R02.7 Guidance For Standard V - Answers

Question #1 of 50 Question ID: 1228424
An analyst has found an investment with what appears to be a great return-to-risk ratio. The
analyst double-checks the data for accuracy, keeps careful records, and is careful to not make
any misrepresentations as he simultaneously sends an e-mail to all his clients with a "buy"
recommendation. According to Standard V(A), Diligence and Reasonable Basis, the analyst has:
A) violated the Standard if he does not verify whether the investment is appropriate
for all the clients.
B) violated the Standard by communicating the recommendation via e-mail.
C) ful lled all obligations.
Explanation
If the analyst had been an investment manager, it would have been inappropriate for him to
make a blanket recommendation for all of his clients without considering the unique needs
of each. However, the analyst is merely stating that given the qualities of the investment, it
is an attractive buy. He has kept adequate records, and made fair disclosure of his rating
decision.
(Study Session 1, Module 2.7, LOS 2-V.(A))
Bob Hat eld, CFA, has his own money management rm with two clients. The accounts of the
two clients are equal in value. It is Hat eld's opinion that interest rates will fall in the near
future. Based upon this, Hat eld begins increasing the bond allocation of each portfolio. In
order to comply with Standard V(B), Communication with Clients and Prospective Clients, the
analyst needs to:
A) make sure that the change is identical for both clients.
B) inform the clients of the change and tell them it is based upon an opinion and not
a fact.
C) perform both of these functions.
Explanation
According to Standard V(B), the analyst must inform the clients of the change and tell them
it is based upon an opinion and not a fact. Making an identical change in two portfolios may
be a violation of this standard if the needs of the clients are not identical.
(Study Session 1, Module 2.7, LOS 2-V.(B))

Janet Coleman, CFA, is preparing a research report on Union Power and Light. Due to
deregulation, utility companies face increased competition. During the past year, three of the
ve utility companies in her region have cut their dividends by 50%, on average, to provide
more internal funds for investment purposes. In a discussion with Union's chief executive
o cer, Coleman learned that Union expects to have a record amount of capital expenditures
during the next year. Although Union subsequently issued a press release about its capital
expenditure plans, it did not make any public statements about a change in dividend policy.
Coleman reasons that the management of Union will be under pressure to cut its dividends
within the next year to remain competitive. Coleman issues a research report in which she
states:
"Union Power and Light will decrease its dividend from $2 to $1 a share by the second quarter.
We expect that Union will strengthen its competitive position by using more internally
generated funds to nance its investment opportunities. If investors buy the stock now at
around $50 a share, their total return could exceed 20% on the stock."
Based on CFA Institute Standards of Professional Conduct, which of the following statements
about Coleman's actions is most accurate?
A) Coleman violated the Standards because she failed to separate opinion from fact
in her research report.
B) Coleman violated the Standards because she used material inside information.
C) Coleman did not violate the Standards.
Explanation
Coleman is required to distinguish between facts and opinions in her research reports. Her
statement that Union will decrease its dividend from $2 to $1 a share is a prediction, not a
fact, and therefore should be distinguished clearly as an opinion.

Randal Brooks is the chief economist for a large brokerage rm. In the aftermath of a national
tragedy, Brooks feels that it is very possible that the stock market will drop signi cantly and
not recover for several years. However, he does not believe that this is the most likely scenario
but merely that the risk of investing in equities has increased. He decides to write a market
commentary to the brokerage clients that discusses the reasons why the market will remain
stable and talks about why he, as a private citizen, feels patriotic. He does not mention the
increase risk in equities. Brooks has:
A) violated the Standards by not including all of the relevant factors in the research
report and making patriotic statements.
B) violated the Standards by not including all of the relevant factors in the research
report, but not by making patriotic statements.
C) not violated the Standards.
Explanation
By not mentioning the increased risk of the market, Brooks has violated the Standard on
using reasonable judgment in a research report. However, the patriotic statements do not
violate the Standards.
(Study Session 1, Module 2, LOS 2.a)
Peggy Green, CFA, is a research analyst following Brown Co. All the information she has
gathered suggests the stock should be rated a weak "hold." During a recent lunch, Green
overheard another analyst say that the stock should be rated a "buy." Green returns to her
o ce and issues a "buy" recommendation. Green:
A) has violated CFA Institute Standards of Professional Conduct because she did not
have a reasonable and adequate basis for making this recommendation.
B) violated CFA Institute Standards of Professional Conduct because she did not seek
approval of the change from her rm's compliance director.
C) has violated CFA Institute Standards of Professional Conduct because she failed to
distinguish between fact and opinion.
Explanation
Analysts are required to have a reasonable and adequate basis, supported by appropriate
research and investigation, for their recommendations.

