in Xania. According to the AIMR Standards of Professional Conduct, Platt may:

A) / not use material inside information.
B) / use material inside information, but only after notifying AIMR.
C) / use material inside information because Xania legally permits this practice.
D) / use material inside information because the AIMR Standards apply only to countries where the use of material inside information is illegal.

Question: 11 - 27922

Which of the following is a Component of the Code of Ethics?

A) / In relationships with clients, members shall use particular care in determining applicable fiduciary duty and shall comply with such duty as to those persons and interests to whom the duty is owed. Members must act for the benefit of their clients and place their clients' interests before their own.
B) / Practice and encourage others to practice in a professional and ethical manner that will reflect credit on members and their profession.
C) / Members shall deal fairly and objectively with all clients and prospects when disseminating investment recommendations, disseminating material changes in prior investment recommendations, and taking investment action.
D) / Members shall preserve the confidentiality of information communicated by clients, prospects, or employers concerning matters within the scope of the client-member, prospect-member, or employer-member relationship unless the member receives information concerning illegal activities on the part of the client, prospect, or employer.

Question: 12 - 29513

Myron Cornforth, CFA, of Allied Management, is handed a research report on Sandstone Corporation by his supervisor, Melvin Block, and is told by Block, make this report and do whatever you need to so we can get these Sandstone shares out of here!? Cornforth reviews the report, which was authored by Virginia Jones, who is also employed by Allied and is supervised by Block. The report states that the outlook for Sandstone’s future earnings growth is bleak. Cornforth changes the analysis to encourage potential purchasers to buy Sandstone shares by omitting certain facts and by carefully editing the less-than-favorable material. The report is then printed under Cornforth’s name as sole author, without any attribution to Jones.

The Code and Standards were violated by:

A) / Cornforth in editing a research report to make it misleading, and in using material written by Jones without acknowledging that fact and identifying the name of the author, and by Block for failing to exercise reasonable supervision over Cornforth.
B) / Cornforth in editing a research report to make it misleading, and by Block in failing to exercise reasonable supervision over Cornforth.
C) / Cornforth in using material written by Jones without acknowledging that fact and identifying the name of the author, and by Block in failing to exercise reasonable supervision over Cornforth.
D) / Block in failing to exercise reasonable supervision over Cornforth.

Question: 13 - 29514

Bertrand Greene, CFA, is preparing a report on Blanding, Inc. Earnings data for Blanding was as follows:

1996 / $1.20
1997 / $1.35
1998 / $1.64
1999 / $1.78
2000 / $1.93
2001 / $2.10
2002 (est.) / $2.40
2003 (est.) / $2.70

Which of the following statements included in Greene’s report violates the Code and Standards:

A) / "Blanding's earnings, based on the fact that earnings will grow at 12.5 percent annually, may reach $2.70 in 2003."
B) / "Blanding's earnings have been compounding at 12.5 percent."
C) / "Blanding's earnings growth is expected to exceed 12.5 percent annually in future years."
D) / "Blanding's upward spiral of earnings has been and continues to be impressive."

Question: 14 - 29515

Phyllis Larson, CFA, is assigned by her supervisor at Cole Financial to update the firm’s buy recommendation on Georgia Mining Company.Larson discovers that Georgia’s sales numbers have been consistently overstatedand she wants to issue a revised report rating the company underperform.?Larson’s supervisor tells her to disclose the finding, but to minimize it and maintain the buy recommendation.

Larson will:

A) / violate the Code and Standards if she does not follow her supervisor's directions.
B) / not violate the Code and Standards if she issues the report as requested, as long as she documents her objections in her research file.
C) / violate the Code and Standards if she writes the report in a manner that is not consistent with her objective opinion.
D) / not violate the Code and Standards if she issues the report as requested, but documents her objections in writing to her supervisor.

Question: 15 - 29516

Victor Baltz, CFA, is a portfolio manager for Jetting Securities. Baltz manages 87 portfolios. All of the portfolios are identical in terms of the percentage invested in each position. They vary only in the absolute size of the portfolio and the absolute size of each position.

Baltz has:

A) / not violated the Code and Standards if a reasonable basis exists for investing in each of the positions.
B) / not violated the Code and Standards if he has disclosed to each of his clients that their individual portfolios will be identical to each of his other clients.
C) / violated the Code and Standards unless each of the 87 clients have similar financial situations, investment experience, and investment objectives.
D) / violated the Code and Standards because each portfolio must be unique and no two investors have the same characteristics.

