Kaplan Mock 3 - Part 2

Question 1

Martin Zwingle is making a capital allocation decision with regard to a new project. The initial expense of the project would cause the company’s earnings per share for the current year to come in below analysts’ expectations. If Zwingle decides against the project, his firm will allocate his division a smaller capital budget next year. Which of these factors are appropriate for Zwingle to include in the capital allocation decision?

A)
Both of these factors are appropriate.
Incorrect Answer
B)
Neither of these factors is appropriate.
Correct Answer
C)
Only one of these factors is appropriate.
Incorrect Answer

Answer 1

Note: Do not make the investment decision based on the change in earnings per share in the short term.

“Basing investment decisions on EPS or ROE. Managers whose incentive compensation is tied to increasing EPS or ROE may avoid positive long-term NPV investments that are expected to reduce EPS or ROE in the short run.
Using the IRR criterion for project decisions. When comparing two mutually exclusive projects, one project may have a higher IRR, but a lower NPV. The NPV criterion is theoretically sound, accurately reflecting the goal of maximizing shareholder wealth, and should be used to choose between two projects that are both acceptable.”

Question 2

Real-time data such as stock market price feeds are said to have low latency. Data that are only communicated periodically or with a lag are said to have high latency.

Answer 2

Counter intuitive meaning for latency of data.

Question 3

distributed ledger is a database that is shared on a network so that each participant has an identical copy

Answer 3

A real-time learning and settlement of securities trades would likely to require a distributed ledger because it would require an identical record of transactions to be visible to multiple parties.

Question 4

Compared to a normal distribution, historical returns on major asset classes in developed markets have exhibited:

A)
less frequent large positive deviations.
Incorrect Answer
B)
more frequent large negative deviations.
Correct Answer
C)
the expected frequency of large deviations.
Incorrect Answer
Explanation
Historical data from global asset markets show that returns distributions exhibit negative skewness and positive excess kurtosis. Large negative deviations, and large deviations in general, have been more frequent than would be expected if returns were normally distributed. (Module 62.1, LOS 62.c)

Answer 4

The major assets don’t follow a normal distribution. It is negative skewed and has excess kurtosis.

Question 5

Mutual funds are one form of pooled investments (i.e., a single portfolio that contains investment funds from multiple investors).

• The total net value of the assets in the fund (pool) divided by the number of such shares issued is referred to as the net asset value (NAV) of each share.

Answer 5

With an open-end fund, investors can buy newly issued shares at the NAV.

Closed-end funds are professionally managed pools of investor money that do not take new investments into the fund or redeem investor shares.

• Exchange-traded funds (ETFs) are similar to closed-end funds in that purchases and sales are made in the market rather than with the fund itself.

Question 6

The asset beta of a firm equals its equity beta if:

A)
the company has no debt.
Correct Answer
B)
the company has no equity.
Incorrect Answer
C)
the company’s debt equals its equity.
Incorrect Answer

Answer 6

Not hard but recall the Beta Asset formula.

Question 7

Joanne Soto is responsible for implementing her firm’s environmental, social, and governance (ESG) investing goals. Soto decides on a best-in-class approach to ESG investing. Soto will most likely instruct her firm’s portfolio managers to use:

A)
positive screening.
Correct Answer
B)
full integration.
Incorrect Answer
C)
active ownership.
Incorrect Answer

Answer 7

The best-in-class approach to ESG implementation is an example of positive screening.

Full integration refers to including ESG factors in fundamental analysis.

Active ownership is using share voting and access to company management to pursue ESG objectives. (Module 29.2, LOS 29.f)

Question 8

Derivatives risks (sometimes referred to as “the Greeks”) include:

Delta. This is the sensitivity of derivatives values to the price of the underlying asset.

Gamma. This is the sensitivity of delta to changes in the price of the underlying asset.

Vega. This is the sensitivity of derivatives values to the (V)olatility of the price of the underlying asset.