Nicole Wise, CFA, is an analyst at Chicago Securities. She attends a meeting with management
of one of the companies that she covers. During the meeting, management expresses great
optimism about the company's recent acquisition of a new business. Wise is excited about
these prospects and issues a research report that states that the company is about to achieve
signi cant success with the new acquisition. Wise has:
A) violated CFA Institute Standards of Professional Conduct because she

misrepresented the optimism by turning it to certainty.
B) violated CFA Institute Standards of Professional Conduct because she did not
check the accuracy of the statements that management made.
C) not violated CFA Institute Standards of Professional Conduct because she had
reasonable reason to believe that the statements in her report were true.
Explanation
Standard V(B), Communication with Clients and Prospective Clients. Members must
distinguish between fact and opinion in the presentation of a research report or investment
recommendation. Wise violated the standard because she misrepresented management's
enthusiasm by turning it into certainty.
An analyst nds a stock that has had a low beta given its historical return, but its total risk has
been commensurate with its return. When writing a research report about the stock for clients
with well-diversi ed portfolios, according to Standard V(B), Communication with Clients and
Prospective Clients, the analyst needs to mention:
A) the relationship of the historical beta and return only.
B) the relationship of the historical total risk to return only.
C) both the historical beta and total risk and return.
Explanation
Using reasonable judgment, an analyst may exclude certain factors from research reports.
Since the report will be delivered to clients with well-diversi ed portfolios, total risk is not as
important as beta. Given that the total risk has been only commensurate with historical
return, furthermore, then the analyst is not negligent by not mentioning it.

According to CFA Institute Standards of Professional Conduct, members are least likely
required to:
A) distribute a detailed research report to clients with any recommendation.
B) analyze the investment's basic characteristics before recommending a speci c

investment to a broad client group.
C) make diligent e orts to determine whether third party research relied on is sound.
Explanation
Recommendations can be made in various contexts. For example, an analyst's rm may

issue a list of buy recommendations or a brief recommendation that does not contain all the
relevant details of the analysis, but clients must be informed that a full analysis supporting
the recommendation is available. The other actions are required by the Standards.
(Study Session 1, Module 2.7, LOS 2-V.(C))
In the process of recommending an investment, in order to comply with Standard V(A),
Diligence and Reasonable Basis, a CFA Institute member must:
A) do both of these.
B) support a recommendation with appropriate research and investigation.
C) have a reasonable and adequate basis for the recommendation.
Explanation
Both of these are explicitly required by Standard V(A).

Jim Crockett is a portfolio manager for Miami Advisors and reports to Vicki Tubbs, the Chief
Investment O cer. Miami has developed a proprietary model that has been thoroughly
researched and is known throughout the industry as the Miami model. The model is purely
quantitative and takes a given set of client characteristics and universe of potential securities
and forms a portfolio for the investor. Individual portfolio managers are responsible for
selecting securities to t into the model based on recommendations from the rm's research
department and the managers' own judgment. Because of the speci c nature of the inputs to
the model, each manager is responsible for applying the model on his or her own computer.
The basic philosophy of the process is thoroughly explained to clients. Crockett does not
understand the basics of the model, but feels that since it provides pure quantitative output,
he does not need to understand it. However, he misapplies the model for several of his clients.
In reviewing some of Crockett's portfolios, Tubbs nds the errors and points them out to
Crockett. Which of the following statements regarding Tubbs and Crockett is CORRECT?
A) Crockett has violated the Standards by not considering the appropriateness and
suitability of the investment for his clients.
B) Crockett has violated the Standards by not exercising diligence and thoroughness
in making investment recommendations.
C) Tubbs has violated the Standards by failing to supervise adequately.
Explanation
Crockett had a responsibility to know the model well enough to detect the mistakes that
could occur from misapplication, so he violated the Standard of diligence and reasonable
basis.
An analyst receives a research report from a colleague. The colleague's report has an
elaborate table with performance data on publicly traded stocks. The colleague says the data
in the table consists of measures provided by Standard & Poor's. The analyst nds the table a
useful reference for a report she is writing. She uses several pieces of data from the table. The
analyst is potentially in violation of:
A) Standard I(C), Misrepresentation, concerning the use of the work of others.
B) Standard V(A), Diligence and Reasonable Basis, if she does not rst verify the data
in the table is accurate.
C) no particular standard because this is appropriate activity.
Explanation
Since the data in the table supposedly comes from Standard & Poor's, a recognized data
source, the analyst does not have to cite the source of the data. However, the analyst needs
to use reasonable care and verify that the data is accurate by going back to the source. Had
the analyst printed the table prepared by her colleague without acknowledgement, the
analyst would have violated Standard I(C), Misrepresentation.
Victor Logan is a portfolio manager for McCoy Advisors, and Jack Brisco is the Director of
Research for McCoy. Brisco has developed a proprietary model that has been thoroughly
researched and is known throughout the industry as the McCoy model. The model is purely
quantitative and screens stocks into buy, hold, and sell categories. The basic philosophy of the
model is thoroughly explained to clients. Brisco frequently alters the model based on rigorous
research""an aspect that is well explained to clients, although the speci c alterations are not
continually disclosed. Portfolio managers then make speci c sector and security holding
decisions, purchasing only securities that are indicated as "buys" by the model. Logan has
conducted very thorough research on his own, using the same process that Brisco uses to
validate his ndings. Logan feels the model is missing some key elements that would further
reduce the list of acceptable securities to purchase, however, Brisco has refused to look at
Logan's research. Frustrated by this, Logan applies his own version of the model, with the
justi cation that he is still only purchasing securities on the buy list. Because of the con ict
with Brisco, he does not disclose the use of the model to anyone at McCoy or to clients. Which
of the following statements regarding Logan and Brisco is CORRECT? Logan is:
A) violating the Standards by applying his version of the model and by not disclosing
it to clients. Brisco is violating the Standards by failing to consider Logan's
B) violating the Standards by applying his version of the model and by not disclosing
it to clients. Brisco is not violating the Standards.
C) not violating the Standards by applying his version of the model, but is violating
the Standards by not disclosing it to clients. Brisco is not violating the Standards.
Explanation
Because the research is thoroughly conducted, and Logan has authority to make individual
security selection decisions, Logan is not violating the Standards by applying his model.
However, Logan is violating the Standard on communication with clients and prospective
clients by excluding relevant factors of the investment process. The use of his model is an
important aspect of the investment process and should be disclosed to clients. Brisco is not
violating the Standards by not considering Logan's research.

Susan Plumb is the supervisor of her rm's research department. Her rm has been seeking
the mandate to underwrite Wings Industries' proposed secondary stock o ering. Without
mentioning that the rm is seeking the mandate, she asks Jack Dawson to analyze Wings
common stock and prepare a research report. After reasonable e ort, Dawson produces a
favorable report on Wings stock. After reviewing the report, Plumb then adds a footnote
describing the underwriting relationship with Wings and disseminates the report to the rm's
clients. According to CFA Institute Standards of Professional Conduct, these actions are:
A) a violation of Standard VI(A), Disclosure of Con icts.
B) not a violation of any Standard.
C) a violation of Standard V(A), Diligence and Reasonable Basis.
Explanation
The fact that the rm is seeking the mandate does not preclude the research department
from performing analytical work on the security. As long as the nal recommendation is
based upon reasonable facts, not the desire to obtain the mandate, there is no violation.
Lynne Jennings is a chemical industry research analyst for a large brokerage company. That
industry is currently seeing an increase in mergers and acquisitions. While ying through
Chicago, Jennings sees several senior o cers who she knows are from the largest and fourth
largest chemical companies walk into a conference room. She concludes that negotiations for
an acquisition might be taking place. Jennings:
A) should inform her compliance o cer that she has material nonpublic information
on rms she covers.
B) may use this information to support an investment recommendation.
C) may not act or cause others to act on this information.
Explanation
The fact that the company o cers met is not material nonpublic information. As long as she
bases her investment recommendation on her own independent research, Jennings will not
violate any Standards if she uses this additional information to support it.

A nancial analyst and CFA Institute member sends a preliminary research report on a
company to his supervisor. The supervisor approves the report, but then the analyst receives
news that causes him to revise downward the earnings estimate of the company. The analyst
resubmits the report to the supervisor with the new earnings estimate. The analyst soon nds
out that the supervisor plans to release the rst version of the report with the rst earnings
estimate without a reasonable and adequate basis. In response to this the analyst must:
A) insist that the supervisor change the earnings forecast or remove his (the
analyst's) name from the report.
B) only insist that the rst report be followed up by a revision.
C) both insist that a follow up report be issued and take up the issue with regulatory
authorities.
Explanation
According to Standard V(A), Diligence and Reasonable Basis, the analyst must exercise
diligence, independence, and thoroughness when performing investment analysis, making a
recommendation, or taking investment action. The analyst should document the di erence
in opinion including any request to remove his or her name from the report.
Susan Tigra, CFA, is a portfolio co-manager for the Sandia Energy pension fund. Sandra Bulow,
a research analyst under Tigra's supervision, creates a new trading model and immediately
begins to trade. Susan stops Bulow from trading, but notes that the rm has no guidelines for
testing new models. Tigra should most likely:
A) encourage her rm to develop detailed, written guidance that establishes

minimum levels of testing for all computer-based models as recommended by
S d d V(A) "Dili dR bl B i "
B) encourage her rm to develop detailed, written guidance that establishes
minimum levels of testing for all computer-based models as required by Standard
bl
C) report Bulow to the rm’s compliance department for violation of Standard V(A)
"Diligence and Reasonable Basis."
Explanation
Tigra should encourage her rm to develop detailed, written guidance that establishes
minimum levels of testing for all computer-based models as recommended by Standard V(A)
"Diligence and Reasonable Basis." Reporting Bulow to the Compliance Department would be
of limited usefulness as she has already established that the rm does not have rules
discouraging this behavior.
An analyst has several groups of clients who are categorized according to their speci c needs.
Compared to research reports distributed to all of the clients, reports for a speci c group:
A) may generally exclude more basic facts.
B) will not be allowed because it violates the Standard III(B), Fair Dealing.
C) will de nitely include more basic facts.
Explanation
According to Standard V(B), an analyst can use reasonable judgment regarding the exclusion
of some facts and should include more basic facts for reports to wider audiences. The key
issue is that analysts should tailor their reports to the intended audience.
Lee Hurst, CFA, is an equity research analyst who has recently left a large rm to start
independent practice. He is able to re-create several of his previous recommendation reports,
based on his clear recollection of supporting documentation he compiled at his previous

employer. He publishes the reports and obtains several new clients. Hurst is most likely:
A) in violation of Standard V(C) Record Retention.
B) not in violation of any Standard.
C) in violation of Standard V(A) "Diligent and Reasonable Basis."
Explanation
Hurst is most likely in violation of Standard V(C) Record Retention because the supporting
documentation is unavailable. He needs to recreate the supporting records based on
information gathered through public sources or the covered company. He may have a
reasonable basis for his recommendations and have been diligent in his analysis, but must
reconstruct the records of this analysis before issuing the reports.
(Study Session 1, Module 2.7, LOS 2-V.(C))
In the preparation of a research report, a CFA Institute member may emphasize certain
matters, touch brie y on others, and omit some altogether:
A) provided that the analyst has a reasonable basis for his or her actions.
B) provided that the analyst both has a reasonable basis and is unconstrained by the
Mosaic theory.
C) under no circumstances.
Explanation
According to Standard V(B), the analyst must use reasonable judgment in identifying
relevant factors when communicating with clients and prospects . The Mosaic theory does
not apply here.
An analyst nds a stock with historical returns that are not correlated with interest rate
changes. The analyst writes a report for his clients that have large allocations in xed-income
instruments and emphasizes the observed lack of correlation. He feels the stock would be of
little value to investors whose portfolios are composed primarily of equities. The clients with
allocations of xed income instruments are the only clients to see the report. According to
Standard V(B), Communication with Clients and Prospective Clients, the analyst has:
A) not violated the Standard.
B) violated the Standard concerning fair dealings with all clients.
C) violated the article in the Standard concerning facts and opinions.
Explanation
Recommending a stock whose return is uncorrelated with interest rate changes is
appropriate for the clients described in the problem. Emphasizing the lack of correlation is
appropriate as long as the analyst makes no guarantees concerning the relationship in the
future. Reporting historical correlation is a presentation of fact, and is not in violation. The
analyst is free to show the report only to investors for whom the investment is appropriate.
Scott LaRue is a portfolio manager for Washington Advisors. Washington has developed a
proprietary model that has been thoroughly researched and is known throughout the industry
as the Washington model. The model is purely quantitative and screens stocks into buy, hold,
and sell categories. The basic philosophy of the model is thoroughly explained to clients. The
director of research frequently alters the model based on rigorous research—an aspect that is
well explained to clients, although the speci c alterations are not continually disclosed.
Portfolio managers then make speci c sector and security holding decisions, purchasing only
securities that are indicated as "buys" by the model. La Rue feels the model would be
improved by adding some factors but he has not fully tested this new version of the model.
LaRue discloses his model to his own clients but not to his supervisor. LaRue is:
A) violating the Standards by not considering the appropriateness of the

