CFA-Institute CFA-Level-II Exam Dumps

CFA Level II Chartered Financial Analyst

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Question # 1

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semesterof studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.Garvey's work involves preparing research reports on small companies.Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocksand takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about ValloEngineering, a small stock he has tried repeatedly to convince the investment director to add to themonitored list. While the investment director does not like Vallo, Topel has faith in the company andhas gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tellsthe group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the lastweek at the office doing research on Koral. She has concluded that the stock is undervalued andconsensus earnings estimates are conservative. However, she has not filed a report for Samson, nordoes she intend to. She said she has purchased the stock for herself and advises her colleagues to dothe same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares ofKoral for herself.Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial districtto supplement her income. The dinner crowd includes many analysts and brokers who work atnearby businesses. While waiting tables that night, Garvey hears two employees of a majorbrokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say thatthe broker's star analyst has issued a report with a buy rating on Metrona that morning. The dinersplans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager MandyJones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard workat the restaurant, praising her punctuality and positive attitude, and offers her two tickets to aYankees game as a bonus.The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soonafterward, she receives a call from Harold Koons, one of Samson's largest money-managementclients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koonswanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stocksoared soon after it was added to his portfolio. Garvey prepared the original report on AnvilHammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanksKoons, then asks her immediate supervisor, Karl May, about the gift from Koons but does notmention the gift from Jones. May approves the Koons' gift.After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garveyuses a simple linear regression to estimate the relationship between GDP growth and Zenith's salesgrowth. Next she uses a consensus GDP estimate from a well-known economic data reporting serviceand her regression model to extrapolate growth rates for the next three years.Later that afternoon, Garvey attends a company meeting on the ethics of money management. Shelistens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his jobresponsibilities. Garvey takes notes that include the following three statements made by Bloomquist:Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage thefixed-income portion of client portfolios.Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,instead I work to serve both of their interests.Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.Garvey is not working at the diner that night, so she goes home to work on her biography for anonline placement service. In it she makes the following two statements:Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFAprogram is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety offinancial instruments as well as knowledge of the forces that drive our economy and financialmarkets.Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.During the lunch conversation, which CFA Institute Standard of Professional Conduct was most likelyviolated?

A. III(B) Fair Dealing.
B. IV(A) Loyalty.
C. V(A) Reasonable Basis.

Answer: B

Show Answer

Question # 2

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semesterof studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.Garvey's work involves preparing research reports on small companies.Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocksand takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about ValloEngineering, a small stock he has tried repeatedly to convince the investment director to add to themonitored list. While the investment director does not like Vallo, Topel has faith in the company andhas gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tellsthe group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the lastweek at the office doing research on Koral. She has concluded that the stock is undervalued andconsensus earnings estimates are conservative. However, she has not filed a report for Samson, nordoes she intend to. She said she has purchased the stock for herself and advises her colleagues to dothe same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares ofKoral for herself.Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial districtto supplement her income. The dinner crowd includes many analysts and brokers who work atnearby businesses. While waiting tables that night, Garvey hears two employees of a majorbrokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say thatthe broker's star analyst has issued a report with a buy rating on Metrona that morning. The dinersplans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager MandyJones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard workat the restaurant, praising her punctuality and positive attitude, and offers her two tickets to aYankees game as a bonus.The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soonafterward, she receives a call from Harold Koons, one of Samson's largest money-managementclients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koonswanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stocksoared soon after it was added to his portfolio. Garvey prepared the original report on AnvilHammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanksKoons, then asks her immediate supervisor, Karl May, about the gift from Koons but does notmention the gift from Jones. May approves the Koons' gift.After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garveyuses a simple linear regression to estimate the relationship between GDP growth and Zenith's salesgrowth. Next she uses a consensus GDP estimate from a well-known economic data reporting serviceand her regression model to extrapolate growth rates for the next three years.Later that afternoon, Garvey attends a company meeting on the ethics of money management. Shelistens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his jobresponsibilities. Garvey takes notes that include the following three statements made by Bloomquist:Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage thefixed-income portion of client portfolios.Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,instead I work to serve both of their interests.Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.Garvey is not working at the diner that night, so she goes home to work on her biography for anonline placement service. In it she makes the following two statements:Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFAprogram is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety offinancial instruments as well as knowledge of the forces that drive our economy and financialmarkets.Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.Does Garvey's acceptance of the gifts from Koons and Jones violate Standard 1(B) Independence andObjectivity?

A. Accepting Koons' gift was a violation.
B. Accepting Jones* gift was a violation.
C. Neither gift would result in a violation.

Answer: C

Show Answer

Question # 3

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semesterof studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.Garvey's work involves preparing research reports on small companies.Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocksand takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about ValloEngineering, a small stock he has tried repeatedly to convince the investment director to add to themonitored list. While the investment director does not like Vallo, Topel has faith in the company andhas gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tellsthe group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the lastweek at the office doing research on Koral. She has concluded that the stock is undervalued andconsensus earnings estimates are conservative. However, she has not filed a report for Samson, nordoes she intend to. She said she has purchased the stock for herself and advises her colleagues to dothe same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares ofKoral for herself.Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial districtto supplement her income. The dinner crowd includes many analysts and brokers who work atnearby businesses. While waiting tables that night, Garvey hears two employees of a majorbrokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say thatthe broker's star analyst has issued a report with a buy rating on Metrona that morning. The dinersplans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager MandyJones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard workat the restaurant, praising her punctuality and positive attitude, and offers her two tickets to aYankees game as a bonus.The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soonafterward, she receives a call from Harold Koons, one of Samson's largest money-managementclients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koonswanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stocksoared soon after it was added to his portfolio. Garvey prepared the original report on AnvilHammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanksKoons, then asks her immediate supervisor, Karl May, about the gift from Koons but does notmention the gift from Jones. May approves the Koons' gift.After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garveyuses a simple linear regression to estimate the relationship between GDP growth and Zenith's salesgrowth. Next she uses a consensus GDP estimate from a well-known economic data reporting serviceand her regression model to extrapolate growth rates for the next three years.Later that afternoon, Garvey attends a company meeting on the ethics of money management. Shelistens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his jobresponsibilities. Garvey takes notes that include the following three statements made by Bloomquist:Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage thefixed-income portion of client portfolios.Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,instead I work to serve both of their interests.Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.Garvey is not working at the diner that night, so she goes home to work on her biography for anonline placement service. In it she makes the following two statements:Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFAprogram is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety offinancial instruments as well as knowledge of the forces that drive our economy and financialmarkets.Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.Did Garvey violate Standard 11(A) Material Nonpublic Information when she purchased Vallo andMetrona?

A. Buying Vallo was a violation.
B. Buying Metrona was a violation.
C. Neither purchase was a violation.

Answer: C

Show Answer

Question # 4

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semesterof studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.Garvey's work involves preparing research reports on small companies.Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocksand takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about ValloEngineering, a small stock he has tried repeatedly to convince the investment director to add to themonitored list. While the investment director does not like Vallo, Topel has faith in the company andhas gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tellsthe group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the lastweek at the office doing research on Koral. She has concluded that the stock is undervalued andconsensus earnings estimates are conservative. However, she has not filed a report for Samson, nordoes she intend to. She said she has purchased the stock for herself and advises her colleagues to dothe same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares ofKoral for herself.Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial districtto supplement her income. The dinner crowd includes many analysts and brokers who work atnearby businesses. While waiting tables that night, Garvey hears two employees of a majorbrokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say thatthe broker's star analyst has issued a report with a buy rating on Metrona that morning. The dinersplans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager MandyJones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard workat the restaurant, praising her punctuality and positive attitude, and offers her two tickets to aYankees game as a bonus.The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soonafterward, she receives a call from Harold Koons, one of Samson's largest money-managementclients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koonswanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stocksoared soon after it was added to his portfolio. Garvey prepared the original report on AnvilHammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanksKoons, then asks her immediate supervisor, Karl May, about the gift from Koons but does notmention the gift from Jones. May approves the Koons' gift.After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garveyuses a simple linear regression to estimate the relationship between GDP growth and Zenith's salesgrowth. Next she uses a consensus GDP estimate from a well-known economic data reporting serviceand her regression model to extrapolate growth rates for the next three years.Later that afternoon, Garvey attends a company meeting on the ethics of money management. Shelistens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his jobresponsibilities. Garvey takes notes that include the following three statements made by Bloomquist:Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage thefixed-income portion of client portfolios.Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,instead I work to serve both of their interests.Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.Garvey is not working at the diner that night, so she goes home to work on her biography for anonline placement service. In it she makes the following two statements:Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFAprogram is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety offinancial instruments as well as knowledge of the forces that drive our economy and financialmarkets.Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.In her estimation of Zenith's future growth rate, what standard did Garvey violate?

A. Standard 1(C) Misrepresentation regarding plagiarism.
B. Standard V(A) Diligence and Reasonable Basis.
C. Both 1(C) and V(A).

Answer: B

Show Answer

Question # 5

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semesterof studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her scoreGarvey's work involves preparing research reports on small companies.Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocksand takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about ValloEngineering, a small stock he has tried repeatedly to convince the investment director to add to themonitored list. While the investment director does not like Vallo, Topel has faith in the company andhas gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tellsthe group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the lastweek at the office doing research on Koral. She has concluded that the stock is undervalued andconsensus earnings estimates are conservative. However, she has not filed a report for Samson, nordoes she intend to. She said she has purchased the stock for herself and advises her colleagues to dothe same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares ofKoral for herself.Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial districtto supplement her income. The dinner crowd includes many analysts and brokers who work atnearby businesses. While waiting tables that night, Garvey hears two employees of a majorbrokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say thatthe broker's star analyst has issued a report with a buy rating on Metrona that morning. The dinersplans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager MandyJones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard workat the restaurant, praising her punctuality and positive attitude, and offers her two tickets to aYankees game as a bonus.The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soonafterward, she receives a call from Harold Koons, one of Samson's largest money-managementclients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koonswanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stocksoared soon after it was added to his portfolio. Garvey prepared the original report on AnvilHammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanksKoons, then asks her immediate supervisor, Karl May, about the gift from Koons but does notmention the gift from Jones. May approves the Koons' gift.After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garveyuses a simple linear regression to estimate the relationship between GDP growth and Zenith's salesgrowth. Next she uses a consensus GDP estimate from a well-known economic data reporting serviceand her regression model to extrapolate growth rates for the next three years.Later that afternoon, Garvey attends a company meeting on the ethics of money management. Shelistens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his jobresponsibilities. Garvey takes notes that include the following three statements made by Bloomquist:Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage thefixed-income portion of client portfolios.Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,instead I work to serve both of their interests.Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.Garvey is not working at the diner that night, so she goes home to work on her biography for anonline placement service. In it she makes the following two statements:Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFAprogram is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety offinancial instruments as well as knowledge of the forces that drive our economy and financialmarkets.Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.Which of Bloomquist's statements most likely applies to both the Prudent Man Rule and the PrudentInvestor Rule?

A. Statement 1.
B. Statement 2.
C. Statement 3.

Answer: B

Show Answer

Question # 6

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semesterof studies for her MBA, She took the Level 3 CFA® exam in June but has not yet received her score.Garvey's work involves preparing research reports on small companies.Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocksand takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about ValloEngineering, a small stock he has tried repeatedly to convince the investment director to add to themonitored list. While the investment director does not like Vallo, Topel has faith in the company andhas gradually accumulated 5,000 shares for his own account. Another analyst, Mary Kennedy, tellsthe group about Koral Koatings, a paint and sealant manufacturer. Kennedy has spent most of the lastweek at the office doing research on Koral. She has concluded that the stock is undervalued andconsensus earnings estimates are conservative. However, she has not filed a report for Samson, nordoes she intend to. She said she has purchased the stock for herself and advises her colleagues to dothe same. After she gets back to the office, Garvey purchases 25 shares of Vallo and 50 shares ofKoral for herself.Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial districtto supplement her income. The dinner crowd includes many analysts and brokers who work atnearby businesses. While waiting tables that night, Garvey hears two employees of a majorbrokerage house discussing Metrona, a nanotechnology company. The restaurant patrons say thatthe broker's star analyst has issued a report with a buy rating on Metrona that morning. The dinersplans to buy the stock the next morning. After Garvey finishes her shift, restaurant manager MandyJones, a longtime Samson client, asks to speak with her. Jones commends Garvey for her hard workat the restaurant, praising her punctuality and positive attitude, and offers her two tickets to aYankees game as a bonus.The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soonafterward, she receives a call from Harold Koons, one of Samson's largest money-managementclients. Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koonswanted to reward the analyst who discovered Anvil Hammers, a machine-tool company whose stocksoared soon after it was added to his portfolio. Garvey prepared the original report on AnvilHammers. Koons offers Garvey two free round-trip tickets to the city of her choice. Garvey thanksKoons, then asks her immediate supervisor, Karl May, about the gift from Koons but does notmention the gift from Jones. May approves the Koons' gift.After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garveyuses a simple linear regression to estimate the relationship between GDP growth and Zenith's salesgrowth. Next she uses a consensus GDP estimate from a well-known economic data reporting serviceand her regression model to extrapolate growth rates for the next three years.Later that afternoon, Garvey attends a company meeting on the ethics of money management. Shelistens to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his jobresponsibilities. Garvey takes notes that include the following three statements made by Bloomquist:Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage thefixed-income portion of client portfolios.Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries,instead I work to serve both of their interests.Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.Garvey is not working at the diner that night, so she goes home to work on her biography for anonline placement service. In it she makes the following two statements:Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFAprogram is a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety offinancial instruments as well as knowledge of the forces that drive our economy and financialmarkets.Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester.As both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.Did the two statements in Garvey's biography violate Standard VII(B) Reference to CFA Institute, theCFA designation, and the CFA program?

A. Statement 1 is a violation.
B. Statement 2 is a violation.
C. Both statements are violations.

Answer: C

Show Answer

Question # 7

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris iscommonly involved in complex trading strategies on behalf of Islandwide and maintains a significantrelationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recentmarket volatility has led Islandwide to incur record-high trading volume and commissions withQuadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an allexpenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to hersupervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversationbetween the president and chief financial officer (CFO) of Progressive Industries. The presidentinforms the CFO that Progressive's board of directors has just approved dropping the company's cashdividend, despite its record of paying dividends for the past 46 quarters. The company plans toannounce this information in about a week. Harris owns Progressive's common stock andimmediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continueserving on the board of directors of Landmark Enterprises, a private company owned by her brotherin-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the localsymphony on investing their large endowment and receives four season tickets to the symphonyperformances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the greatperformance of her account over the previous quarter. Bert Baker, also a client, has offered Harristwo airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the followingyear.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clarkparticipates in a conference call for several analysts in which the chief executive officer at Dex sayshis company's board of directors has just accepted a tender offer from Monolith Chemicals to buyDex at a 40% premium over the market price. Clark contacts a friend and relates the informationabout Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex'sstock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented abuy program for a client. This buy program has driven up the price of a small-cap stock, in whichIslandwide owns shares, by approximately 5% because the orders were large in relation to theaverage daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm tomarket in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk willcreate additional liquidity in the stock over its first 90 days of trading by committing to minimum bidsand offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of anoversubscribed IPO. One of his clients has been complaining about the execution price of a tradePark made for her last month, but Park knows from researching it that the trade received the bestpossible execution. In order to calm the client down. Park increases her allocation of shares in theIPO above what it would be if he allocated them to all suitable client accounts based on account size.He allocates a pro rata portion of the remaining shares to a trust account held at his firm for whichhis brother-in-law is the primary beneficiary.By accepting the trip from Quadrangle, has Harris complied with the CFA Institute Code andStandards?

A. Harris may accept the trip since she maintains a significant relationship with Quadrangle that contributes to the performance of client accounts.
B. Harris may accept the trip since she disclosed the trip to her supervisor and compliance officer andaccepted based on their approval.  
C. Harris may not accept the trip since the offer from Quadrangle could impede her ability to makeobjective investment decisions on behalf of the client. 

Answer: C

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Question # 8

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris iscommonly involved in complex trading strategies on behalf of Islandwide and maintains a significantrelationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recentmarket volatility has led Islandwide to incur record-high trading volume and commissions withQuadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an allexpenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to hersupervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversationbetween the president and chief financial officer (CFO) of Progressive Industries. The presidentinforms the CFO that Progressive's board of directors has just approved dropping the company's cashdividend, despite its record of paying dividends for the past 46 quarters. The company plans toannounce this information in about a week. Harris owns Progressive's common stock andimmediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continueserving on the board of directors of Landmark Enterprises, a private company owned by her brotherin-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the localsymphony on investing their large endowment and receives four season tickets to the symphonyperformances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the greatperformance of her account over the previous quarter. Bert Baker, also a client, has offered Harristwo airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the followingyear.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clarkparticipates in a conference call for several analysts in which the chief executive officer at Dex sayshis company's board of directors has just accepted a tender offer from Monolith Chemicals to buyDex at a 40% premium over the market price. Clark contacts a friend and relates the informationabout Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex'sstock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented abuy program for a client. This buy program has driven up the price of a small-cap stock, in whichIslandwide owns shares, by approximately 5% because the orders were large in relation to theaverage daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm tomarket in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk willcreate additional liquidity in the stock over its first 90 days of trading by committing to minimum bidsand offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of anoversubscribed IPO. One of his clients has been complaining about the execution price of a tradePark made for her last month, but Park knows from researching it that the trade received the bestpossible execution. In order to calm the client down. Park increases her allocation of shares in theIPO above what it would be if he allocated them to all suitable client accounts based on account size.He allocates a pro rata portion of the remaining shares to a trust account held at his firm for whichhis brother-in-law is the primary beneficiary.Has either Harris or Clark violated Standard 11(A) Integrity of Capital Markets: Material NonpublicInformation?

A. Harris is in violation.
B. Clark is in violation.
C. Both are in violation.

Answer: C

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Question # 9

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris iscommonly involved in complex trading strategies on behalf of Islandwide and maintains a significantrelationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recentmarket volatility has led Islandwide to incur record-high trading volume and commissions withQuadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an allexpenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to hersupervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversationbetween the president and chief financial officer (CFO) of Progressive Industries. The presidentinforms the CFO that Progressive's board of directors has just approved dropping the company's cashdividend, despite its record of paying dividends for the past 46 quarters. The company plans toannounce this information in about a week. Harris owns Progressive's common stock andimmediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continueserving on the board of directors of Landmark Enterprises, a private company owned by her brotherin-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the localsymphony on investing their large endowment and receives four season tickets to the symphonyperformances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the greatperformance of her account over the previous quarter. Bert Baker, also a client, has offered Harristwo airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the followingyear.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clarkparticipates in a conference call for several analysts in which the chief executive officer at Dex sayshis company's board of directors has just accepted a tender offer from Monolith Chemicals to buyDex at a 40% premium over the market price. Clark contacts a friend and relates the informationabout Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex'sstock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented abuy program for a client. This buy program has driven up the price of a small-cap stock, in whichIslandwide owns shares, by approximately 5% because the orders were large in relation to theaverage daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm tomarket in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk willcreate additional liquidity in the stock over its first 90 days of trading by committing to minimum bidsand offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of anoversubscribed IPO. One of his clients has been complaining about the execution price of a tradePark made for her last month, but Park knows from researching it that the trade received the bestpossible execution. In order to calm the client down. Park increases her allocation of shares in theIPO above what it would be if he allocated them to all suitable client accounts based on account size.He allocates a pro rata portion of the remaining shares to a trust account held at his firm for whichhis brother-in-law is the primary beneficiary.According to the Standards of Practice, with respect to the two offers from Adams and Baker, Harris:

A. may accept both offers if she discloses them to her employer.
B. may accept both gifts only if she discloses them to her employer and receives permission.
C. must disclose the offer from Adams to her employer if she accepts it but must receive heremployer's permission to accept the offer from Baker.

Answer: C

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Question # 10

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris iscommonly involved in complex trading strategies on behalf of Islandwide and maintains a significantrelationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recentmarket volatility has led Islandwide to incur record-high trading volume and commissions withQuadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an allexpenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to hersupervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversationbetween the president and chief financial officer (CFO) of Progressive Industries. The presidentinforms the CFO that Progressive's board of directors has just approved dropping the company's cashdividend, despite its record of paying dividends for the past 46 quarters. The company plans toannounce this information in about a week. Harris owns Progressive's common stock andimmediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continueserving on the board of directors of Landmark Enterprises, a private company owned by her brotherin-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the localsymphony on investing their large endowment and receives four season tickets to the symphonyperformances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the greatperformance of her account over the previous quarter. Bert Baker, also a client, has offered Harristwo airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the followingyear.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clarkparticipates in a conference call for several analysts in which the chief executive officer at Dex sayshis company's board of directors has just accepted a tender offer from Monolith Chemicals to buyDex at a 40% premium over the market price. Clark contacts a friend and relates the informationabout Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex'sstock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented abuy program for a client. This buy program has driven up the price of a small-cap stock, in whichIslandwide owns shares, by approximately 5% because the orders were large in relation to theaverage daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm tomarket in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk willcreate additional liquidity in the stock over its first 90 days of trading by committing to minimum bidsand offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of anoversubscribed IPO. One of his clients has been complaining about the execution price of a tradePark made for her last month, but Park knows from researching it that the trade received the bestpossible execution. In order to calm the client down. Park increases her allocation of shares in theIPO above what it would be if he allocated them to all suitable client accounts based on account size.He allocates a pro rata portion of the remaining shares to a trust account held at his firm for whichhis brother-in-law is the primary beneficiary.Has Michaels violated Standard 11(B) Integrity of Capital Markets: Manipulation with respect to anyof the following?

A. The buy program is a violation.
B. The liquidity activity is a violation.
C. There is no violation.

Answer: C

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Question # 11

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris iscommonly involved in complex trading strategies on behalf of Islandwide and maintains a significantrelationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recentmarket volatility has led Islandwide to incur record-high trading volume and commissions withQuadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an allexpenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to hersupervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversationbetween the president and chief financial officer (CFO) of Progressive Industries. The presidentinforms the CFO that Progressive's board of directors has just approved dropping the company's cashdividend, despite its record of paying dividends for the past 46 quarters. The company plans toannounce this information in about a week. Harris owns Progressive's common stock andimmediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continueserving on the board of directors of Landmark Enterprises, a private company owned by her brotherin-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the localsymphony on investing their large endowment and receives four season tickets to the symphonyperformances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the greatperformance of her account over the previous quarter. Bert Baker, also a client, has offered Harristwo airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the followingyear.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clarkparticipates in a conference call for several analysts in which the chief executive officer at Dex sayshis company's board of directors has just accepted a tender offer from Monolith Chemicals to buyDex at a 40% premium over the market price. Clark contacts a friend and relates the informationabout Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex'sstock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented abuy program for a client. This buy program has driven up the price of a small-cap stock, in whichIslandwide owns shares, by approximately 5% because the orders were large in relation to theaverage daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm tomarket in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk willcreate additional liquidity in the stock over its first 90 days of trading by committing to minimum bidsand offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of anoversubscribed IPO. One of his clients has been complaining about the execution price of a tradePark made for her last month, but Park knows from researching it that the trade received the bestpossible execution. In order to calm the client down. Park increases her allocation of shares in theIPO above what it would be if he allocated them to all suitable client accounts based on account size.He allocates a pro rata portion of the remaining shares to a trust account held at his firm for whichhis brother-in-law is the primary beneficiary.According to Standard IV Duties to Employers, which of the following is most likely required ofSwamy? Swamy must:

A. secure written permission from her employer before performing services for the symphony.
B. inform her immediate supervisor at Dillon in writing that she (Swamy) must comply with the Codeand Standards.
C. disclose to her employer any additional compensation she receives from Landmark Enterprisesand secure written permission to serve on the board.

Answer: A

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Question # 12

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris iscommonly involved in complex trading strategies on behalf of Islandwide and maintains a significantrelationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recentmarket volatility has led Islandwide to incur record-high trading volume and commissions withQuadrangle for the quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an allexpenses-paid week of golf at Pebble Beach for her and her husband. Harris discloses the offer to hersupervisor and compliance officer and, based on their approval, accepts the trip.Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law.While Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversationbetween the president and chief financial officer (CFO) of Progressive Industries. The presidentinforms the CFO that Progressive's board of directors has just approved dropping the company's cashdividend, despite its record of paying dividends for the past 46 quarters. The company plans toannounce this information in about a week. Harris owns Progressive's common stock andimmediately calls her broker to sell her shares in anticipation of a price decline.Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continueserving on the board of directors of Landmark Enterprises, a private company owned by her brotherin-law, for which she receives $2,000 annually. Swamy also serves as an unpaid advisor to the localsymphony on investing their large endowment and receives four season tickets to the symphonyperformances.After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the greatperformance of her account over the previous quarter. Bert Baker, also a client, has offered Harristwo airplane tickets to Hawaii if his account beats its benchmark by more than 2% over the followingyear.Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clarkparticipates in a conference call for several analysts in which the chief executive officer at Dex sayshis company's board of directors has just accepted a tender offer from Monolith Chemicals to buyDex at a 40% premium over the market price. Clark contacts a friend and relates the informationabout Dex and Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex'sstock.Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented abuy program for a client. This buy program has driven up the price of a small-cap stock, in whichIslandwide owns shares, by approximately 5% because the orders were large in relation to theaverage daily trading volume of the stock. Michaels' firm is about to bring shares of an OTC firm tomarket in anIPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk willcreate additional liquidity in the stock over its first 90 days of trading by committing to minimum bidsand offers of 5,000 shares and to a maximum spread of one-eighth.Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of anoversubscribed IPO. One of his clients has been complaining about the execution price of a tradePark made for her last month, but Park knows from researching it that the trade received the bestpossible execution. In order to calm the client down. Park increases her allocation of shares in theIPO above what it would be if he allocated them to all suitable client accounts based on account size.He allocates a pro rata portion of the remaining shares to a trust account held at his firm for whichhis brother-in-law is the primary beneficiary.According to Standard IV Duties to Employers, which of the following is most likely required ofSwamy? Swamy must:Which action by Park violated Standard III(B) Duties to Clients: Fair Dealing?

A. Increasing allocation to the problem client.
B. Decreased allocation to the brother-in-law and other firm clients.
C. Both actions are violations.

Answer: C

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Question # 13

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firmthat employs three investment professionals and currently has approximately $250 million of assetsunder management. The client base of United Partners is varied, and accounts range in size fromsmall retirement accounts to a $30 million private school endowment. In addition to Burton'sadministrative responsibilities as the managing partner at United, he also serves as an investmentadvisor to several clients. Because United Partners is a small firm, the company does not employ anyresearch analysts but instead obtains its investment research products and services from twonational brokerage firms, which in turn execute all client trades for United Partners. Thearrangement with the two brokers has enabled United to assure its clients that the firm will alwaysseek the best execution for them by having both brokers competitively bid for United's business.A prospective client, Harold Crossley, has approached Burton about shifting some of his personalassets under management from MoneyCorp to United Partners. Burton provides Crossley with apacket of marketing information that Burton developed himself. The packet contains five years ofhistorical performance data for the private school endowment, Unitcd's largest client. Burton statesthat the composite's management style and performance results are representative of themanagement style and returns that United can be expected to achieve for Crossley. Also included inthe information packet are brief bios on each of United's three investment professionals. Crossleynotices that all three of United's investment professionals are described as "CFA charterholders," buthe is not familiar with the designation. In response to Crossley's inquiry. Burton explains thesignificance of the program by stating that the designation, which is only awarded after passing threerigorous exams and obtaining the requisite years of work experience, represents a commitment tothe highest standards of ethical and professional conduct.As a condition of moving his account to United Partners, Crossley insists that all of his trades beexecuted through his brother-in-law, a broker for Security Bank. Security Bank is a large, New Yorkbased broker/dealer but is not one of the two brokerage firms with which United currently doesbusiness. Burton contacts Crossley's brother-in-law and determines that Security Bank's tradeexecution is competitive, but Crossley's account alone would not generate enough volume towarrant any soft dollar arrangement for research materials.However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton fordirecting any of United's clients to Security Bank's retail banking division. To bring Crossley on as aclient, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute allof Crossley's trades but will use research materials provided by the other two brokers to assist in themanagement of Crossley's account.Several months later, Burton is invited to a road show for an initial public offering (IPO) for SolutionWare, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.Burton attends the meeting, which is led by two investment bankers and one software industryresearch analyst from Security Bank who covers SolutionWare. Burton notes that the bankers fromSecurity Bank have included detailed financial statements for SolutionWare in the offeringprospectus and also disclosed that Security Bank provides a warehouse line of credit toSolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWareequity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placingCrossley's order, Burton reads the SolutionWare marketing materials and performs a detailedanalysis of expected future earnings and other key factors for the investment decision. Burtondetermines that the offering would be a suitable investment for his own retirement portfolio inaddition to Crossley's portfolio. United Partners, being a small firm, has no formal written policyregarding trade allocation, employee participation in equity offerings, or established blackoutperiods for employee trading. Burton adds his order to Crossley's order and places a purchase orderfor the combined number of shares with Security Bank. Burton is later notified that the offering wasoversubscribed, and United Partners was only able to obtain roughly 75% of the desired number ofshares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and hisown retirement account. When Burton notifies Crossley of the situation, Crossley is nonethelesspleased to have a position, though smaller than requested, in such a "hot" offering.Did the marketing materials presented to Crossley by Burton violate Standard III(D) PerformancePresentation or Standard VI 1(B) Reference to CFA Institute, the CFA Designation, and the CFAProgram?

A. Standard III(D) only.
B. Standard VII(B) only.
C. Both Standard III(D) and Standard VIT(B) are violated.

Answer: A

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Question # 14

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firmthat employs three investment professionals and currently has approximately $250 million of assetsunder management. The client base of United Partners is varied, and accounts range in size fromsmall retirement accounts to a $30 million private school endowment. In addition to Burton'sadministrative responsibilities as the managing partner at United, he also serves as an investmentadvisor to several clients. Because United Partners is a small firm, the company does not employ anyresearch analysts but instead obtains its investment research products and services from twonational brokerage firms, which in turn execute all client trades for United Partners. Thearrangement with the two brokers has enabled United to assure its clients that the firm will alwaysseek the best execution for them by having both brokers competitively bid for United's business.A prospective client, Harold Crossley, has approached Burton about shifting some of his personalassets under management from MoneyCorp to United Partners. Burton provides Crossley with apacket of marketing information that Burton developed himself. The packet contains five years ofhistorical performance data for the private school endowment, Unitcd's largest client. Burton statesthat the composite's management style and performance results are representative of themanagement style and returns that United can be expected to achieve for Crossley. Also included inthe information packet are brief bios on each of United's three investment professionals. Crossleynotices that all three of United's investment professionals are described as "CFA charterholders," buthe is not familiar with the designation. In response to Crossley's inquiry. Burton explains thesignificance of the program by stating that the designation, which is only awarded after passing threerigorous exams and obtaining the requisite years of work experience, represents a commitment tothe highest standards of ethical and professional conduct.As a condition of moving his account to United Partners, Crossley insists that all of his trades beexecuted through his brother-in-law, a broker for Security Bank. Security Bank is a large, New Yorkbased broker/dealer but is not one of the two brokerage firms with which United currently doesbusiness. Burton contacts Crossley's brother-in-law and determines that Security Bank's tradeexecution is competitive, but Crossley's account alone would not generate enough volume towarrant any soft dollar arrangement for research materials.However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton fordirecting any of United's clients to Security Bank's retail banking division. To bring Crossley on as aclient, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute allof Crossley's trades but will use research materials provided by the other two brokers to assist in themanagement of Crossley's account.Several months later, Burton is invited to a road show for an initial public offering (IPO) for SolutionWare, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.Burton attends the meeting, which is led by two investment bankers and one software industryresearch analyst from Security Bank who covers SolutionWare. Burton notes that the bankers fromSecurity Bank have included detailed financial statements for SolutionWare in the offeringprospectus and also disclosed that Security Bank provides a warehouse line of credit toSolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWareequity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placingCrossley's order, Burton reads the SolutionWare marketing materials and performs a detailedanalysis of expected future earnings and other key factors for the investment decision. Burtondetermines that the offering would be a suitable investment for his own retirement portfolio inaddition to Crossley's portfolio. United Partners, being a small firm, has no formal written policyregarding trade allocation, employee participation in equity offerings, or established blackoutperiods for employee trading. Burton adds his order to Crossley's order and places a purchase orderfor the combined number of shares with Security Bank. Burton is later notified that the offering wasoversubscribed, and United Partners was only able to obtain roughly 75% of the desired number ofshares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and hisown retirement account. When Burton notifies Crossley of the situation, Crossley is nonethelesspleased to have a position, though smaller than requested, in such a "hot" offering.The trading arrangement between Burton and Security Bank is most likely to be a violation of the CFAInstitute Soft Dollar Standards because:

A. the practice of directed brokerage violates the member's or candidate's duty of loyalty to theclient.
B. although Security Bank's execution is competitive, Burton will not be able to always obtain thebest execution for his client.
C. the other clients' brokerage will be used to pay for research that will be utilized in themanagement of Crossley's account.

Answer: C

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Question # 15

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firmthat employs three investment professionals and currently has approximately $250 million of assetsunder management. The client base of United Partners is varied, and accounts range in size fromsmall retirement accounts to a $30 million private school endowment. In addition to Burton'sadministrative responsibilities as the managing partner at United, he also serves as an investmentadvisor to several clients. Because United Partners is a small firm, the company does not employ anyresearch analysts but instead obtains its investment research products and services from twonational brokerage firms, which in turn execute all client trades for United Partners. Thearrangement with the two brokers has enabled United to assure its clients that the firm will alwaysseek the best execution for them by having both brokers competitively bid for United's business.A prospective client, Harold Crossley, has approached Burton about shifting some of his personalassets under management from MoneyCorp to United Partners. Burton provides Crossley with apacket of marketing information that Burton developed himself. The packet contains five years ofhistorical performance data for the private school endowment, Unitcd's largest client. Burton statesthat the composite's management style and performance results are representative of themanagement style and returns that United can be expected to achieve for Crossley. Also included inthe information packet are brief bios on each of United's three investment professionals. Crossleynotices that all three of United's investment professionals are described as "CFA charterholders," buthe is not familiar with the designation. In response to Crossley's inquiry. Burton explains thesignificance of the program by stating that the designation, which is only awarded after passing threerigorous exams and obtaining the requisite years of work experience, represents a commitment tothe highest standards of ethical and professional conduct.As a condition of moving his account to United Partners, Crossley insists that all of his trades beexecuted through his brother-in-law, a broker for Security Bank. Security Bank is a large, New Yorkbased broker/dealer but is not one of the two brokerage firms with which United currently doesbusiness. Burton contacts Crossley's brother-in-law and determines that Security Bank's tradeexecution is competitive, but Crossley's account alone would not generate enough volume towarrant any soft dollar arrangement for research materials.However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton fordirecting any of United's clients to Security Bank's retail banking division. To bring Crossley on as aclient, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute allof Crossley's trades but will use research materials provided by the other two brokers to assist in themanagement of Crossley's account.Several months later, Burton is invited to a road show for an initial public offering (IPO) for SolutionWare, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.Burton attends the meeting, which is led by two investment bankers and one software industryresearch analyst from Security Bank who covers SolutionWare. Burton notes that the bankers fromSecurity Bank have included detailed financial statements for SolutionWare in the offeringprospectus and also disclosed that Security Bank provides a warehouse line of credit toSolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWareequity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placingCrossley's order, Burton reads the SolutionWare marketing materials and performs a detailedanalysis of expected future earnings and other key factors for the investment decision. Burtondetermines that the offering would be a suitable investment for his own retirement portfolio inaddition to Crossley's portfolio. United Partners, being a small firm, has no formal written policyregarding trade allocation, employee participation in equity offerings, or established blackoutperiods for employee trading. Burton adds his order to Crossley's order and places a purchase orderfor the combined number of shares with Security Bank. Burton is later notified that the offering wasoversubscribed, and United Partners was only able to obtain roughly 75% of the desired number ofshares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and hisown retirement account. When Burton notifies Crossley of the situation, Crossley is nonethelesspleased to have a position, though smaller than requested, in such a "hot" offering.According to CFA Institute Standards of Professional Conduct, which of the following statements bestdescribes the circumstances under which Burton may enter into the referral agreement with SecurityBank? Burton may enter into the agreement:

A. under no circumstances.
B. only after receiving written permission from clients.
C. only after fully disclosing the referral arrangement to clients and prospective clients.

Answer: C

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Question # 16

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firmthat employs three investment professionals and currently has approximately $250 million of assetsunder management. The client base of United Partners is varied, and accounts range in size fromsmall retirement accounts to a $30 million private school endowment. In addition to Burton'sadministrative responsibilities as the managing partner at United, he also serves as an investmentadvisor to several clients. Because United Partners is a small firm, the company does not employ anyresearch analysts but instead obtains its investment research products and services from twonational brokerage firms, which in turn execute all client trades for United Partners. Thearrangement with the two brokers has enabled United to assure its clients that the firm will alwaysseek the best execution for them by having both brokers competitively bid for United's business.A prospective client, Harold Crossley, has approached Burton about shifting some of his personalassets under management from MoneyCorp to United Partners. Burton provides Crossley with apacket of marketing information that Burton developed himself. The packet contains five years ofhistorical performance data for the private school endowment, Unitcd's largest client. Burton statesthat the composite's management style and performance results are representative of themanagement style and returns that United can be expected to achieve for Crossley. Also included inthe information packet are brief bios on each of United's three investment professionals. Crossleynotices that all three of United's investment professionals are described as "CFA charterholders," buthe is not familiar with the designation. In response to Crossley's inquiry. Burton explains thesignificance of the program by stating that the designation, which is only awarded after passing threerigorous exams and obtaining the requisite years of work experience, represents a commitment tothe highest standards of ethical and professional conduct.As a condition of moving his account to United Partners, Crossley insists that all of his trades beexecuted through his brother-in-law, a broker for Security Bank. Security Bank is a large, New Yorkbased broker/dealer but is not one of the two brokerage firms with which United currently doesbusiness. Burton contacts Crossley's brother-in-law and determines that Security Bank's tradeexecution is competitive, but Crossley's account alone would not generate enough volume towarrant any soft dollar arrangement for research materials.However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton fordirecting any of United's clients to Security Bank's retail banking division. To bring Crossley on as aclient, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute allof Crossley's trades but will use research materials provided by the other two brokers to assist in themanagement of Crossley's account.Several months later, Burton is invited to a road show for an initial public offering (IPO) for SolutionWare, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.Burton attends the meeting, which is led by two investment bankers and one software industryresearch analyst from Security Bank who covers SolutionWare. Burton notes that the bankers fromSecurity Bank have included detailed financial statements for SolutionWare in the offeringprospectus and also disclosed that Security Bank provides a warehouse line of credit toSolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWareequity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placingCrossley's order, Burton reads the SolutionWare marketing materials and performs a detailedanalysis of expected future earnings and other key factors for the investment decision. Burtondetermines that the offering would be a suitable investment for his own retirement portfolio inaddition to Crossley's portfolio. United Partners, being a small firm, has no formal written policyregarding trade allocation, employee participation in equity offerings, or established blackoutperiods for employee trading. Burton adds his order to Crossley's order and places a purchase orderfor the combined number of shares with Security Bank. Burton is later notified that the offering wasoversubscribed, and United Partners was only able to obtain roughly 75% of the desired number ofshares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and hisown retirement account. When Burton notifies Crossley of the situation, Crossley is nonethelesspleased to have a position, though smaller than requested, in such a "hot" offering.With respect to the road show meeting regarding the initial public offering of Solution Ware, didSecurity Bank comply with the requirements and recommendations of the CFA Institute ResearchObjectivity Standards?

A. No, because it publicly revealed that it also provides corporate finance services for Solution Ware.
B. No, because it failed to provide Burton with adequate information to make an investmentdecision.
C. No, because it allowed an analyst to participate in a marketing road show for a company that hecovers.

Answer: C

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Question # 17

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firmthat employs three investment professionals and currently has approximately $250 million of assetsunder management. The client base of United Partners is varied, and accounts range in size fromsmall retirement accounts to a $30 million private school endowment. In addition to Burton'sadministrative responsibilities as the managing partner at United, he also serves as an investmentadvisor to several clients. Because United Partners is a small firm, the company does not employ anyresearch analysts but instead obtains its investment research products and services from twonational brokerage firms, which in turn execute all client trades for United Partners. Thearrangement with the two brokers has enabled United to assure its clients that the firm will alwaysseek the best execution for them by having both brokers competitively bid for United's business.A prospective client, Harold Crossley, has approached Burton about shifting some of his personalassets under management from MoneyCorp to United Partners. Burton provides Crossley with apacket of marketing information that Burton developed himself. The packet contains five years ofhistorical performance data for the private school endowment, Unitcd's largest client. Burton statesthat the composite's management style and performance results are representative of themanagement style and returns that United can be expected to achieve for Crossley. Also included inthe information packet are brief bios on each of United's three investment professionals. Crossleynotices that all three of United's investment professionals are described as "CFA charterholders," buthe is not familiar with the designation. In response to Crossley's inquiry. Burton explains thesignificance of the program by stating that the designation, which is only awarded after passing threerigorous exams and obtaining the requisite years of work experience, represents a commitment tothe highest standards of ethical and professional conduct.As a condition of moving his account to United Partners, Crossley insists that all of his trades beexecuted through his brother-in-law, a broker for Security Bank. Security Bank is a large, New Yorkbased broker/dealer but is not one of the two brokerage firms with which United currently doesbusiness. Burton contacts Crossley's brother-in-law and determines that Security Bank's tradeexecution is competitive, but Crossley's account alone would not generate enough volume towarrant any soft dollar arrangement for research materials.However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton fordirecting any of United's clients to Security Bank's retail banking division. To bring Crossley on as aclient, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute allof Crossley's trades but will use research materials provided by the other two brokers to assist in themanagement of Crossley's account.Several months later, Burton is invited to a road show for an initial public offering (IPO) for SolutionWare, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.Burton attends the meeting, which is led by two investment bankers and one software industryresearch analyst from Security Bank who covers SolutionWare. Burton notes that the bankers fromSecurity Bank have included detailed financial statements for SolutionWare in the offeringprospectus and also disclosed that Security Bank provides a warehouse line of credit toSolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWareequity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placingCrossley's order, Burton reads the SolutionWare marketing materials and performs a detailedanalysis of expected future earnings and other key factors for the investment decision. Burtondetermines that the offering would be a suitable investment for his own retirement portfolio inaddition to Crossley's portfolio. United Partners, being a small firm, has no formal written policyregarding trade allocation, employee participation in equity offerings, or established blackoutperiods for employee trading. Burton adds his order to Crossley's order and places a purchase orderfor the combined number of shares with Security Bank. Burton is later notified that the offering wasoversubscribed, and United Partners was only able to obtain roughly 75% of the desired number ofshares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and hisown retirement account. When Burton notifies Crossley of the situation, Crossley is nonethelesspleased to have a position, though smaller than requested, in such a "hot" offering.According to CFA Institute Standards of Professional Conduct, Burton's recommendation to Crossleythat he purchase shares of the Solution Ware initial public offering is most likely:

A. in violation of Standard III(C) Suitability for not determining the appropriateness of the investmentfor the portfolio and Standard III(B) Fair Dealing for not making the investment recommendation toall of his clients at the same time.
B. in violation of Standard V(A) Diligence and Reasonable Basis for not thoroughly analyzing theinvestment before making a recommendation and in violation of Standard III(C) Suitability for notdetermining the appropriateness of the investment for the portfolio.
C. in violation of Standard V(A) Diligence and Reasonable Basis for not thoroughly analyzing theinvestment before making a recommendation and in violation of Standard III(B) Fair Dealing for notmaking the investment recommendation to all of his clients at the same time.

Answer: B

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Question # 18

Connor Burton, CFA, is the managing partner for United Partners, a small investment advisory firmthat employs three investment professionals and currently has approximately $250 million of assetsunder management. The client base of United Partners is varied, and accounts range in size fromsmall retirement accounts to a $30 million private school endowment. In addition to Burton'sadministrative responsibilities as the managing partner at United, he also serves as an investmentadvisor to several clients. Because United Partners is a small firm, the company does not employ anyresearch analysts but instead obtains its investment research products and services from twonational brokerage firms, which in turn execute all client trades for United Partners. Thearrangement with the two brokers has enabled United to assure its clients that the firm will alwaysseek the best execution for them by having both brokers competitively bid for United's business.A prospective client, Harold Crossley, has approached Burton about shifting some of his personalassets under management from MoneyCorp to United Partners. Burton provides Crossley with apacket of marketing information that Burton developed himself. The packet contains five years ofhistorical performance data for the private school endowment, Unitcd's largest client. Burton statesthat the composite's management style and performance results are representative of themanagement style and returns that United can be expected to achieve for Crossley. Also included inthe information packet are brief bios on each of United's three investment professionals. Crossleynotices that all three of United's investment professionals are described as "CFA charterholders," buthe is not familiar with the designation. In response to Crossley's inquiry. Burton explains thesignificance of the program by stating that the designation, which is only awarded after passing threerigorous exams and obtaining the requisite years of work experience, represents a commitment tothe highest standards of ethical and professional conduct.As a condition of moving his account to United Partners, Crossley insists that all of his trades beexecuted through his brother-in-law, a broker for Security Bank. Security Bank is a large, New Yorkbased broker/dealer but is not one of the two brokerage firms with which United currently doesbusiness. Burton contacts Crossley's brother-in-law and determines that Security Bank's tradeexecution is competitive, but Crossley's account alone would not generate enough volume towarrant any soft dollar arrangement for research materials.However, Crossley'-s brother-in-law does offer for Security Bank to pay a referral fee to Burton fordirecting any of United's clients to Security Bank's retail banking division. To bring Crossley on as aclient, Burton agrees to the arrangement. Going forward. Burton will use Security Bank to execute allof Crossley's trades but will use research materials provided by the other two brokers to assist in themanagement of Crossley's account.Several months later, Burton is invited to a road show for an initial public offering (IPO) for SolutionWare, a software company. Security Bank is serving as lead underwriter on SolutionWare's IPO.Burton attends the meeting, which is led by two investment bankers and one software industryresearch analyst from Security Bank who covers SolutionWare. Burton notes that the bankers fromSecurity Bank have included detailed financial statements for SolutionWare in the offeringprospectus and also disclosed that Security Bank provides a warehouse line of credit toSolutionWare. After the meeting, Burton calls Crossley to recommend the purchase of SolutionWareequity. Crossley heeds Burton's advice and tells him to purchase 5,000 shares. Before placingCrossley's order, Burton reads the SolutionWare marketing materials and performs a detailedanalysis of expected future earnings and other key factors for the investment decision. Burtondetermines that the offering would be a suitable investment for his own retirement portfolio inaddition to Crossley's portfolio. United Partners, being a small firm, has no formal written policyregarding trade allocation, employee participation in equity offerings, or established blackoutperiods for employee trading. Burton adds his order to Crossley's order and places a purchase orderfor the combined number of shares with Security Bank. Burton is later notified that the offering wasoversubscribed, and United Partners was only able to obtain roughly 75% of the desired number ofshares. To be fair. Burton allocates the shares on a pro rata basis between Crossley's account and hisown retirement account. When Burton notifies Crossley of the situation, Crossley is nonethelesspleased to have a position, though smaller than requested, in such a "hot" offering.According to CFA Standards of Professional Conduct, Burton's participation in the Solution Wareoffering most likely:

A. is in violation of the Standards because his actions adversely affected the interests of Crossley.
B. is in violation of the Standards because he did not disclose his participation in the offering toSecurity Bank.
C. is not in violation of the Standards since the shares obtained in the IPO were distributed equitablyon a pro rata basis.

Answer: A

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Question # 19

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investmentadvice and financial planning services globally to institutional and retail clients. Shortly after thecompany opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as asource of international investment opportunities for U.S. clients. Montpier's main task is to coversmall-cap stocks in the region and develop a network of contacts with other investment firms in theregion.Through her interaction with other analysts in Malaysia, Montpier learns that the use of materialnonpublic information is common practice in analyst research reports and recommendations. Suchpractice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because sherecently observed several investment bankers meeting numerous times at an exclusive local countryclub with the CEOs of two Malaysian rival companies. It is public information that one of thecompanies is searching for potential acquisition targets. She has thought several times about issuinga recommendation on one of the companies but has not done so for fear of breaking the law. Afterlearning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisitiontarget, which she had already established as a good investment through prior research.Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangementsby investment professionals. It is common for analysts and portfolio managers to maintain ongoingconsulting contracts with entities other than their primary employer. As a result of this, Montpier hasbegun financial service consultations for members of a local investment club. The club is developingan appropriate compensation package for her services, which to date have included financialplanning activities and investment research. When Montpier established the relationship with theinvestment club, she informed them that she had a full-time job at World Renowned Advisers, whichoffers similar services.After a year of consulting with the investment club, Malaysian law changed, requiring investmentbankers, securities analysts, and portfolio managers to register with the Malaysian SecuritiesCommission in order to engage in independent consulting practice. Since she is unaware of thechange, Montpier does not file the proper registration forms and is later investigated, fined, andtemporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have thesanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpartin the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors forapproximately seven years. Taylor researches health care and biotech stocks for the firm andparticipates in client meetings when managers are recommending stocks that Taylor covers. Taylorrecently completed Level 1 of the CFA examination and is waiting for his results so he can register forthe Level 2 examination.In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a researchreport on attractive companies in the health care industry. Since Taylor is busy preparing for companyconference calls, James tells him to "throw something together from the street." To meet James'request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he hasheard about but has not researched. Taylor takes the original reports he obtains from a third-party,adds some general industry information, and submits "strong buy" recommendations to James forthe stocks. He does not credit the original authors in the report, which is a violation of copyright law.Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFAProgram." Although written procedures require James to review all analyst reports prior to release,time constraints often prevent her from reviewing the reports prior to distribution. Jamesrecommends the stocks to her clients, who then purchase them. Several months later, the clients areable to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%and 17%, respectively. James informs Taylor of the clients' successful investments and requests thathe begin investigating potential biotech investments for the same group of investors.To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he andothers will be the subject of testing for the efficacy of several new drugs. On his application, Taylorindicates that he has the appropriate medical condition for the study and signs a confidentialityagreement, but he leaves the question about his occupation blank. During the study, Taylor learnsthat two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval haveserious negative side effects in patient testing. This information confirms existing research that Taylorhas been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mailto his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. NextBreakthrough releases information that the drugs in question have been held up by a regulatoryagency pending additional investigation. The stock plunges over 30% on the news.Has Montpier likely violated any CFA Standards of Professional Conduct by recommending the stockof the acquisition target company?

A. Yes
B. No, because she has already researched the company and deemed it a good investment.
C. No, because she is recommending the stock based on information assembled under the mosaictheory.

Answer: C

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Question # 20

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investmentadvice and financial planning services globally to institutional and retail clients. Shortly after thecompany opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as asource of international investment opportunities for U.S. clients. Montpier's main task is to coversmall-cap stocks in the region and develop a network of contacts with other investment firms in theregion.Through her interaction with other analysts in Malaysia, Montpier learns that the use of materialnonpublic information is common practice in analyst research reports and recommendations. Suchpractice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because sherecently observed several investment bankers meeting numerous times at an exclusive local countryclub with the CEOs of two Malaysian rival companies. It is public information that one of thecompanies is searching for potential acquisition targets. She has thought several times about issuinga recommendation on one of the companies but has not done so for fear of breaking the law. Afterlearning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisitiontarget, which she had already established as a good investment through prior research.Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangementsby investment professionals. It is common for analysts and portfolio managers to maintain ongoingconsulting contracts with entities other than their primary employer. As a result of this, Montpier hasbegun financial service consultations for members of a local investment club. The club is developingan appropriate compensation package for her services, which to date have included financialplanning activities and investment research. When Montpier established the relationship with theinvestment club, she informed them that she had a full-time job at World Renowned Advisers, whichoffers similar services.After a year of consulting with the investment club, Malaysian law changed, requiring investmentbankers, securities analysts, and portfolio managers to register with the Malaysian SecuritiesCommission in order to engage in independent consulting practice. Since she is unaware of thechange, Montpier does not file the proper registration forms and is later investigated, fined, andtemporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have thesanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpartin the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors forapproximately seven years. Taylor researches health care and biotech stocks for the firm andparticipates in client meetings when managers are recommending stocks that Taylor covers. Taylorrecently completed Level 1 of the CFA examination and is waiting for his results so he can register forthe Level 2 examination.In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a researchreport on attractive companies in the health care industry. Since Taylor is busy preparing for companyconference calls, James tells him to "throw something together from the street." To meet James'request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he hasheard about but has not researched. Taylor takes the original reports he obtains from a third-party,adds some general industry information, and submits "strong buy" recommendations to James forthe stocks. He does not credit the original authors in the report, which is a violation of copyright law.Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFAProgram." Although written procedures require James to review all analyst reports prior to release,time constraints often prevent her from reviewing the reports prior to distribution. Jamesrecommends the stocks to her clients, who then purchase them. Several months later, the clients areable to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%and 17%, respectively. James informs Taylor of the clients' successful investments and requests thathe begin investigating potential biotech investments for the same group of investors.To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he andothers will be the subject of testing for the efficacy of several new drugs. On his application, Taylorindicates that he has the appropriate medical condition for the study and signs a confidentialityagreement, but he leaves the question about his occupation blank. During the study, Taylor learnsthat two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval haveserious negative side effects in patient testing. This information confirms existing research that Taylorhas been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mailto his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. NextBreakthrough releases information that the drugs in question have been held up by a regulatoryagency pending additional investigation. The stock plunges over 30% on the news.By not filing the proper registration forms with the Malaysian Securities Commission, did Montpierlikely violate any CFA Institute Standards of Professional Conduct?

A. Yes. Montpier attempted to deceive the Malaysian Securities Commission, which violates theStandards.
B. No. Montpier‘s sanction was later removed, indicating the Commission did not hold herresponsible for the oversight.
C. Yes. Montpier should have regularly updated her knowledge about local laws and by not doing soviolated the Standards.

Answer: C

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Question # 21

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investmentadvice and financial planning services globally to institutional and retail clients. Shortly after thecompany opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as asource of international investment opportunities for U.S. clients. Montpier's main task is to coversmall-cap stocks in the region and develop a network of contacts with other investment firms in theregion.Through her interaction with other analysts in Malaysia, Montpier learns that the use of materialnonpublic information is common practice in analyst research reports and recommendations. Suchpractice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because sherecently observed several investment bankers meeting numerous times at an exclusive local countryclub with the CEOs of two Malaysian rival companies. It is public information that one of thecompanies is searching for potential acquisition targets. She has thought several times about issuinga recommendation on one of the companies but has not done so for fear of breaking the law. Afterlearning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisitiontarget, which she had already established as a good investment through prior research.Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangementsby investment professionals. It is common for analysts and portfolio managers to maintain ongoingconsulting contracts with entities other than their primary employer. As a result of this, Montpier hasbegun financial service consultations for members of a local investment club. The club is developingan appropriate compensation package for her services, which to date have included financialplanning activities and investment research. When Montpier established the relationship with theinvestment club, she informed them that she had a full-time job at World Renowned Advisers, whichoffers similar services.After a year of consulting with the investment club, Malaysian law changed, requiring investmentbankers, securities analysts, and portfolio managers to register with the Malaysian SecuritiesCommission in order to engage in independent consulting practice. Since she is unaware of thechange, Montpier does not file the proper registration forms and is later investigated, fined, andtemporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have thesanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpartin the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors forapproximately seven years. Taylor researches health care and biotech stocks for the firm andparticipates in client meetings when managers are recommending stocks that Taylor covers. Taylorrecently completed Level 1 of the CFA examination and is waiting for his results so he can register forthe Level 2 examination.In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a researchreport on attractive companies in the health care industry. Since Taylor is busy preparing for companyconference calls, James tells him to "throw something together from the street." To meet James'request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he hasheard about but has not researched. Taylor takes the original reports he obtains from a third-party,adds some general industry information, and submits "strong buy" recommendations to James forthe stocks. He does not credit the original authors in the report, which is a violation of copyright law.Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFAProgram." Although written procedures require James to review all analyst reports prior to release,time constraints often prevent her from reviewing the reports prior to distribution. Jamesrecommends the stocks to her clients, who then purchase them. Several months later, the clients areable to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%and 17%, respectively. James informs Taylor of the clients' successful investments and requests thathe begin investigating potential biotech investments for the same group of investors.To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he andothers will be the subject of testing for the efficacy of several new drugs. On his application, Taylorindicates that he has the appropriate medical condition for the study and signs a confidentialityagreement, but he leaves the question about his occupation blank. During the study, Taylor learnsthat two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval haveserious negative side effects in patient testing. This information confirms existing research that Taylorhas been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mailto his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. NextBreakthrough releases information that the drugs in question have been held up by a regulatoryagency pending additional investigation. The stock plunges over 30% on the news.In providing financial planning and investment research services to the investment club, hasMontpier likely violated any CFA Institute Standards of Professional Conduct?

A. Yes. She has not received consent from her employer to all of the terms of the arrangement.
B. Yes. She has not received verbal approval from her employer and written approval from herfinancial service client.
C. No. She has not yet received any compensation for her consulting services and has informed herfinancial service client of her firm and its services.

Answer: A

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Question # 22

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investmentadvice and financial planning services globally to institutional and retail clients. Shortly after thecompany opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as asource of international investment opportunities for U.S. clients. Montpier's main task is to coversmall-cap stocks in the region and develop a network of contacts with other investment firms in theregion.Through her interaction with other analysts in Malaysia, Montpier learns that the use of materialnonpublic information is common practice in analyst research reports and recommendations. Suchpractice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because sherecently observed several investment bankers meeting numerous times at an exclusive local countryclub with the CEOs of two Malaysian rival companies. It is public information that one of thecompanies is searching for potential acquisition targets. She has thought several times about issuinga recommendation on one of the companies but has not done so for fear of breaking the law. Afterlearning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisitiontarget, which she had already established as a good investment through prior research.Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangementsby investment professionals. It is common for analysts and portfolio managers to maintain ongoingconsulting contracts with entities other than their primary employer. As a result of this, Montpier hasbegun financial service consultations for members of a local investment club. The club is developingan appropriate compensation package for her services, which to date have included financialplanning activities and investment research. When Montpier established the relationship with theinvestment club, she informed them that she had a full-time job at World Renowned Advisers, whichoffers similar services.After a year of consulting with the investment club, Malaysian law changed, requiring investmenbankers, securities analysts, and portfolio managers to register with the Malaysian SecuritiesCommission in order to engage in independent consulting practice. Since she is unaware of thechange, Montpier does not file the proper registration forms and is later investigated, fined, andtemporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have thesanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpartin the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors forapproximately seven years. Taylor researches health care and biotech stocks for the firm andparticipates in client meetings when managers are recommending stocks that Taylor covers. Taylorrecently completed Level 1 of the CFA examination and is waiting for his results so he can register forthe Level 2 examination.In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a researchreport on attractive companies in the health care industry. Since Taylor is busy preparing for companyconference calls, James tells him to "throw something together from the street." To meet James'request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he hasheard about but has not researched. Taylor takes the original reports he obtains from a third-party,adds some general industry information, and submits "strong buy" recommendations to James forthe stocks. He does not credit the original authors in the report, which is a violation of copyright law.Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFAProgram." Although written procedures require James to review all analyst reports prior to release,time constraints often prevent her from reviewing the reports prior to distribution. Jamesrecommends the stocks to her clients, who then purchase them. Several months later, the clients areable to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%and 17%, respectively. James informs Taylor of the clients' successful investments and requests thathe begin investigating potential biotech investments for the same group of investors.To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he andothers will be the subject of testing for the efficacy of several new drugs. On his application, Taylorindicates that he has the appropriate medical condition for the study and signs a confidentialityagreement, but he leaves the question about his occupation blank. During the study, Taylor learnsthat two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval haveserious negative side effects in patient testing. This information confirms existing research that Taylorhas been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mailto his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. NextBreakthrough releases information that the drugs in question have been held up by a regulatoryagency pending additional investigation. The stock plunges over 30% on the news.In referencing his participation in the CFA program, has Taylor likely violated any CFA InstituteStandards of Professional Conduct?

A. No, since he did not imply superior investment ability as a result of his candidacy.
B. Yes, since he must refer to himself as a Level 1 candidate, not a Level 2 candidate.
C. No, since he appropriately referenced his candidacy and did not imply a partial designation.

Answer: B

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Question # 23

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investmentadvice and financial planning services globally to institutional and retail clients. Shortly after thecompany opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as asource of international investment opportunities for U.S. clients. Montpier's main task is to coversmall-cap stocks in the region and develop a network of contacts with other investment firms in theregion.Through her interaction with other analysts in Malaysia, Montpier learns that the use of materialnonpublic information is common practice in analyst research reports and recommendations. Suchpractice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because sherecently observed several investment bankers meeting numerous times at an exclusive local countryclub with the CEOs of two Malaysian rival companies. It is public information that one of thecompanies is searching for potential acquisition targets. She has thought several times about issuinga recommendation on one of the companies but has not done so for fear of breaking the law. Afterlearning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisitiontarget, which she had already established as a good investment through prior research.Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangementsby investment professionals. It is common for analysts and portfolio managers to maintain ongoingconsulting contracts with entities other than their primary employer. As a result of this, Montpier hasbegun financial service consultations for members of a local investment club. The club is developingan appropriate compensation package for her services, which to date have included financialplanning activities and investment research. When Montpier established the relationship with theinvestment club, she informed them that she had a full-time job at World Renowned Advisers, whichoffers similar services.After a year of consulting with the investment club, Malaysian law changed, requiring investmentbankers, securities analysts, and portfolio managers to register with the Malaysian SecuritiesCommission in order to engage in independent consulting practice. Since she is unaware of thechange, Montpier does not file the proper registration forms and is later investigated, fined, andtemporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have thesanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpartin the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors forapproximately seven years. Taylor researches health care and biotech stocks for the firm andparticipates in client meetings when managers are recommending stocks that Taylor covers. Taylorrecently completed Level 1 of the CFA examination and is waiting for his results so he can register forthe Level 2 examination.In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a researchreport on attractive companies in the health care industry. Since Taylor is busy preparing for companyconference calls, James tells him to "throw something together from the street." To meet James'request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he hasheard about but has not researched. Taylor takes the original reports he obtains from a third-party,adds some general industry information, and submits "strong buy" recommendations to James forthe stocks. He does not credit the original authors in the report, which is a violation of copyright law.Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFAProgram." Although written procedures require James to review all analyst reports prior to release,time constraints often prevent her from reviewing the reports prior to distribution. Jamesrecommends the stocks to her clients, who then purchase them. Several months later, the clients areable to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%and 17%, respectively. James informs Taylor of the clients' successful investments and requests thathe begin investigating potential biotech investments for the same group of investors.To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he andothers will be the subject of testing for the efficacy of several new drugs. On his application, Taylorindicates that he has the appropriate medical condition for the study and signs a confidentialityagreement, but he leaves the question about his occupation blank. During the study, Taylor learnsthat two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval haveserious negative side effects in patient testing. This information confirms existing research that Taylorhas been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mailto his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. NextBreakthrough releases information that the drugs in question have been held up by a regulatoryagency pending additional investigation. The stock plunges over 30% on the news.In creating his report on Immune Healthcare and Remedy Corp., Taylor likely violated the CFAInstitute Standards of Professional Conduct for all of the following reasons except that he failed to:

A. give proper credit to the sources of information used in his report.
B. establish a reasonable and adequate basis for his recommendation.
C. determine the suitability of the investment for his firm's clients.

Answer: C

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Question # 24

Mary Montpicr is an equity analyst with World Renowned Advisors. The firm provides investmentadvice and financial planning services globally to institutional and retail clients. Shortly after thecompany opened an office in Malaysia, Montpier's supervisor in the New York office. Rick Reynolds,asked her to relocate, and Montpier agreed. The goal of the new Malaysian office is to serve as asource of international investment opportunities for U.S. clients. Montpier's main task is to coversmall-cap stocks in the region and develop a network of contacts with other investment firms in theregion.Through her interaction with other analysts in Malaysia, Montpier learns that the use of materialnonpublic information is common practice in analyst research reports and recommendations. Suchpractice is not prohibited by law in Malaysia. Montpier is encouraged by this knowledge because sherecently observed several investment bankers meeting numerous times at an exclusive local countryclub with the CEOs of two Malaysian rival companies. It is public information that one of thecompanies is searching for potential acquisition targets. She has thought several times about issuinga recommendation on one of the companies but has not done so for fear of breaking the law. Afterlearning of the Malaysian insider trading laws, Montpier recommends the stock of the acquisitiontarget, which she had already established as a good investment through prior research.Montpier has also learned that Malaysian law is very lax regarding outside consulting arrangementsby investment professionals. It is common for analysts and portfolio managers to maintain ongoingconsulting contracts with entities other than their primary employer. As a result of this, Montpier hasbegun financial service consultations for members of a local investment club. The club is developingan appropriate compensation package for her services, which to date have included financialplanning activities and investment research. When Montpier established the relationship with theinvestment club, she informed them that she had a full-time job at World Renowned Advisers, whichoffers similar services.After a year of consulting with the investment club, Malaysian law changed, requiring investmentbankers, securities analysts, and portfolio managers to register with the Malaysian SecuritiesCommission in order to engage in independent consulting practice. Since she is unaware of thechange, Montpier does not file the proper registration forms and is later investigated, fined, andtemporarily sanctioned by the Malaysian Securities Commission. Montpier is able to have thesanction, but not the fine, removed after appealing the Commission's ruling. Montpier's counterpartin the New York office is Jim Taylor, who has worked as an analyst at World Renowned Advisors forapproximately seven years. Taylor researches health care and biotech stocks for the firm andparticipates in client meetings when managers are recommending stocks that Taylor covers. Taylorrecently completed Level 1 of the CFA examination and is waiting for his results so he can register forthe Level 2 examination.In preparation for a client meeting, Taylor's supervisor, Jessica James, asks him to prepare a researchreport on attractive companies in the health care industry. Since Taylor is busy preparing for companyconference calls, James tells him to "throw something together from the street." To meet James'request, Taylor obtains reports on Immune Healthcare and Remedy Corp., two companies that he hasheard about but has not researched. Taylor takes the original reports he obtains from a third-party,adds some general industry information, and submits "strong buy" recommendations to James forthe stocks. He does not credit the original authors in the report, which is a violation of copyright law.Taylor includes his qualifications in the report and mentions that he is a "Level 2 Candidate in the CFAProgram." Although written procedures require James to review all analyst reports prior to release,time constraints often prevent her from reviewing the reports prior to distribution. Jamesrecommends the stocks to her clients, who then purchase them. Several months later, the clients areable to sell the Immune Healthcare and Remedy Corp. shares at annualized rates of return of 21%and 17%, respectively. James informs Taylor of the clients' successful investments and requests thathe begin investigating potential biotech investments for the same group of investors.To gain insight on biotech stocks, Taylor registers for an upcoming medical study, where he andothers will be the subject of testing for the efficacy of several new drugs. On his application, Taylorindicates that he has the appropriate medical condition for the study and signs a confidentialityagreement, but he leaves the question about his occupation blank. During the study, Taylor learnsthat two of the new drugs on which Next Breakthrough Corp. is awaiting regulatory approval haveserious negative side effects in patient testing. This information confirms existing research that Taylorhas been working on in the health care sector. At the conclusion of the study, Taylor sends an e-mailto his clients recommending that they "sell" Next Breakthrough Corp. Over the next two weeks. NextBreakthrough releases information that the drugs in question have been held up by a regulatoryagency pending additional investigation. The stock plunges over 30% on the news.By using the information obtained as a result of participating in the drug study, did Taylor likelyviolate any CFA Institute Standards of Professional Conduct?

A. Yes.
B. No. By participating in the study, Taylor had permission to use the information for the benefit ofhis clients.
C. No. The information received supplemented Taylor's existing research and was non-material,nonpublic information.

Answer: A

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Question # 25

Valentine notes that a share of Trailblazer's stock is currently priced at $32. Moreover, she expectsthe dividend for next year to be $1.47 and forecasts that the price of one share of Trailblazer stock atthe end of the year wilt be $35.In her report, Valentine makes the following statements about Trailblazer dividends:Statement 1: Trailblazer is expected to pay a dividend next year and will continue to do so for theforeseeable future.Statement 2: The required rate of return for Trailblazer stock will likely exceed the growth rate of itsdividends.Statement 3: Trailblazer is in a mature sector of its industry, and accordingly,I expect dividends to decline to a constant rate of 4% indefinitely.In speaking to a colleague at her firm, Valentine makes the following additional statements after herreport is released:Statement 4: Trailblazer has a 10-year history of paying regular quarterly dividends.Statement 5: Over a recent 10-year period, Trailblazer has experienced one 3-year period ofconsecutive losses and another period of two annual losses in a row but has been extremelyprofitable in the remaining five years.Valentine is concerned about the theoretical validity of using the APT to obtain an estimate of therequired rate of return on equity. She decides to attend a conference dealing specifically withestimation techniques that analysts can employ. At one of the conference seminars, the followingpoints are made:Statement 6: The APT is a better approach than the CAPM because even though the factor riskpremiums are difficult to estimate, the CAPM is more problematic because it relies on a singlemarket risk premium estimate, which in turn leads to greater input uncertainty.Statement 7: Model uncertainty is a problem with the APT but not with the CAPM.Valentine is also analyzing the stock of Farwell, Inc. Farwell shares are currently trading at $48 basedon current earnings of $4 and a current dividend of $2.60. Dividends are expected to grow at 5% peryear indefinitely. The risk-free rate is 3.5%, the market risk premium is 4.5%, and Farwell's beta isestimated to be 1.2.Based on the APT model and the bond yield plus risk-premium (BYPRP) method, the discount rateValentine should use in valuing the equity of Trailblazer is closest to:Rate based on APT Rate based on BYPRP

A. 8.40% 10.25% 
B. 4.90% 10.25% 
C. 8.40% 7.25% 

Answer: A

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Question # 26

Valentine notes that a share of Trailblazer's stock is currently priced at $32. Moreover, she expectsthe dividend for next year to be $1.47 and forecasts that the price of one share of Trailblazer stock atthe end of the year wilt be $35.In her report, Valentine makes the following statements about Trailblazer dividends:Statement 1: Trailblazer is expected to pay a dividend next year and will continue to do so for theforeseeable future.Statement 2: The required rate of return for Trailblazer stock will likely exceed the growth rate of itsdividends.Statement 3: Trailblazer is in a mature sector of its industry, and accordingly,I expect dividends to decline to a constant rate of 4% indefinitely.In speaking to a colleague at her firm, Valentine makes the following additional statements after herreport is released:Statement 4: Trailblazer has a 10-year history of paying regular quarterly dividends.Statement 5: Over a recent 10-year period, Trailblazer has experienced one 3-year period ofconsecutive losses and another period of two annual losses in a row but has been extremelyprofitable in the remaining five years.Valentine is concerned about the theoretical validity of using the APT to obtain an estimate of therequired rate of return on equity. She decides to attend a conference dealing specifically withestimation techniques that analysts can employ. At one of the conference seminars, the followingpoints are made:Statement 6: The APT is a better approach than the CAPM because even though the factor riskpremiums are difficult to estimate, the CAPM is more problematic because it relies on a singlemarket risk premium estimate, which in turn leads to greater input uncertainty.Statement 7: Model uncertainty is a problem with the APT but not with the CAPM.Valentine is also analyzing the stock of Farwell, Inc. Farwell shares are currently trading at $48 basedon current earnings of $4 and a current dividend of $2.60. Dividends are expected to grow at 5% peryear indefinitely. The risk-free rate is 3.5%, the market risk premium is 4.5%, and Farwell's beta isestimated to be 1.2.How many of the first three statements Valentine made concerning Trailblazer's dividends areconsistent with assumptions of the Gordon growth model (GGM)?

A. None. 
B. Two. 
C. Three. 

Answer: C

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Question # 27

Valentine notes that a share of Trailblazer's stock is currently priced at $32. Moreover, she expectsthe dividend for next year to be $1.47 and forecasts that the price of one share of Trailblazer stock atthe end of the year wilt be $35.In her report, Valentine makes the following statements about Trailblazer dividends:Statement 1: Trailblazer is expected to pay a dividend next year and will continue to do so for theforeseeable future.Statement 2: The required rate of return for Trailblazer stock will likely exceed the growth rate of itsdividends.Statement 3: Trailblazer is in a mature sector of its industry, and accordingly,I expect dividends to decline to a constant rate of 4% indefinitely.In speaking to a colleague at her firm, Valentine makes the following additional statements after herreport is released:Statement 4: Trailblazer has a 10-year history of paying regular quarterly dividends.Statement 5: Over a recent 10-year period, Trailblazer has experienced one 3-year period ofconsecutive losses and another period of two annual losses in a row but has been extremelyprofitable in the remaining five years.Valentine is concerned about the theoretical validity of using the APT to obtain an estimate of therequired rate of return on equity. She decides to attend a conference dealing specifically withestimation techniques that analysts can employ. At one of the conference seminars, the followingpoints are made:Statement 6: The APT is a better approach than the CAPM because even though the factor riskpremiums are difficult to estimate, the CAPM is more problematic because it relies on a singlemarket risk premium estimate, which in turn leads to greater input uncertainty.Statement 7: Model uncertainty is a problem with the APT but not with the CAPM.Valentine is also analyzing the stock of Farwell, Inc. Farwell shares are currently trading at $48 basedon current earnings of $4 and a current dividend of $2.60. Dividends are expected to grow at 5% peryear indefinitely. The risk-free rate is 3.5%, the market risk premium is 4.5%, and Farwell's beta isestimated to be 1.2.Do Statements 4 and 5 support the decision by Valentine to use a dividend discount model?

A. Both statements support the use of DDM. 
B. Only Statement 4 supports the use of DDM. 
C. Only Statement 5 supports the use of DDM. 

Answer: B

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Question # 28

Valentine notes that a share of Trailblazer's stock is currently priced at $32. Moreover, she expectsthe dividend for next year to be $1.47 and forecasts that the price of one share of Trailblazer stock atthe end of the year wilt be $35.In her report, Valentine makes the following statements about Trailblazer dividends:Statement 1: Trailblazer is expected to pay a dividend next year and will continue to do so for theforeseeable future.Statement 2: The required rate of return for Trailblazer stock will likely exceed the growth rate of itsdividends.Statement 3: Trailblazer is in a mature sector of its industry, and accordingly,I expect dividends to decline to a constant rate of 4% indefinitely.In speaking to a colleague at her firm, Valentine makes the following additional statements after herreport is released:Statement 4: Trailblazer has a 10-year history of paying regular quarterly dividends.Statement 5: Over a recent 10-year period, Trailblazer has experienced one 3-year period ofconsecutive losses and another period of two annual losses in a row but has been extremelyprofitable in the remaining five years.Valentine is concerned about the theoretical validity of using the APT to obtain an estimate of therequired rate of return on equity. She decides to attend a conference dealing specifically withestimation techniques that analysts can employ. At one of the conference seminars, the followingpoints are made:Statement 6: The APT is a better approach than the CAPM because even though the factor riskpremiums are difficult to estimate, the CAPM is more problematic because it relies on a singlemarket risk premium estimate, which in turn leads to greater input uncertainty.Statement 7: Model uncertainty is a problem with the APT but not with the CAPM.Valentine is also analyzing the stock of Farwell, Inc. Farwell shares are currently trading at $48 basedon current earnings of $4 and a current dividend of $2.60. Dividends are expected to grow at 5% peryear indefinitely. The risk-free rate is 3.5%, the market risk premium is 4.5%, and Farwell's beta isestimated to be 1.2.Are Statements 6 and 7 correct?

A. Both statements are incorrect. 
B. Only Statement 6 is incorrect. 
C. Only Statement 7 is incorrect. 

Answer: A

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Question # 29

Valentine notes that a share of Trailblazer's stock is currently priced at $32. Moreover, she expectsthe dividend for next year to be $1.47 and forecasts that the price of one share of Trailblazer stock atthe end of the year wilt be $35.In her report, Valentine makes the following statements about Trailblazer dividends:Statement 1: Trailblazer is expected to pay a dividend next year and will continue to do so for theforeseeable future.Statement 2: The required rate of return for Trailblazer stock will likely exceed the growth rate of itsdividends.Statement 3: Trailblazer is in a mature sector of its industry, and accordingly,I expect dividends to decline to a constant rate of 4% indefinitely.In speaking to a colleague at her firm, Valentine makes the following additional statements after herreport is released:Statement 4: Trailblazer has a 10-year history of paying regular quarterly dividends.Statement 5: Over a recent 10-year period, Trailblazer has experienced one 3-year period ofconsecutive losses and another period of two annual losses in a row but has been extremelyprofitable in the remaining five years.Valentine is concerned about the theoretical validity of using the APT to obtain an estimate of therequired rate of return on equity. She decides to attend a conference dealing specifically withestimation techniques that analysts can employ. At one of the conference seminars, the followingpoints are made:Statement 6: The APT is a better approach than the CAPM because even though the factor riskpremiums are difficult to estimate, the CAPM is more problematic because it relies on a singlemarket risk premium estimate, which in turn leads to greater input uncertainty.Statement 7: Model uncertainty is a problem with the APT but not with the CAPM.Valentine is also analyzing the stock of Farwell, Inc. Farwell shares are currently trading at $48 basedon current earnings of $4 and a current dividend of $2.60. Dividends are expected to grow at 5% peryear indefinitely. The risk-free rate is 3.5%, the market risk premium is 4.5%, and Farwell's beta isestimated to be 1.2.The justified leading and justified trailing P/E ratios of Farwell are closest to:Justified leading P/E Justified trailing P/E

A. 16.67 9.42 
B. 8.97 17.50 
C. 16.67 17.50 

Answer: A

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Question # 30

Tom Vadney, CFA, is president and CEO of Vadney Research and Advisors (VRA), a large equityresearch firm that specializes in providing international investment and advisory services to globalportfolio managers. He has a staff of five junior analysts and three senior analysts covering industriesand firms across the Americas, Europe, and Asia-Pacific regions.In a recent meeting with an institutional portfolio manager, Vadney is asked to review the differencesbetween U.S. GAAP and International Financial Reporting Standards (IFRS) as well as provide acomprehensive industry analysis for the telecommunications sector in Europe and the Asia-Pacificregion. Vadney asks Maria Mnoyan, a senior analyst covering the sector, to research the requestedinformation for the client meeting.Prior to the meeting, Vadney and Mnoyan meet to prepare for the client presentation. They firstdiscuss differences between U.S. GAAP and IFRS. Mnoyan states that although there will beincreasing convergence between the two accounting standards, one major difference currently isthat IFRS permits either the "partial goodwill" or "full goodwill" method to value the goodwill andthe noncontrolling interest under the acquisition method. U.S. GAAP requires the full goodwillmethod. Vadney adds that U.S. GAAP requires equity method accounting for joint ventures, whileunder IFRS, proportionate consolidation is preferred, but the equity method is permitted.Vadney then asks Mnoyan to share her findings on the telecommunications sector. Mnoyan firstpresents an overview of the competitive forces that characterize the sector in the two regions. Inparticular, she notes that the sector in both regions is characterized by high switching costs. Vadneyasks how high switching costs would affect the bargaining power of buyers and suppliers.Mnoyan firmly believes that investing in companies located in developing countries provides stronggrowth potential through technological change and increases in capital, labor, and savings thatcontribute to higher dividend levels, even if the dividend growth rate is unaffected.In her research report Mnoyan identifies several countries and industries with attractive investmentpotential. She notices that the telecommunications sector in one of the countries is characterized bya duopoly. The $50 billion telecom industry in another country in her analysis is dominated by h\efirms with market shares of $10 billion each.Finally, Vadney and Mnoyan discuss investment opportunities in specific firms. Mnoyan values firmsusing both the discounted cash flow model and the franchise value method. She makes the followingstatements on the franchise value method:Statement 1: A higher asset turnover ratio increases the franchise P/E ratio, one of the componentsof the intrinsic P/E value.Statement 2: When firms pay out profits as dividends at a higher rate, a firm's intrinsic P/E valuedecreases.Are Mnoyan and Vadney correct about differences between U.S. GAAP and IFRS?

A. Both are correct. 
B. Only Mnoyan is correct. 
C. Only Vadney is correct. 

Answer: A

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Question # 31

Mike Zonding, CFA, is conducting a background check on CFA candidate Annie Cooken, a freshlynudled MBA who applied for a stock-analysis job at his firm, Khasko Financiar.vZoftding does not liketo hire anyone who does not adhere to the Code and Standards' professional conduct requirements.The background check reveals the following:(i) While doing a full-time, unpaid internship at Kale Investments, Cooken was reprimanded forworking a 30-hour-a-week night job as a waitress.(ii) As an intern at Lammar Corp., Cooken was fired after revealing to the FBI that one of theprincipals was embezzling from the firm's clients.(iii) Cooken performed 40 hours of community service in relation to a conviction on a misdemeanordrug possession charge when she was 16 years old.(iv) On her resume, Cooken writes, "Recently passed Level 2 of the CFA exam, a test that measurescandidates' knowledge of finance and investing."During the interview, Zonding asks Cooken several questions on ethics-related issues, includingquestions about the role of a fiduciary and Standard III(E) Preservation of Confidentiality. He asks herabout her internship at Kale Investments, specifically about the working hours. Cooken replies thatthe internship turned out to require more time than she originally planned, up to 65 hours per week.Zonding subsequently hires Cooken and functions as her supervisor. On her third day at the moneymanagement boutique firm, portfolio manager Steven Garrison hands her a report on MoclineTobacco and tells her to revise the report to reflect a buy rating. Cooken is uncomfortable aboutrevising the reportTo supplement the meager income from her entry-level stock-analysis job, Cooken looks for parttime work. She is offered a position working three hours each Friday and Saturday night tending barat a sports bar and grill downtown. Cooken does not tell her employer about the job.During her first week, Cooken has lunch with former MBA classmates, including Taira Basch, CFA,who works for the compliance officer at a large investment bank in town. Basch arrives late,explaining, "What a day, it's only noon and already I have worked on the following requests:1. A federal regulator called and wanted information on potentially illegal activities related to one ofthe firm's key clients.2. A rival company's employee wanted information regarding employment opportunities at the firm.3. A potential client contacted an employee and wanted detailed performance records of clientaccounts so he can decide whether to invest with the firm."Basch goes on to say that she is responsible for developing a presentation on the differencesbetween the Prudent Investor and the Prudent Man rules for managing trust portfolios. Baschexplains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciarystandards in managing the assets of a trust account, including care, skill, caution, loyalty, andimpartiality. She states that although there are many differences between the Prudent Man and thenewer Prudent Investor rule, one element of continuity is the duty of the trustee to delegateinvestment authority in the event that the trustee lacks sufficient investment knowledge.Toward the end of the lunch meeting, Basch suggests that in exchange for research published byCooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small fortheir firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangementsounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over andget back with her next week with a decision.In the context of the Code and Standards, which of the items from the background check would mostlikely indicate that Zonding should not have hired Cooken?

A. Item i.
B. Item ii.
C. Item iii.

Answer: A

Show Answer

Question # 32

Tom Vadney, CFA, is president and CEO of Vadney Research and Advisors (VRA), a large equityresearch firm that specializes in providing international investment and advisory services to globalportfolio managers. He has a staff of five junior analysts and three senior analysts covering industriesand firms across the Americas, Europe, and Asia-Pacific regions.In a recent meeting with an institutional portfolio manager, Vadney is asked to review the differencesbetween U.S. GAAP and International Financial Reporting Standards (IFRS) as well as provide acomprehensive industry analysis for the telecommunications sector in Europe and the Asia-Pacificregion. Vadney asks Maria Mnoyan, a senior analyst covering the sector, to research the requestedinformation for the client meeting.Prior to the meeting, Vadney and Mnoyan meet to prepare for the client presentation. They firstdiscuss differences between U.S. GAAP and IFRS. Mnoyan states that although there will beincreasing convergence between the two accounting standards, one major difference currently isthat IFRS permits either the "partial goodwill" or "full goodwill" method to value the goodwill andthe noncontrolling interest under the acquisition method. U.S. GAAP requires the full goodwillmethod. Vadney adds that U.S. GAAP requires equity method accounting for joint ventures, whileunder IFRS, proportionate consolidation is preferred, but the equity method is permitted.Vadney then asks Mnoyan to share her findings on the telecommunications sector. Mnoyan firstpresents an overview of the competitive forces that characterize the sector in the two regions. Inparticular, she notes that the sector in both regions is characterized by high switching costs. Vadneyasks how high switching costs would affect the bargaining power of buyers and suppliers.Mnoyan firmly believes that investing in companies located in developing countries provides stronggrowth potential through technological change and increases in capital, labor, and savings thatcontribute to higher dividend levels, even if the dividend growth rate is unaffected.In her research report Mnoyan identifies several countries and industries with attractive investmentpotential. She notices that the telecommunications sector in one of the countries is characterized bya duopoly. The $50 billion telecom industry in another country in her analysis is dominated by h\efirms with market shares of $10 billion each.Finally, Vadney and Mnoyan discuss investment opportunities in specific firms. Mnoyan values firmsusing both the discounted cash flow model and the franchise value method. She makes the followingstatements on the franchise value method:Statement 1: A higher asset turnover ratio increases the franchise P/E ratio, one of the componentsof the intrinsic P/E value.Statement 2: When firms pay out profits as dividends at a higher rate, a firm's intrinsic P/E valuedecreases.Mnoyan's best response to Vadney on how high switching costs affect the bargaining power of buyersand suppliers, respectively, should be:

A. only the bargaining power of buyers will decrease. 
B. only the bargaining power of supplies will decrease. 
C. the bargaining power of buyers and supplies will decrease. 

Answer: A

Show Answer

Question # 33

Mike Zonding, CFA, is conducting a background check on CFA candidate Annie Cooken, a freshlynudled MBA who applied for a stock-analysis job at his firm, Khasko Financiar.vZoftding does not liketo hire anyone who does not adhere to the Code and Standards' professional conduct requirements.The background check reveals the following:(i) While doing a full-time, unpaid internship at Kale Investments, Cooken was reprimanded forworking a 30-hour-a-week night job as a waitress.(ii) As an intern at Lammar Corp., Cooken was fired after revealing to the FBI that one of theprincipals was embezzling from the firm's clients.(iii) Cooken performed 40 hours of community service in relation to a conviction on a misdemeanordrug possession charge when she was 16 years old.(iv) On her resume, Cooken writes, "Recently passed Level 2 of the CFA exam, a test that measurescandidates' knowledge of finance and investing."During the interview, Zonding asks Cooken several questions on ethics-related issues, includingquestions about the role of a fiduciary and Standard III(E) Preservation of Confidentiality. He asks herabout her internship at Kale Investments, specifically about the working hours. Cooken replies thatthe internship turned out to require more time than she originally planned, up to 65 hours per week.Zonding subsequently hires Cooken and functions as her supervisor. On her third day at the moneymanagement boutique firm, portfolio manager Steven Garrison hands her a report on MoclineTobacco and tells her to revise the report to reflect a buy rating. Cooken is uncomfortable aboutrevising the report.To supplement the meager income from her entry-level stock-analysis job, Cooken looks for parttime work. She is offered a position working three hours each Friday and Saturday night tending barat a sports bar and grill downtown. Cooken does not tell her employer about the job.During her first week, Cooken has lunch with former MBA classmates, including Taira Basch, CFA,who works for the compliance officer at a large investment bank in town. Basch arrives late,explaining, "What a day, it's only noon and already I have worked on the following requests:1. A federal regulator called and wanted information on potentially illegal activities related to one ofthe firm's key clients.2. A rival company's employee wanted information regarding employment opportunities at the firm.3. A potential client contacted an employee and wanted detailed performance records of clientaccounts so he can decide whether to invest with the firm."Basch goes on to say that she is responsible for developing a presentation on the differencesbetween the Prudent Investor and the Prudent Man rules for managing trust portfolios. Baschexplains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciarystandards in managing the assets of a trust account, including care, skill, caution, loyalty, andimpartiality. She states that although there are many differences between the Prudent Man and thenewer Prudent Investor rule, one element of continuity is the duty of the trustee to delegateinvestment authority in the event that the trustee lacks sufficient investment knowledge.Toward the end of the lunch meeting, Basch suggests that in exchange for research published byCooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small fortheir firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangementsounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over andget back with her next week with a decision.Which of the following statements provides the least appropriate , justification for Cooken's cautionabout revising the report on Mocline Tobacco?

A. Cooken knows next to nothing about Mocline stock. _
B. Cooken's uncle, George Whales, is the CFO of Mocline.
C. In college, Cooken worked for Mocline but never declared the income on her taxes.

Answer: C

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Question # 34

Tom Vadney, CFA, is president and CEO of Vadney Research and Advisors (VRA), a large equityresearch firm that specializes in providing international investment and advisory services to globalportfolio managers. He has a staff of five junior analysts and three senior analysts covering industriesand firms across the Americas, Europe, and Asia-Pacific regions.In a recent meeting with an institutional portfolio manager, Vadney is asked to review the differencesbetween U.S. GAAP and International Financial Reporting Standards (IFRS) as well as provide acomprehensive industry analysis for the telecommunications sector in Europe and the Asia-Pacificregion. Vadney asks Maria Mnoyan, a senior analyst covering the sector, to research the requestedinformation for the client meeting.Prior to the meeting, Vadney and Mnoyan meet to prepare for the client presentation. They firstdiscuss differences between U.S. GAAP and IFRS. Mnoyan states that although there will beincreasing convergence between the two accounting standards, one major difference currently isthat IFRS permits either the "partial goodwill" or "full goodwill" method to value the goodwill andthe noncontrolling interest under the acquisition method. U.S. GAAP requires the full goodwillmethod. Vadney adds that U.S. GAAP requires equity method accounting for joint ventures, whileunder IFRS, proportionate consolidation is preferred, but the equity method is permitted.Vadney then asks Mnoyan to share her findings on the telecommunications sector. Mnoyan firstpresents an overview of the competitive forces that characterize the sector in the two regions. Inparticular, she notes that the sector in both regions is characterized by high switching costs. Vadneyasks how high switching costs would affect the bargaining power of buyers and suppliers.Mnoyan firmly believes that investing in companies located in developing countries provides stronggrowth potential through technological change and increases in capital, labor, and savings thatcontribute to higher dividend levels, even if the dividend growth rate is unaffected.In her research report Mnoyan identifies several countries and industries with attractive investmentpotential. She notices that the telecommunications sector in one of the countries is characterized bya duopoly. The $50 billion telecom industry in another country in her analysis is dominated by h\efirms with market shares of $10 billion each.Finally, Vadney and Mnoyan discuss investment opportunities in specific firms. Mnoyan values firmsusing both the discounted cash flow model and the franchise value method. She makes the followingstatements on the franchise value method:Statement 1: A higher asset turnover ratio increases the franchise P/E ratio, one of the components of the intrinsic P/E value.Statement 2: When firms pay out profits as dividends at a higher rate, a firm's intrinsic P/E valuedecreases.Mnoyan's description of the growth potential of developing countries is best described through the:

A. endogenous growth theory. 
B. neoclassical growth theory. 
C. multifactor model theory. 

Answer: A

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Question # 35

Mike Zonding, CFA, is conducting a background check on CFA candidate Annie Cooken, a freshlynudled MBA who applied for a stock-analysis job at his firm, Khasko Financiar.vZoftding does not liketo hire anyone who does not adhere to the Code and Standards' professional conduct requirements.The background check reveals the following:(i) While doing a full-time, unpaid internship at Kale Investments, Cooken was reprimanded forworking a 30-hour-a-week night job as a waitress.(ii) As an intern at Lammar Corp., Cooken was fired after revealing to the FBI that one of theprincipals was embezzling from the firm's clients.(iii) Cooken performed 40 hours of community service in relation to a conviction on a misdemeanordrug possession charge when she was 16 years old.(iv) On her resume, Cooken writes, "Recently passed Level 2 of the CFA exam, a test that measurescandidates' knowledge of finance and investing."During the interview, Zonding asks Cooken several questions on ethics-related issues, includingquestions about the role of a fiduciary and Standard III(E) Preservation of Confidentiality. He asks herabout her internship at Kale Investments, specifically about the working hours. Cooken replies thatthe internship turned out to require more time than she originally planned, up to 65 hours per week.Zonding subsequently hires Cooken and functions as her supervisor. On her third day at the moneymanagement boutique firm, portfolio manager Steven Garrison hands her a report on MoclineTobacco and tells her to revise the report to reflect a buy rating. Cooken is uncomfortable aboutrevising the report.To supplement the meager income from her entry-level stock-analysis job, Cooken looks for parttime work. She is offered a position working three hours each Friday and Saturday night tending barat a sports bar and grill downtown. Cooken does not tell her employer about the job.During her first week, Cooken has lunch with former MBA classmates, including Taira Basch, CFA,who works for the compliance officer at a large investment bank in town. Basch arrives late,explaining, "What a day, it's only noon and already I have worked on the following requests:1. A federal regulator called and wanted information on potentially illegal activities related to one ofthe firm's key clients.2. A rival company's employee wanted information regarding employment opportunities at the firm.3. A potential client contacted an employee and wanted detailed performance records of clientaccounts so he can decide whether to invest with the firm."Basch goes on to say that she is responsible for developing a presentation on the differencesbetween the Prudent Investor and the Prudent Man rules for managing trust portfolios. Baschexplains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciarystandards in managing the assets of a trust account, including care, skill, caution, loyalty, andimpartiality. She states that although there are many differences between the Prudent Man and thenewer Prudent Investor rule, one element of continuity is the duty of the trustee to delegateinvestment authority in the event that the trustee lacks sufficient investment knowledge.Toward the end of the lunch meeting, Basch suggests that in exchange for research published byCooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small fortheir firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangementsounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over andget back with her next week with a decision.By not telling Zonding about the bartending position, Cooken has most likely violated:

A. no Standards.
B. Standard IV(B) Additional Compensation Arrangements.
C. Standard IV(A) Loyalty (to employer) and Standard IV(B) Additional Compensation Arrangements.

Answer: A

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Question # 36

Mike Zonding, CFA, is conducting a background check on CFA candidate Annie Cooken, a freshlynudled MBA who applied for a stock-analysis job at his firm, Khasko Financiar.vZoftding does not liketo hire anyone who does not adhere to the Code and Standards' professional conduct requirements.The background check reveals the following:(i) While doing a full-time, unpaid internship at Kale Investments, Cooken was reprimanded forworking a 30-hour-a-week night job as a waitress.(ii) As an intern at Lammar Corp., Cooken was fired after revealing to the FBI that one of theprincipals was embezzling from the firm's clients.(iii) Cooken performed 40 hours of community service in relation to a conviction on a misdemeanordrug possession charge when she was 16 years old.(iv) On her resume, Cooken writes, "Recently passed Level 2 of the CFA exam, a test that measurescandidates' knowledge of finance and investing."During the interview, Zonding asks Cooken several questions on ethics-related issues, includingquestions about the role of a fiduciary and Standard III(E) Preservation of Confidentiality. He asks herabout her internship at Kale Investments, specifically about the working hours. Cooken replies thatthe internship turned out to require more time than she originally planned, up to 65 hours per week.Zonding subsequently hires Cooken and functions as her supervisor. On her third day at the moneymanagement boutique firm, portfolio manager Steven Garrison hands her a report on MoclineTobacco and tells her to revise the report to reflect a buy rating. Cooken is uncomfortable aboutrevising the report.To supplement the meager income from her entry-level stock-analysis job, Cooken looks for parttime work. She is offered a position working three hours each Friday and Saturday night tending barat a sports bar and grill downtown. Cooken does not tell her employer about the job.During her first week, Cooken has lunch with former MBA classmates, including Taira Basch, CFA,who works for the compliance officer at a large investment bank in town. Basch arrives late,explaining, "What a day, it's only noon and already I have worked on the following requests:1. A federal regulator called and wanted information on potentially illegal activities related to one ofthe firm's key clients.2. A rival company's employee wanted information regarding employment opportunities at the firm.3. A potential client contacted an employee and wanted detailed performance records of clientaccounts so he can decide whether to invest with the firm."Basch goes on to say that she is responsible for developing a presentation on the differencesbetween the Prudent Investor and the Prudent Man rules for managing trust portfolios. Baschexplains to Cooken that the Prudent Investor rule requires a trustee to exercise five fiduciarystandards in managing the assets of a trust account, including care, skill, caution, loyalty, andimpartiality. She states that although there are many differences between the Prudent Man and thenewer Prudent Investor rule, one element of continuity is the duty of the trustee to delegateinvestment authority in the event that the trustee lacks sufficient investment knowledge.Toward the end of the lunch meeting, Basch suggests that in exchange for research published byCooken and Khasko, Basch can have portfolio managers at her firm send clients that are too small fortheir firm to Khasko. Since Khasko specializes in clients with smaller portfolios, the arrangementsounds like a good idea to Cooken. Cooken tells Basch that she will think the arrangement over andget back with her next week with a decision.Which of the requests, if fulfilled, is most likely to place Basch in violation of Standard III(E)Preservation of Confidentiality?

A. Request 1.
B. Request 2.
C. Request 3.

Answer: C

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