CFA level 1 mock exam sample

In most cases the regulations are stricter than the Global Investment Performance Standards GIPS®, and he decides that since he is complying with the local regulations he will claim GIPS

Mock Exam

1

LEVEL 1 2016 Mock Exam 1—Questions 

Ethical and Professional Standards 1–18 27

Financial Reporting and Analysis 45–68 36

Alternative Investments 116–120 8

Questions 1–18 Ethical and Professional Standards

1 Giles Stafford, CFA, is the chief investment officer of a small investment management firm in a

country that already has strict regulations on the way that performance is reported In most cases the regulations are stricter than the Global Investment Performance Standards (GIPS®), and he decides that since he is complying with the local regulations he will claim GIPS compliance

Which of the following statements best describes the situation?

A As long as the local regulations are generally stricter, satisfying the local regulations is sufficient to claim GIPS compliance

B Stafford must ensure that all the requirements of GIPS are followed before his firm can claim compliance If there are differences between the local laws and the GIPS, the differences must be disclosed

C If the country where Stafford is working cannot be persuaded to use the GIPS as its national standard for presenting performance, then a firm operating in that country cannot claim GIPS compliance

Answer: B LOS 4c

Stafford must meet the local laws and regulations but must make full disclosure of the conflict in the compliant presentation

2 ABC Investment Managers decides to calculate and present performance in compliance with

GIPS® Which of the following is most accurate?

A ABC Investment Managers must wait five years before they can claim GIPS compliance and

in the meantime build up five years of compliant data

B ABC Investment Managers may present noncompliant data for the past five years as long as they disclose that it is noncompliant and all future data is compliant with GIPS

C ABC Investment Managers must present five years’ historic data (or data from inception of the firm or composites if their existence is less than five years) that is compliant with GIPS

Answer: C LOS 4b

Five years of compliant data must be presented Each subsequent year ABC must add compliant data until they have built up to providing 10 years’ data

3 Thomas Jewitt, CFA, works for MidWest Brokerage, a firm that specializes in providing brokerage services to private clients Occasionally he refers his clients to MidWest’s personal financial planning department, a subsidiary of MidWest brokerage, for which he receives referral

fees He does not disclose this arrangement to his clients Which of the following statements best

describes Jewitt’s actions?

A Jewitt has violated the CFA Institute Standards because he has not disclosed the arrangement

to his clients

B Jewitt is in compliance with the CFA Institute Standards because this is an internal arrangement within MidWest

C Jewitt has violated the CFA Institute Standards; under the Standards, he is not permitted to receive fees for internal referrals

Answer: A LOS 2b

Jewitt has violated Standard VI(C) since the Standard does not distinguish between third‐party

and internal arrangements All referral fees are permitted but must be disclosed to clients Even

though it is not a regular occurrence he still needs to disclose the arrangement to his clients at the time of referral

4 Valery de Picarde, CFA, is the director of a major Karamba‐owned investment management firm’s branch in Indopulo Karamba is known as the world’s center of investment management with securities laws stricter than the CFA Institute Code and Standards In Indopulo, an emerging market, the local securities laws and regulations are embryonic They are very vague regarding the definition of insider trading and have no provision regulating soft dollars De Picarde’s client is a citizen of Karamba but residing in and doing business in Indopulo The client and de Picarde’s business dealings are under the jurisdiction of the laws of Indopulo

Which is the most appropriate action for de Picarde to follow when dealing with this client?

A De Picarde should follow the laws of Karamba since they are stricter that the laws of Indopulo

B De Picarde does not need to comply with the laws of Karamba since the client is not resident there, and can therefore take full advantage of soft‐dollars arrangements but not insider trading opportunities

C As a CFA Institute member, de Picarde must comply with the CFA Institute Code and Standards regarding insider trading and soft dollars, as they are stricter than the laws of Indopulo

Answer C LOS 2a

According to Standard I(A) the rule of thumb is that members must comply with the stricter of the applicable laws (in this case Indopulo’s laws) and the Code of Standards

5 James Richards, CFA, who is a quantitative analyst at Chelsea Investments, a money management

firm, has recently been working on a quantitative risk management model for a convertible arbitrage strategy Richards recently attended a CFA Institute conference where he learned that High Finance, a competing investment advisory firm, is also developing a similar model but approaching it from a different angle He did not agree with the main assumptions of the High Finance model although he admitted that its new methodology is innovative Upon returning to his office, Richards adopted High Finance’s quantitative techniques but kept the original assumptions from his model The results are promising, and Jane Seamore, the CEO of Chelsea Investments, is pleased with Richards’s research She appears in public seminars to present the new methodology and to win client mandates Which of the following complies with the CFA Institute Standards?

A Richards or Seamore must credit High Finance for having developed the model

B Richards should not have misappropriated the quantitative techniques from High Finance

C Seamore does not need to refer to either Richards or High Finance developing the model in

an oral presentation

Answer: A LOS 2b

Standard I(C): Misrepresentation says Richards or Seamore must acknowledge the original source of the quantitative techniques, although Richards can take credit for the final results

Richards is employed by Chelsea Investments; therefore, the intellectual property of research work generally belongs to the employer, unless specified differently

6 Catherine Vieira, CFA, has been recently recruited to head the Asian research department in Hong

Kong of a Paris‐based brokerage firm The firm employs many analysts spread across different countries in Asia, some of whom are members of CFA Institute and subject to the CFA Institute Standards Vieira thinks that the firm’s compliance procedures need to be significantly upgraded

to adequately deal with current global requirements Which is the best course of action for Vieira

according to the CFA Institute Standards?

A Vieira should not delegate supervisory duties until the compliance procedures are upgraded

B Vieira should seek to improve the compliance procedures before she accepts supervisory responsibility

C Vieira may only accept supervisory responsibility after notifying her employer she is not happy with the compliance procedures

Answer: B LOS 2b

If the compliance procedures are inadequate, she should not accept responsibility until reasonable procedures are in place Standard IV(C) states that supervisory responsibility remains with the supervisor, although the actual supervision duties can be delegated Members can rely on reasonable procedures to detect and prevent violations to applicable statutes, regulations and provisions of the Code and Standards

7 Which of the following actions is least likely to support an information barrier (firewall)?

A Limit the number of people in the firm who have access to material nonpublic information

B Place securities on a restricted list when the firm has access to material nonpublic information

C Limit the number of major institutional clients who regularly receive “special investment tips” prior to information being made public

Answer: C LOS 2c

Firewalls are intended to block the dissemination of material nonpublic information Choice C is still dissemination and therefore in violation of Standard II(A)

8 William Johnson, CFA, is a stock analyst covering the oil sector Through his contacts in the oil industry, he has accumulated and analyzed several pieces of nonpublic information Although none of the information is material, Johnson reached the conclusion that one of the companies

he covers has discovered a new oil field, which will probably have a major impact on future earnings According to the CFA Institute Standards, Johnson:

A Should urge the oil company to make the information public immediately

B Is allowed to use the information to make investment recommendations and decisions

C Is not allowed to make investment recommendations or take actions based on this information

Answer: B LOS 2b

Each individual piece of information is nonmaterial so Johnson does not violate the Code and Standards; his action is permissible under the “mosaic” theory