Question: 16 - 29517

William Henry, CFA, is an analyst with Taylor Smith Advisors. Henry is a 20 percent beneficiary of the Henry Family account at another broker, which was given to him and his four brothers and sisters by Henry’s parents. His parents also assigned Henry voting power over another account established for the benefit of EastColoradoStateUniversity.

Taylor Smith has just issued a buy recommendation for Flanders Automotive. Henry will:

A) / violate the Code and Standards if he trades in Flanders Automotive on behalf of the Henry Family account, the East Colorado account, or in his own account before all clients and Taylor Smith Advisors have had full opportunity to buy the shares.
B) / violate the Code and Standards if he trades in Flanders Automotive on behalf of the East Colorado account or in his own account before all his clients and Taylor Smith Advisors have had full opportunity to buy the shares.
C) / violate the Code and Standards if he trades in Flanders Automotive in his own account before all clients and Taylor Smith Advisors have had full opportunity to buy the shares.
D) / not violate the Code and Standards by trading in the Henry Family account, the East Colorado account, or in his own account as long as he waits until the buy recommendation has been sent out.

Question: 17 - 29518

Danielle Smith, CFA, is a representative for Fairfax Securities. She has contacted Willard Mangan, one of her clients, concerning her recommendation that Mangan invest in 20-year bonds that will be issued by Continental Telephone, Inc. She informs Mangan that:

• Continental Telephone is the strongest company in its industry.
• Continental Telephone has an extremely strong credit rating.
• Based on these factors, payment of these obligationsis assured just like a government bond with a corporate interest rate.

Smith has:

A) / violated the Code and Standards by implying that eventual payment of the bonds was assured.
B) / not violated the Code and Standards if her statements were made verbally and not in writing.
C) / violated the Code and Standards by attempting to persuade Mangan that Continental Telephone was a strong company and by implying that eventual payment of the bonds was assured.
D) / not violated the Code and Standards because her statements cannot be proven to be fraudulent.

Question: 18 - 29519

Johnson Asset Managers claims compliance with AIMR’s Performance Presentation Standards (PPS). When Johnson creates its composites, accounts of terminated clients must be:

A) / included through the actual date of termination.
B) / excluded retroactively.
C) / maintained in a separate composite for terminated accounts.
D) / included through the last full reporting period before termination.

Quantitative Analysis - 18 Questions - 27 minutes

Question: 19 - 18863

Use the results from the following survey of 500 firms to answer the question.

Number of Employees / Frequency
300 up to 400 / 40
400 up to 500 / 62
500 up to 600 / 78
600 up to 700 / 101
700 up to 800 / 131
800 up to 900 / 88

The width of each class for this frequency table is:

A) / 50
B) / 100
C) / 101
D) / 600

Question: 20 - 19359

What's the maximum an investor should be willing to pay for an annuity that will pay out $10,000 at the beginning of each of the next 10 years, given the investor wants to earn 12.5 percent, compounded annually?

A) / $62,285.
B) / $55,364.
C) / $52,285.
D) / $69,620.

Question: 21 - 19903

SPC, Inc., earned $0.90 a share in 1995 and $1.52 in 2000. SPC’s annual rate of growth in earnings per share over this period was:

A) / 9.13%.
B) / 11.05%.
C) / 10.55%.
D) / 13.78%.

Question: 22 - 29084

Natalie Brunswick, neurosurgeon at a large eastern U.S. University, was recently granted permission to take an 18-month sabbatical. During the sabbatical, (scheduled to start in one year), Brunswick will be a horking studentfor a famous German horse riding instructor based in California.Brunswick has calculated that she will need $2,500 (over the modest stipend) at the beginning of each month for living expenses that month. Her financial planner estimates that she will earn an annual rate of 9 percent over the next year on any money she saves. The annual rate of return during her sabbatical term will likely increase to 10 percent. At the end of each month during the year before the sabbatical, Brunswick should save approximately:

A) / $3,356.
B) / $3,505.
C) / $3,550.
D) / $3,330.

Question: 23 - 29098

Consider the following information about the stock of Night Train Express, Inc., a sports team.

• The stock is currently trading at $25 per share.
• There is a 75% probability that the team will win a game, and a 25% probability that the team will not win.
• If the team wins, the stock price will increase by 20%; if the team loses, the stock price will decrease by 20%.

The expected value of the stock after two games is closest to: