Exam 1

Question 1

• What is ethics?

Answer 1

o Ethics refers to standards of right and wrong that prescribe what humans ought to do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues.

Question 2

• Sway

Answer 2

o the irresistible pull of irrational behavior

Question 3

• Dogma

Answer 3

o a principle or set of principles laid down by an authority as incontrovertibly true

Question 4

• Justice

Answer 4

o Distributing scarce goods in which it maximizes welfare, respects freedom, and in a virtuous way

Question 5

• Cultural Relativism

Answer 5

o Ethical decisions are based upon cultural and social (and professional) norms.
o There is no objective right or wrong. Right or Wrong is determined by the culture and the time.

Question 6

o Claims by Cultural Relativists

Answer 6

 Different societies have different moral codes – there is no universal truth in ethics.
 The moral code of a society determines what is right within that society.
 There is no standard that can be used to judge one society’s code as better than another’s.
 The moral code of our own society has no special status.
 We should be tolerant of other cultures moral codes.

Question 7

• Problematic Implications of Cultural Relativism

Answer 7

1. It undermines the criticism of the practices of other societies.
2. Something is moral if it abides by your society’s moral code. – Is our society perfect?
3. Can a society make moral progress – can it become better at social justice?

Question 8

• Ethical Egoism

Answer 8

o Each person ought to pursue his or her own self-interest exclusively.
o Other people matter only insofar as they can benefit me

Question 9

• Psychological Egoism

Answer 9

o We do pursue self-interest, that’s the way things are – animalistic?

Question 10

• Altruism

Answer 10

o The belief or practice of selfless concern for the well-being of others
Train tracks rescues

Question 11

• Ayn Rand’s argument for ethical egoism

Answer 11

o Morality demands the ultimate respect for the rights of individuals
o Altruism denies the value of an individual (the person that helps)

Question 12

• Arguments for Ethical Egoism

Answer 12

o Ethical Egoism is compatible with commonplace morality
o ethical egoism may explain commonplace morality (tell truth, avoid harm, etc.).
o Unifying principle of self-interest / reciprocal relationships – the Golden Rule

Question 13

• Deontology

Answer 13

o Some things are immoral no matter what the outcome.

Question 14

• Act Utilitarianism

Answer 14

o Always pursue the action that results in the greatest good for the greatest number
o Transplant surgeon with 5 critical patients and one ne’er-do-well, orphaned neighbor

Question 15

• Rule Utilitarianism

Answer 15

o Live by rules that, in general, are likely to lead to the greatest good for the greatest number
o Long-term cost of harvesting organs from unsuspecting innocents

Question 16

• Utilitarianism – Objections (individual rights)

Answer 16

 Society benefit vs Individuals
 Individuals matter, but only to the extent that preferences are tallied along with everyone else’s
 Utilitarianism may sanction actions that violate those middle of the road norms that we discussed earlier (respect, decency)

Examples:
 Throwing Christians to the Lions
 Is Torture ever justified?
 City of Omelas – Ursula K. La Guin

Question 17

• Kant

Answer 17

Humans are special. We’re rational beings worthy of dignity and respect

o Morality is not about maximizing happiness (or any other end), instead it is about respecting persons as an end in themselves

Question 18

• Pure Practical Reason

Answer 18

o Pleasure/pain certainly drive us, but we also have the capacity for reason
o We have the capacity for autonomy – choosing freely

Question 19

• Freedom

Answer 19

acting according to a law I give myself (free will/autonomy), not according to dictates of nature or social convention (heteronomy)

Question 20

• Hypothetical Imperatives

Answer 20

o The action is good solely as a means to something else
In order to get good grades, you have to study
o A means to an end

Question 21

• Categorical Imperatives

Answer 21

o The act is good in itself – not merely as a means to an end.
• An imperative is an act that is required.

Question 22

• Two forms of the categorical imperative

Answer 22

o Universal law

o Humanity as an end and not just a means

Question 23

• Criticisms of Kant’s Categorical Imperative

Answer 23

o There are many things that satisfy Kant’s description of a categorical imperative that do not appear to rise to the level of a moral obligation.
Talking on the phone in class

o The rules regarding the categorical imperative are so absolute.
You cannot lie ever even when you are better off and everyone else is better off if you tell a lie.
o It is hard to work through in some cases. There is no guarantee that it will lead to contradiction in every case. In other words, just because you cannot force a contradiction does not mean that the act is moral or immoral.
Some issues work very well. Stealing, lying, copyright infringement.

Question 24

Universalizing test

Answer 24

o a way of checking to see if the action puts my interests and special circumstances ahead of everyone else’s

 If we lie, then we are saying that everyone else should lie. If we will everyone to lie, then we will never know who is telling the truth, and therefore never be able to communicate

Question 25

• Inaction

Answer 25

o Inaction combined with continuing association with those involved in illegal or unethical conduct may be construed as participation or assistance in the illegal or unethical conduct.

Question 26

Standard 1 (a) of the CFA: Professionalism

Answer 26

Knowledge of the Law

 Members must understand and comply with all applicable Laws.
 When different countries laws and/or the Standards conflict, the stricter applies.
 Members must not engage in conduct that violates the Standards even when the conduct is permitted by law.

Question 27

Standard 1 (b) of the CFA: Professionalism

Answer 27

Independence and Objectivity

 Members and Candidates must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities.
 Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.
 MAINLY ABOUT AVOIDING CONFLICTS OF INTEREST
 Pressure sometimes results in vague statements, disclaimers – users of research may not understand such subtleties.

Question 28

Standard 1 (c) of the CFA: Professionalism

Answer 28

Misrepresentation

 Members and Candidates must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
 A misrepresentation consists of
• An untrue statement
• A true statement that is misleading
 You may also lie by omission. If you fail to correct a false impression you are in violation of standard 1C.
 Misrepresentation can be oral or written through any medium.
 Misrepresentation that is caused by carelessness is also prohibited. Example, failure to update a web page.

Question 29

Standard 1 (d) of the CFA: Professionalism

Answer 29

Misconduct

 Members and Candidates must not engage in any professional conduct involving dishonest, fraud, or deceit or commit any act that reflects adversely on their professional reputation, integrity, or competence.
 Any illegal or unethical practice would be in violation of this standard.
 Acts that reflect adversely on professional reputation, integrity, or confidence. Include acts outside of the professional realm.
 For example repeated arrests for DUI would reflect adversely on integrity, judgment, and competence and would therefore be in violation of Standard I (D).

Question 30

• Libertarianism

Answer 30

o A political philosophy that holds individual liberty as a basic moral principle. Libertarianism includes diverse beliefs, all advocating minimization of government regulation and sharing the goal of maximizing individual liberty and political freedom.

Question 31

• Libertarianism would oppose:

Answer 31

o Paternalism
o Morals Legislation
o Laws that redistribute wealth
 Wealth Re-Distribution
• Suppose you took $1Million from Bill Gates and found the 100 poorest of the poor and gave them each $10,000.
• Bill Gate’s would have very little change to his lifestyle, but the 100 poor would benefit greatly.
• To be “fair,” should we take from BG until it hurts him as much as it helps the next recipient?
• Marginal cost should equal marginal benefit

Question 32

• Objections to Wealth Re-Distribution

Answer 32

o Utilitarian – the incentive to work is removed/lessened  overall pool of $ available shrinks = lower overall utility
o Libertarian – to take $ is coercive, a violation of the fundamental right of LIBERTY

Question 33

• Nozick’s “Entitlement Theory”

Answer 33

o Justice in Acquisition: If you acquire property through your own labor or by using your labor and the fruits of the world (for example mining, fishing, or agriculture). Then you have absolute entitlement to the property.
o Justice in Transfer: If you acquire something through a free exchange in the marketplace or from a gift voluntarily given, then you are entitled to it.
o Based on the potential, not the outcome

Question 34

• General Principles for Research Independence

Answer 34

o Research must be objective and free of bias.
o Analysts must exercise diligence, independence, and thoroughness.
o Analysts must distinguish between fact and opinion in their reports.
o Conclusions must have a reasonable and adequate bases.
o Analysts must fully disclose conflicts of interest in the report.
o Analysts must report the nature of their compensation in the report.

Question 35

• Standard II (a): Integrity of Capital Markets

Answer 35

o Material Nonpublic Information
 Members and Candidates who possess material nonpublic information must not act or cause others to act on the information.
 Cannot be used by CFA people
• Insider trading

o Material Information
 Information that would be likely to have an impact on the value of the stock.
(and/or)
 Reasonable investors would like to know this information prior to making an investment decision.
 Key Factors in Determining if Information is Material
• Specificity
• Extent of Difference from public information
• Nature of the information
• Reliability of the information
o Non-Public Information
 Selective disclosure say as to a select group of “friendly” financial analysts would not be considered to be public information. Trading on such information may be considered trading on “insider information.”
 Comments by insiders regarding questions about the interpretation of publicly available information may be considered non-public information.

Question 36

• Standard II (b) – Market manipulation

Answer 36

o Members and Candidates must not engage in practices that distort prices or artificially inflate trading volume with the intent to mislead market participants.

o Prohibits:
 Any actions designed to generate distortions in price, volume, or other reports in order to deceive market participants.
 The dissemination of false rumors (pump and dump strategy).
 Securing a position in an asset in order to manipulate the price of it’s derivative asset (or underlying asset).
o Not Prohibited
 Legal tax loss capture and tax swap strategies are not prohibited.
 Such strategies do not involve misleading the market.

Question 37

• Standard III (a) - Duties to Clients

Answer 37

o Loyalty, Prudence, and Care
o Investment actions must be carried out for the sole benefit of the client.
o Clients’ interests must be placed above the interests of the member and her employer.
o Member must know and abide by legal fiduciary standards.
o Members must know and abide by investment policies that limit investment options (examples charities and pension investments).
o Who is the Client?
 When managing a portfolio, the client is the beneficiary of the portfolio, not the investment advisor who placed the money with you.

Question 38

• Standard III (B) Fair Dealing

Answer 38

o Members and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.
o Dissemination of Investment Recommendations:
 Dissemination should be in a manner that permits all affected clients to act on the new information. The determination of who is an affected client should be made based upon suitability and indicated interest.
 Clients who place orders contrary to a current recommendation should be advised of the recommendation before the order is executed

Question 39

• Standard III (C) – Suitability

Answer 39

o When Members and Candidates are in an advisory relationship with a client, they must:
 a. Make a reasonable inquiry into a client or prospective client’s investment experience, risk and return objectives, and financial constraints prior to making any investment recommendation or taking investment action and must reassess and update this information regularly.
 b. Determine that an investment is suitable to the client’s financial situation and consistent with the client’s written objectives, mandates, and constraints before making an investment recommendation or taking investment action. Judge the suitability of investments in the context of the client’s total portfolio.

Question 40

• Investment Policy Statement

Answer 40

o Help the client design a written Investment Policy Statement that addresses
 Risk tolerance
 Return requirements
 Investment Constraints (preferences, time horizon, liquidity needs, tax concerns, all other concerns)

Question 41

• Prudent Man Rules

Answer 41

Prohibits the investment in certain types of risky investment such as options or very risky equity investments.

Question 42

• Prudent Investor

Answer 42

Permits such investments if they reduce the risk of the portfolio.

Question 43

• Justice is:

Answer 43

o Teleological – to define rights, we need to figure out the telos (purpose, end, essential nature) of the social practice
o Honorific – to reason about the telos of a social practice, is to reason about the virtues it should honor and reward