MOck question 2 Flashcards
Justin Matthews, CFA, is chief financial officer of a bank and serves on the bank’s investment committee. The majority of the committee has voted to invest in medium-term euro debt. Matthews feels very strongly that this is a poor strategy and that trends in both the exchange rate and in euro interest rates over the next year will result in large losses on the position. According to the Code and Standards, Matthews should most appropriately:
A)
document his difference of opinion with the committee.
B)
express his concerns to the bank’s chief executive officer directly.
C)
dissociate from the recommendation by asking that his name not be included.
A)
document his difference of opinion with the committee.
Standard V(A) Diligence and Reasonable Basis states that if a consensus opinion has a reasonable basis, a member or candidate who disagrees with it does not have to dissociate from it but should document the difference of opinion
Katrina Anderson, CFA, left her job as an account manager at RTJ Capital Management and joined Parnell Associates. Anderson did not sign a noncompete agreement at RTJ and took no RTJ property with her when she left. According to CFA Institute Standards of Professional Conduct, Anderson:
A)
must not harm RTJ by soliciting her previous clients.
B)
is free to contact her previous clients at RTJ after her employment there ends.
C)
must seek permission from RTJ before contacting her previous clients there.
B)
is free to contact her previous clients at RTJ after her employment there ends.
Standard IV(A) Loyalty does not prohibit former employees from contacting clients of their previous firm so long as the contact information does not come from the records of the previous employer or violate a noncompete agreement.
Paul White, CFA, works as an analyst at an investment banking firm that also manages equity-only accounts for clients. White has agreed independently to manage a portfolio of fixed-income securities for an endowment fund for a small fee but has not informed his employer. Additionally, White’s supervisor has asked him to work this weekend on a proposal for a large IPO that must be delivered on Monday morning, but White declines as he would prefer to spend the weekend with his family. Which of White’s actions violate the Standard concerning loyalty?
A)
Both of these actions.
B)
Neither of these actions.
C)
Only one of these actions.
C)
Only one of these actions.
The Standards do not require that members put their employment ahead of their personal lives; these are issues between White and his employer. However, Standard IV(A) Loyalty states that a member who engages in independent practice must notify his employer.
Charmaine Townsend, CFA, has been managing equity portfolios for clients using a model that identifies growth companies selling at reasonable multiples. With economic growth slowing for the foreseeable future, she has decided to change to a securities selection model that emphasizes dividend income and low valuation. To comply with the Code and Standards, Townsend should most appropriately:
A)
promptly notify her clients of the change.
B)
get written permission from her clients prior to the change.
C)
get written acknowledgment of the change from her clients within a reasonable period of time after the change is made.
A)
promptly notify her clients of the change.
Standard V(B) Communication with Clients and Prospective Clients requires prompt disclosure of any change that might significantly affect the manager’s investment processes. The disclosure need not be in writing
Alberto Cosini is the top-rated, sell-side analyst in the biotechnology industry. His recommendations significantly affect prices of industry stocks regularly. Yesterday Cosini changed his rating on Biopharm from “hold” to “buy,” and Cosini’s firm emailed the change to its clients although no public disclosure has yet been made. If Peter Allen, CFA, who heard about Cosini’s rating change for Biopharm from his brother, purchases Biopharm in his personal account, Allen will most likely:
A)
not violate the Standards.
B)
violate the Standard concerning diligence and reasonable basis.
C)
violate the Standard concerning material nonpublic information.
A)
not violate the Standards.
There is no requirement that a firm publicly release ratings changes by its analysts. Individuals outside the firm acting on this information after it is released to clients are not in violation of the Standard concerning nonpublic information. Purchases in a member’s personal account are not subject to the requirements of the Standard concerning diligence and reasonable basis, so there is no violation indicated here.
Campbell Hill, CFA, has recently accepted the position of Chief Compliance Officer at an investment management firm. Hill distributes a memo stating that effective immediately (1) material supporting all company research reports will be kept in the company database in electronic form for 10 years, and hard copies of the same material will be maintained for one year only, and (2) hard copy records of all trade confirmations sent to clients must be kept on file for five years, the period mandated by local regulations. With respect to record retention:
A)
neither of Hill’s policies violates the Standards.
B)
Hill’s policies regarding both research reports and trade confirmations violate the Standards.
C)
Hill’s policy regarding research reports does not violate the Standards, but the policy regarding trade confirmations does.
A)
neither of Hill’s policies violates the Standards.
In the absence of regulatory requirements, Standard V(C) Record Retention recommends maintaining records supporting investment recommendations and actions and records of investment-related communications with clients for at least seven years. Here, there is regulatory guidance, and seven years is a recommendation, not a requirement, in any case. Records can be maintained in electronic or hard copy format.
Paul James, CFA, a retail stock broker, notices that one client in particular, Chet Young, Ph.D., is especially adept at picking stocks. James decides to replicate Young’s trades in his own account after he enters them. By doing so, James:
A)
is not in violation of any Standards.
B)
is in violation of the Standard on priority of transactions because he is front running the client’s account.
C)
is in violation of the Standard on misconduct because he has misappropriated confidential client information.
A)
is not in violation of any Standards.
James is not in violation of the Standards. To comply with Standard VI(B) Priority of Transactions, members and candidates must give transactions for clients and employers priority over their personal transactions. In this instance, James did not adversely affect the client’s interest because the client’s trades were executed before James copied them. He has not acted fraudulently or deceitfully and, thus, has not violated Standard I(D) Misconduct.
Marie Marshall, CFA, charges clients a management fee and commissions on securities transactions. Marshall receives an annual bonus based on the overall success of the firm and a quarterly bonus based on the trading volume in her clients’ accounts. If Marshall does not tell clients about her compensation package, she is violating the Standard concerning:
A)
disclosure of conflicts.
B)
communication with clients.
C)
additional compensation arrangements.
A)
disclosure of conflicts.
Marshall has an obligation to disclose that she receives special compensation based on the amount of client trading volume. Standard VI(A) Disclosure of Conflicts requires members to disclose to clients and prospects all matters that could potentially impair the member’s ability to make investment decisions that are (and to give investment advice that is) objective and unbiased. The Standard on communications with clients addresses issues that involve clearly communicating investment recommendations and analysis. The Standard on additional compensation arrangements is concerned with accepting benefits that may create a conflict between a member’s interests and her employer’s interests
Fred Reilly, CFA, is an investment advisor. Roger Harrison, a long-term client of Reilly, decides to move his accounts to a new firm. In his review of Harrison’s account history, Reilly discovers some transfers of funds from the account of Harrison’s company that Reilly suspects were illegal. Which of the following actions is most appropriate for Reilly to take under the Standards?
A)
Discuss his suspicions with outside counsel.
B)
Inform Harrison’s company of the suspected illegal activities because Harrison is no longer a client.
C)
Do nothing because he must maintain the confidentiality of client information even after the client has left the firm.
A)
Discuss his suspicions with outside counsel.
Of the choices given, seeking the advice of outside counsel about what actions Reilly may be required to take is the most appropriate. Under Standard III(E) Preservation of Confidentiality, members and candidates should maintain the confidentiality of information received in the course of their professional service relating to both current and former clients. In the case of illegal activity, however, Reilly may have a legal obligation to report the activity or, on the other hand, may have a legal obligation to maintain the client’s confidentiality even if he suspects illegal activity.
ormal Corp. has a current ratio above 1 and a quick ratio less than 1. Which of the following actions will increase the current ratio and decrease the quick ratio? Normal Corp.:
A)
buys fixed assets on credit.
B)
uses cash to purchase inventory.
C)
pays off accounts payable from cash.
C)
pays off accounts payable from cash.
Paying off accounts payable from cash lowers current assets and current liabilities by the same amount. Because the current ratio started off above 1, the current ratio will increase. Because the quick ratio started off less than 1, it will decrease further. The other choices are incorrect. Buying fixed assets on credit decreases both ratios because the denominator increases, with no change to the numerator. Using cash to purchase inventory would result in no change in the current ratio but would decrease the quick ratio by decreasing the numerator.
A firm has undertaken a contract with an estimated total cost of $200 million at a price of $220 million. At the end of the first reporting period, the firm has devoted resources of $70 million to the project. The customer has been billed for $80 million and made payments of $60 million. As a result of these transactions, the firm should report revenue from this project of:
A)
$60 million.
B)
$70 million.
C)
$77 million.
C)
$77 million.
Using the percentage of total costs incurred to date as an estimate of the portion of the performance obligations completed, revenue should be (70/200) × $220 million = $77 million.
For an operating lease, the value of the right-to-use asset and the lease liability on the lessee’s balance sheet will be equal in each reporting period over the term of the lease under:
A)
IFRS, but not U.S. GAAP.
B)
U.S. GAAP, but not IFRS.
C)
both IFRS and U.S. GAAP.
B)
U.S. GAAP, but not IFRS.