Rho. This is the sensitivity of derivatives values to changes in the (R)isk-free rate.

Question 9

Other things equal, a company’s operating breakeven level of sales is most likely to increase when:

A)
the tax rate is increased.
Incorrect Answer
B)
its scale of operations is increased.
Correct Answer
C)
fixed interest charges are increased.
Incorrect Answer

Operating breakeven is calculated as fixed operating costs divided by price minus variable costs per unit. Tax rates and interest charges do not affect the operating breakeven quantity of sales. (Module 35.1, LOS 35.e)

Answer 9

Bring the breakeven formula and understand what will affect the formula.

Question 10

The cost of preferred equity in a company’s capital structure is based on the relationship between a preferred share’s:

A)
dividend and par value.
Incorrect Answer
B)
dividend and market price.
Correct Answer
C)
dividend yield and expected growth.
Incorrect Answer

The cost of preferred equity is calculated by dividing the preferred dividend by the market price of a preferred share. Regular preferred dividends do not grow over time. (Module 33.1, LOS 33.d)

Question 11

Diversification ratio

Adding a security with a standard deviation equal to the average will decrease the portfolio standard deviation as long as the added security’s returns are not perfectly positively correlated with the portfolio’s returns. The result is a lower diversification ratio, which indicates a greater benefit from diversification. (Module 61.1, LOS 61.a)

Answer 11

Counter intuitive term. A lower diversification ratio indicates a greater risk-reduction benefit from diversification.

Question 12

core-satellite approach.

Answer 12

The core-satellite approach invests the majority, or core, portion of the portfolio in passively managed indexes and invests a smaller, or satellite, portion in active strategies. This approach reduces the likelihood of excessive trading and offsetting active positions.

Question 13

A leveraged return refers to a return to an investor that is a multiple of the return on the underlying asset.

“The leveraged return is more negative than the nominal return because the investment lost value and leverage magnifies the loss.”

Question 14

Leveraged instruments

Answer 14

Inverse floater is an example of a leveraged instrument. C = 6% − 180-day LIBOR.

When the multiplier on the reference rate is less than one, such as 7% – (0.5 × 180-day LIBOR), the instrument is termed a deleveraged inverse floater.

Question 15

Yield enhancement instruments

Answer 15

A credit-linked note (CLN) has regular coupon payments, but its redemption value depends on whether a specific credit event occurs. If the credit event (e.g., a credit rating downgrade or default of a reference asset) does not occur, the CLN will be redeemed at its par value.

Question 16

Participation instruments

Answer 16

A participation instrument has payments that are based on the value of an underlying instrument, often a reference interest rate or equity index. Participation instruments do not offer capital protection.

One example of a participation instrument is a floating-rate note. With a floating-rate note, the coupon payments are based on the value of a short-term interest rate, such as 90-day LIBOR (the reference rate). When the reference rate increases, the coupon payment increases. Because the coupon payments move with the reference rates on floating-rate securities, their market values remain relatively stable, even when interest rates change.

Question 17

A leveraged buyout fund is evaluating Siena Company relative to its peer companies. Siena is most likely a good candidate for a management buy-in if it has:

A)
higher cash flow and less capable managers than its peers.
Correct Answer
B)
lower cash flow and more capable managers than its peers.
Incorrect Answer
C)
higher cash flow and more capable managers than its peers.
Incorrect Answer

Answer 17

Management buy-in replaces the existing managers of a portfolio company with a new team.

Two types of Leveraged buyouts (LBOs) are management buyouts (MBOs), in which the existing management team is involved in the purchase, and management buy-ins (MBIs), in which an external management team will replace the existing management team.

Question 18

An investor in a sponsored depository receipt (DR):

A)
holds the voting rights for the DR shares.
Correct Answer
B)
must obtain the foreign currency in which the DR is traded.
Incorrect Answer
C)
should be familiar with market procedures and regulations in the DR issuer’s country.
Incorrect Answer

Answer 18

Depository receipts (DRs) represent ownership in a foreign firm and are traded in the markets of other countries in local market currencies.

In a sponsored DR, voting rights of the shares are held by the investor. In an unsponsored DR, voting rights are retained by the depository bank. An advantage of DR shares over direct investments in foreign companies is that DR shares trade in the investor’s domestic market and currency. (Module 39.2, LOS 39.d)

Question 19

Which of the following mortgage-backed securities is most likely to feature credit tranching?

A)
Sequential-pay collateralized mortgage obligations.
Incorrect Answer
B)
Commercial mortgage-backed securities.
Correct Answer
C)
Agency residential mortgage-backed securities.

Answer 19

Credit tranching -> Commercial MBS
Commercial mortgage-backed securities often feature credit tranching in which subordinated tranches are the first to absorb credit losses.

Tiem tranching -> Sequential-pay CMO
Sequential-pay CMOs employ time tranching in which all principal payments flow to Tranche 1 up to its principal amount, then to Tranche 2 up to its principal amount, and so on.

Pass-through -> Agency RMBS
Agency RMBS are pass-through securities and do not feature credit tranching or time tranching. However, it presents prepayment risk.

(Module 45.1, LOS 45.c)

Question 20

With respect to fixed income markets, the “grey market” refers to trading in:

A)
emerging market bonds.
Incorrect Answer
B)
bonds that have not yet been issued.
Correct Answer
C)
bonds that were issued in private placements.
Incorrect Answer

Explanation
“Grey market” refers to trading of bonds on a when-issued basis. (Module 43.1, LOS 43.c)

Question 21

Contingent convertible bonds are described most accurately as those which, if a specified event occurs:

A)
become convertible to equity.
Incorrect Answer
B)
convert automatically to equity.
Correct Answer
C)
increase the equity conversion ratio.
Incorrect Answer

Answer 21

Not optional, it happens automatically.

Contingent convertible bonds are converted automatically to common stock if a specified event occurs.

Question 22

Under cumulative voting, with three board seats up for election, the shareholder can cast up to 1,800 votes for one candidate.

In a statutory voting system, an investor who holds 600 shares can cast 600 votes in the election for each seat. (Module 39.1, LOS 39.b)

Answer 22

cumulative voting is more advantageous for minority group.

Question 23

Which of the following types of index is least likely to require frequent reconstitution of constituent securities?

A)
Equity index.
Correct Answer
B)
Commodity index.
Incorrect Answer
C)
Fixed income index.
Incorrect Answer

Answer 23

Equity indexes typically require reconstitution only in response to corporate events, such as mergers or bankruptcies.

Commodity indexes, which use futures contracts as their constituent securities, and fixed income indexes require frequent reconstitution as futures contracts expire and bonds mature. (Module 37.2, LOS 37.k)

Question 24

The time value of a put option on an asset that provides no cash flows would most likely be increased by:

A)
an increase in the exercise price.
Incorrect Answer
B)
an increase in the asset’s price volatility.
Correct Answer
C)
a decrease in the value of the underlying asset.
Incorrect Answer

Answer 24

Intrinsic vs extrinsic value of an option

An increase in volatility will increase the value of a put option but will not change its intrinsic value, so it is the time value that increases. Changes in the exercise price or the value of the underlying asset will change an option’s intrinsic or exercise value. (Module 55.1, LOS 55.c)

Question 25

The classifications “investment grade” and “non-investment grade” are based on ratings from recognized credit rating agencies. Bonds rated Baa3/BBB– (or higher are classified as investment grade,

while bonds rated Ba1/BB+ or lower are classified as non-investment grade. However, an analyst should not rely exclusively on credit ratings to draw conclusions about the credit risk or loss severity of bond investments. (Module 47.1, LOS 47.e)

Answer 25

If there are BBBs or Baa, it is Invesment grade.

If there are BBs or Ba, it is non-investment grade.

Question 26

Kate Johnson owns shares of a stock that currently trades at $15. If Johnson wants to buy more shares if the price increases to $17, she should enter a:

A)
stop buy order at $17.
Correct Answer
B)
limit order to buy at $17.
Incorrect Answer
C)
market order to buy at $17.
Incorrect Answer

Answer 26

Could be counter intuitive

An order to buy if a price increases to a specified level is a stop buy order. A limit order at $17 will execute immediately if the market price is $15. A market order does not specify a price, but is executed at the prevailing market price. (Module 36.3, LOS 36.h)

Stop orders are those that are not executed unless the stop price has been met.

limit order places a minimum execution price on sell orders and a maximum execution price on buy orders. For example, a buy order with a limit of $6 will be executed immediately as long as the shares can be purchased for $6 or less.

Question 27

A commodity market is in contango if the spot price is:

A)
higher than futures prices.
Incorrect Answer
B)
equal to futures prices.
Incorrect Answer
C)
lower than futures prices.
Correct Answer

Explanation
A commodity market is contango if the futures price is higher than the spot price. (Module 60.2, LOS 60.e)

Answer 27

Related contango with a low convenience yield. Thus, the future price has to be higher than spot price. (Convenience yield refers to the nonmonetary benefits of holding an asset. )

Convenience yield is the value of having the physical commodity for use over the period of the futures contract. If there is little or no convenience yield, futures prices will be higher than spot prices, a situation termed contango.

When the convenience yield is high, futures prices will be less than spot prices, a situation referred to as backwardation.

Question 28

Chris Renburg owns the following portfolio of option-free bonds:

Par value Full price Duration
$3,000,000 $2,400,000 4.625
$3,500,000 $3,600,000 7.322
$1,500,000 $1,200,000 9.300
$8,000,000 $7,200,000
The duration of Renburg’s bond portfolio is closest to:

Explanation
Portfolio duration is the weighted average of component securities, using full prices:

(2,400,000 / 7,200,000) × 4.625 + (3,600,000 / 7,200,000) × 7.322 + (1,200,000 / 7,200,000) × 9.3 = 6.753.

(Module 46.2, LOS 46.f)

Question 29

Yield spreads are most likely to widen in a market environment that exhibits:

A)
slowing economic growth.
Correct Answer
B)
high GDP growth rates.
Incorrect Answer
C)
lower-than-normal supply of new bond issuance.
Incorrect Answer

Answer 29

negative events will increase the yield spread while positive events will decrease the yield spread.

We can think of the yield on an option-free corporate bond as the sum of the real risk-free interest rate, the expected inflation rate, a maturity premium, a liquidity premium, and a credit spread.

yield spread = liquidity premium + credit spread

Question 30

Call vs continuous market

Answer 30

Call: only work in specific times even when the market is open

Continuous: can trade anytime when the market is open; set by auction or dealer

Question 31

The period of time during which a private capital fund will select investments and direct committed capital to them is best described as a:

A)
notice period.
Incorrect Answer
B)
lockup period.
Incorrect Answer
C)
drawdown period.
Correct Answer

Answer 31

The drawdown period for a private equity fund is the span of time over which the fund will draw down its committed capital and use it to invest in portfolio companies. Lockup periods and notice periods are related to hedge fund redemptions. (Module 58.1, LOS 58.c)

Committed capital that has not yet been drawn down is referred to as dry powder.

Question 32

An investor writes a put option that will expire in six months with an exercise price of 23 when the underlying price is 20. The investor will collect a premium that is:

A)
equal to 3.
Incorrect Answer
B)
less than 3.
Incorrect Answer
C)
greater than 3.
Correct Answer
Explanation
The option premium at initiation will equal the option’s exercise value of 23 – 20 = 3 plus some positive time value.

(Module 55.1, LOS 55.a)

Answer 32

Make sure to consider the extrinsic value (time value).

option premium = exercise value + time value

Question 33

Non-Cyclical firm

(A cyclical firm is one whose earnings are highly dependent on the stage of the business cycle. )

Answer 33

• Defensive industries are those that are least affected by the stage of the business cycle and include utilities, consumer staples (such as food producers), and basic services (such as drug stores).
• Growth industries have demand so strong they are largely unaffected by the stage of the business cycle

Defensive stocks (with low betas and low systematic risk) are less sensitive to economic cycles. A high beta stock is a cyclical stock. Stocks with low P/E ratios are value stocks. (Module 40.1, LOS 40.c)

Question 34

A collateralized mortgage obligation with agency RMBS as the collateral is least likely to be created to offer securities with less:

A)
default risk than the underlying RMBS.
Correct Answer
B)
extension risk than the underlying RMBS.
Incorrect Answer
C)
prepayment risk than the underlying RMBS.
Incorrect Answer

Answer 34

CMO with agency RMBS (pass-through) is created to offer securities with less prepayment risk, inducing extension and contraction risk)

Question 35

Question 169

Jim Boo is analyzing Justin Corp., a maker of home appliances. Boo’s research provides the following facts:

Justin’s stock price is $60 per share.
Expected growth rate of dividends is 5%.
Expected retention rate is 60%.
Required rate of return is 10%.
Justin’s expected price to earnings ratio (P0/E1) is closest to:

answer: 8X

Answer 35

D1 / E1 is equal the expected dividend payout ratio

Question 36

Explain why forward and futures prices differ.

Answer 36

Convexity bias can cause forward and futures prices to differ significantly for contracts on longer-term interest rates.

(Module 53.1, LOS 53.b)

Question 37

An investor purchases a 20-year bond with a 5% semiannual coupon and a yield to maturity of 6%. Five years later the investor sells the bond for a price of 91.40. Determine whether the investor realizes a capital gain or loss, and calculate its amount.

Answer 37

Any capital gain or loss is based on the bond’s carrying value at the time of sale, when it has 15 years (30 semiannual periods) to maturity. The carrying value is calculated using the bond’s YTM at the time the investor purchased it.

N = 30; I/Y = 3; PMT = 2.5; FV = 100; CPT → PV = –90.20

Because the selling price of 91.40 is greater than the carrying value of 90.20, the investor realizes a capital gain of 91.40 – 90.20 = 1.20 per 100 of face value.

Question 38

Gerald Snow is a bond manager for Long Vision Investments. Snow is evaluating potential arbitrage opportunities. He has the following list of bonds:

Bond X is a 1-year zero coupon bond selling at 950.
Bond Y is a 2-year zero coupon bond selling at 850.
Bond Z is a 2-year bond with an annual coupon of 8%.
All three bonds have a par value of $1,000. If no arbitrage opportunity exists, the price of Bond Z is closest to:

Answer 38

Find the spot discount rate

Bond X = 1000 / 950 = 1.0526; Bond Y = 1000 / 850 = 1.1765

80 / (1.0526) = 76; 1080 / (1.1765) = 917.98

Bond Z = 76 + 917.98 = 993.98 ≈ 995

The arbitrage-free valuation approach applies time-appropriate spot interest rates to each cash flow of the bond. (Module 44.2, LOS 44.c)

Question 39

Matrix pricing is a method of estimating the required yield-to-maturity (or price) of bonds that are currently not traded or infrequently traded.

Rob Phelps, CFA, is estimating the value of a nontraded 4% annual-pay, A+ rated bond that has three years remaining until maturity. He has obtained the following yields-to-maturity on similar corporate bonds:

A+ rated, 2-year annual-pay, YTM = 4.3%
A+ rated, 5-year annual-pay, YTM = 5.1%
A+ rated, 5-year annual-pay, YTM = 5.3%

Answer 39

Step 1: Take the average YTM of the 5-year bonds: (5.1 + 5.3) / 2 = 5.2%.
Step 2: Interpolate the 3-year YTM based on the 2-year and average 5-year YTMs:
4.3% + (5.2% − 4.3%) × [(3 years − 2 years) / (5 years − 2 years)] = 4.6%
Step 3: Price the nontraded bond with a YTM of 4.6%:
N = 3; PMT = 40; FV = 1,000; I/Y = 4.6; CPT → PV = –983.54
The estimated value is $983.54 per $1,000 par value.

Question 40

Professional organizations adopt codes of ethics that govern their members’ behavior.

Legal standards are enforced by governments or regulatory agencies. (Module 69.1, LOS 69.f)

Question 41

Moe Girard, CFA, works in a large group that decides on recommendations by consensus. Girard does not always agree with the group consensus, but he is confident in the group’s analytical ability. To comply with the Code and Standards when the group issues a recommendation with which he disagrees, Girard:

A)
does not need to take any action.
Correct Answer
B)
must request that his name be removed from the group’s report.
Incorrect Answer
C)
should include his independent opinion as an appendix to the group’s report.
Incorrect Answer

Explanation
Standard V(A) Diligence and Reasonable Basis does not require a Member to dissociate from a group recommendation, as long as the opinion has a reasonable and adequate basis. (Module 71.7, LOS 71.b)

Answer 41

Dissociating is always the last option

Question 42

Carlos Mendez, CFA, is beginning an investment advisory relationship with a new client and plans to formulate an investment policy statement (IPS) for the client. According to the Standard concerning suitability, Mendez is least likely to consider the client’s:

A)
regulatory and legal circumstances.
Incorrect Answer
B)
conflicts of interest.
Correct Answer
C)
performance measurement benchmarks.
Incorrect Answer
Explanation

Under Standard III(C) Suitability, the investment advisor should consider the following in writing an investment policy statement (IPS) for each client: (1) client identification (type and nature of clients, existence of separate beneficiaries, and approximate portion of total client assets); (2) investment objectives (return objectives and risk tolerance); (3) investor constraints (liquidity needs, time horizon, tax considerations, legal and regulatory circumstances, unique needs and preferences); and (4) performance measurement benchmarks.

Answer 42

Standard VI(A) Disclosure of Conflicts requires that members and candidates disclose all potential areas of conflict to clients, but this disclosure is not part of a client’s IPS. (Module 71.8, LOS 71.b)

Question 43

Riley and Smith, a broker-dealer, is bringing to market a secondary offering for All Pro Company. One of the reasons All Pro selected the firm to lead the offering is because Riley and Smith has been a market maker for All Pro’s stock for the past five years. The firm is in possession of material nonpublic information relevant to All Pro’s offering. To be in compliance with the Code and Standards, Riley and Smith:

A)
may not serve as underwriter for the same stock in which it acts as a market maker.
Incorrect Answer
B)
should continue to serve as market maker but take only the contra side of unsolicited customer trades.
Correct Answer
C)
should abstain from making a market in All Pro stock during the offering period but may resume market making activities after the offering.
Incorrect Answer

Answer 43

Important

Monitor and restrict proprietary trading while a firm is in possession of material nonpublic information. However, prohibiting all proprietary trading while a firm is in possession of material nonpublic information may be inappropriate because it may send a signal to the market. In these cases, firms should only take the opposite side of unsolicited customer trade

Taking the opposite side of an unsolicited customer trade refers to a situation where a customer initiates a trade or transaction in a financial market, and a financial institution or individual takes a position that is directly opposite to the customer’s trade, often as a counterparty.

The firm should continue making a market but should only carry out unsolicited transactions for clients. A complete withdrawal from market-making activities could be a signal to outsiders that a significant transaction is underway. (Module 71.3, LOS 71.b)

Question 44

Which of the following statements is most accurate regarding the GIPS requirement for definition of the firm?

A)
The firm must be the distinct business entity held out to clients. (business is not mixed with clients)
Correct Answer
B)
If a firm has offices in different geographical locations, the firm definition may include just the primary location where all the investment decisions are made.
Incorrect Answer
C)
The firm definition may include the corporation or a subsidiary of the corporation, but the firm cannot be defined as simply a “division” of the corporation.
Incorrect Answer

Answer 44

The GIPS-compliant firm definition must be the corporation, subsidiary, or division that holds itself out to the client as a specific business entity. If the firm has different geographic locations, this firm definition should include all the locations. (Module 72.1, LOS 72.d)

Question 45

Jenny Pickler, a Level II CFA Candidate, writes an economic forecast containing several interest rate projections. Her firm’s investment committee reviews Pickler’s report and changes several of the interest rates Pickler had forecast. To comply with CFA Institute Standards, Pickler:

A)
does not need to take any further action.
Correct Answer
B)
should ask that her name be removed from the report.
Incorrect Answer
C)
is required to independently review the data supporting the investment committee’s changes.
Incorrect Answer

Answer 45

According to Standard V(A) Diligence and Reasonable Basis, group consensus is not required in the course of preparation of analytical reports.

Pickler would only need to have her name removed from the report if she had reason to believe the investment committee did not have a reasonable and adequate basis for their changes. (Module 71.7, LOS 71.b)

Question 46

Which of the following statements is most accurate about the Standard concerning knowledge of the law? Members and candidates are responsible for violations:

A)
that are proven by a regulatory authority.
Incorrect Answer
B)
of which they are aware or should be aware.
Incorrect Answer
C)
in which they knowingly participate or assist.
Correct Answer

Answer 46

Recommended but not required to be aware of violations.

Standard I(A) Knowledge of the Law holds members and candidates responsible for violations in which they knowingly participate or assist. The Standard is not limited to violations that are proven by a regulatory authority. Although the Standard strongly encourages members and candidates to report potential violations of which they are aware, the Standard does not require them to do so. (Module 71.1, LOS 71.b)

This is different from Standard IV(C) Responsibilities of Supervisors, in which it requires supervisors to institute procedures to prevent and detect violations of rules and regulations by those subject to their supervision.

Question 47

Recommended procedures for compliance with the Standard concerning misconduct suggest that firms in the investment industry should:

A)
periodically test their employees’ knowledge of applicable laws, regulations, and the firm’s code of ethics. (never mentioned)
Incorrect Answer
B)
periodically inform employees of violations that have occurred and the disciplinary actions that the firm took against the employees involved. (never mentioned)
Incorrect Answer
C)
check references of potential employees to verify that they are of good character and eligible for employment in the investment industry.
Correct Answer

Answer 47

Checking the references given by potential employees is one of the recommended procedures for compliance with Standard I(D) Misconduct. Other recommended procedures are that the firm adopt a code of ethics and inform employees of potential violations and their consequences for disciplinary action. Neither testing employees’ knowledge of laws and regulations nor informing them of actual violations by other employees is specified as a recommended procedure. (Module 71.2, LOS 71.b)

Question 48

With regard to independent practice by Members and Candidates who are employed, the Code and Standards specify that:

A)
undertaking independent practice includes preparations to begin such practice.
Incorrect Answer
B)
written consent must be obtained from both the employer and clients who may be affected.
Incorrect Answer
C)
members and candidates contemplating independent competitive business must notify their current employer of the types of services to be rendered, duration, and compensation.
Correct Answer

Answer 48

Consent from the firm but not the client.

Standard IV(A) Loyalty requires that members and candidates notify their employer all details of the independent practice and receive the employer’s consent before engaging in the competitive activity, but does not require any statement from firm clients. If the independent practice is likely to affect clients negatively, the employer can refuse permission. Making preparations to begin a competitive practice is allowed, as long as it does not interfere with current employment duties. (Module 71.6, LOS 71.b)