For operating leases under U.S. GAAP, the principal reduction in the lease liability and the amortization of the right-to-use asset are equal each period so that the values of the lease liability and right-to-use asset will be equal over the term of the lease. This is not the case under IFRS
A U.S. GAAP reporting company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will:
A)
reduce net income and shareholders’ equity by $2 million.
B)
increase shareholders’ equity by $1 million and have no effect on net income.
C)
reduce net income by $2 million and increase shareholders’ equity by ＄1 million.
C)
reduce net income by $2 million and increase shareholders’ equity by ＄1 million.
Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders’ equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 million.
Which of the following statements about hypothesis testing involving a z-statistic is least accurate?
A)
The p-value is the smallest significance level at which the null hypothesis can be rejected.
B)
A z-test is theoretically acceptable in place of a t-test for tests concerning a mean when sample size is small.
C)
If the confidence level is set at 95%, the probability of rejecting the null hypothesis when in fact it is true is 5%.
B)
A z-test is theoretically acceptable in place of a t-test for tests concerning a mean when sample size is small.
The t-test must be used when the sample size is small, the population is normal, and the population variance is unknown. If the population is non-normal and the variance is unknown, there is no valid test statistic when the sample is small.
Which of the following statements on the economic implications of trade restrictions is most accurate?
A)
Quota rents are the amounts received by the domestic government when it charges for import licenses.
B)
In the importing country, import quotas, tariffs, and voluntary export restraints all decrease producer surplus.
C)
In the case of a quota, if the domestic government collects the full value of the import licenses, the result is the same as that of a tariff.
C)
In the case of a quota, if the domestic government collects the full value of the import licenses, the result is the same as that of a tariff.
If the domestic government collects the full value of the import license, a quota can have the same economic result as a tariff. Quota rents are the gains to those foreign exporters who receive import licenses under a quota if the domestic government does not charge for the import licenses. With respect to the importing country, import quotas, tariffs, and voluntary export restraints all decrease consumer surplus and increase producer surplus.
Rowlin Corporation, which reports under IFRS, wrote down its inventory of electronic parts last period from its original cost of €28,000 to net realizable value of €25,000. This period, inventory at net realizable value has increased to €30,000. Rowlin should revalue this inventory to:
A)
€28,000, and report a gain of €3,000 on the income statement.
B)
€30,000, and report a gain of €3,000 on the income statement.
C)
€30,000, and report a gain of €5,000 on the income statement.
A)
€28,000, and report a gain of €3,000 on the income statement.
Under IFRS, inventory values are revalued upward only to the extent they were previously written down. In this case, that is from €25,000 back up to the original value of €28,000. The increase is reported as gain for the period.
An investment has a mean return of 15% and a standard deviation of returns equal to 10%. If the distribution of returns is approximately normal, which of the following statements is least accurate? The probability of obtaining a return:
A)
less than 5% is about 16%.
B)
greater than 35% is about 2.5%.
C)
between 5% and 25% is about 95%.
C)
between 5% and 25% is about 95%.
About 68% of all observations fall within ±1 standard deviation of the mean. Thus, about 68% of the values fall between 5 and 25.
In the context of geopolitical risk, thematic risks are most accurately described as having low:
A)
impact.
B)
velocity.
C)
likelihood.
B)
velocity.
Thematic risks are known factors that have long-term (i.e., low-velocity) effects.
Which of the following statements regarding an audit and a standard auditor’s opinion is most accurate?
A)
The objective of an audit is to enable the auditor to provide an opinion on the numerical accuracy of the financial statements.
B)
To provide an independent review of a company’s financial statements, an external auditor is appointed by the company’s management.
C)
The absence of an explanatory paragraph in the audit report relating to the going concern assumption suggests that there are no serious problems that require a close examination of that assumption by the analyst.
C)
The absence of an explanatory paragraph in the audit report relating to the going concern assumption suggests that there are no serious problems that require a close examination of that assumption by the analyst.
A specific explanatory paragraph that makes reference to (questions) the going concern assumption may be a signal of serious problems and call for close examination by the analyst. Therefore, in the absence of such a paragraph, there is no need for a close examination of the going concern assumption by the analyst. The objective of an audit is to enable the auditor to provide an opinion on the fairness and reliability of the financial statements. This is not the same as numerical accuracy. The auditor generally only provides reasonable assurance that there are no material errors in the financial statements, not an opinion about their numerical accuracy. An external auditor is appointed by the audit committee of the company’s board of directors, not by its management.