recommendations to clients.
B) violating the Standards by not having a reasonable and adequate basis for his
investment recommendation.
C) not violating the Standards.
Explanation
The ad hoc model is not part of the formal research process and does not formulate an
adequate basis for a recommendation.
A client calls his money manager and asks the manager to liquidate a large portion of his
assets under management for an emergency. The manager warns the client of the risk of
selling many assets quickly but says that he will try to get the client the best possible price.
This is a violation of:
A) Standard V(A), Diligence and Reasonable Basis.
B) none of the Standards listed here.
C) Standard III(C), Suitability.
Explanation
The money manager has done his duty. He has warned the client of the risk and made no
explicit promises concerning what he can and cannot do.
Robert Hamilton, a CFA candidate, is preparing a research report on Pets-R-Us for public
distribution. Hamilton's preliminary report contains unfavorable earnings forecasts for the
next four quarters. As part of his analysis, Hamilton met with Linda Brisson, the president of
Pets-R-Us, and asked her to review the preliminary report for factual inaccuracies. Brisson
revised Hamilton's earnings forecasts so that the quarterly earnings showed an upward trend
and resulted in positive earnings by the fourth quarter. Hamilton included the revised
earnings gures in his report without further review. Although the nal report included the
basic characteristics of Pets-R-Us, it emphasized certain areas such as projected quarterly
earnings but only brie y touched on others. According to CFA Institute Standards of
Professional Conduct on research reports, Hamilton:
A) violated the Standard because the report did not give similar attention to all areas
but instead emphasized quarterly earnings at the expense of other areas.
B) violated the Standard because he did not thoroughly review and analyze any
information provided by Brisson.
C) did not violate the Standard.
Explanation
Standard V(B) permits Hamilton to ask company management to review his report for
factual inaccuracies, but Hamilton should have taken care to thoroughly review and analyze
any information provided by the company. Hamilton is not required to give equal emphasis
to all areas but can emphasize certain areas, touch brie y on others, and omit certain
aspects deemed unimportant.

Kim Lee is a research analyst at Superior Investments and is researching a biotech rm
specializing in the analysis of "mad cow" disease. While touring company facilities and meeting
with management, she learns that they believe they may have found a way to reverse the
disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in
someone who didn't even have it? We might then be able to boost that individual's IQ into the
stratosphere!" After returning to her o ce, Lee issues a research report describing the
compound as an "IQ booster with huge potential." This statement:
A) is allowable but only if quoted verbatim from her conversations with

management.
B) is reasonable given the information she was provided by the company.
C) lacks a reasonable and adequate basis in fact.
Explanation
Standard V(A) requires that a member have a "reasonable and adequate basis" before
making an investment recommendation. Extrapolating on the basis of the conjecture of one
member of the management team, without independent corroboration, is clearly in violation
of this Standard. She is also in violation of Standard V(B) concerning the use of reasonable
judgment regarding what is included or excluded in a communication with a client or
prospective client.
Several years ago, Hilton and Ross, a full service investment rm, managed the initial public
o ering of eCom, Inc. Now, eCom wants Hilton and Ross to underwrite its secondary public
o ering. A senior manager at Hilton and Ross asks Brent Whitman, CFA, one of its equity
analysts, to write a favorable research report on eCom to help make the underwriting a
success. Whitman conducts a thorough analysis of eCom and concludes that the company has
serious problems that do not suggest a favorable nancial outlook. Nevertheless, Whitman
writes a favorable report because he is fearful of losing his job. Hilton and Ross publicly
distribute a report that only contains a buy recommendation and a brief description of the
basic characteristics of eCom. Whitman has violated:
A) Standard V(A) Diligence and Reasonable Basis only.
B) Standard I(B) Independence and Objectivity, only.
C) Both Standard I(B) Independence and Objectivity and Standard V(A) Diligence and
Reasonable Basis.
Explanation
Whitman violated Standard V(A) Diligence and Reasonable Basis because he did not have a
reasonable and adequate basis for issuing a favorable recommendation. Whitman violated
Standard I(B) Independence and Objectivity because he did not act independently in issuing
his recommendation but instead was in uenced by senior management at Hilton and Ross.
Wes Smith, CFA, works for Advisors, Inc. In order to remain in compliance with Standard V(A),
Diligence and Reasonable Basis, Smith may recommend a security in which of the following
situations?
A) For either of the reasons listed here.
B) Advisors' research department recommends a stock.
C) Smith reads a favorable review of the security in a widely read periodical.
Explanation
Smith will be in violation if he acts solely on the basis of what he read in the periodical. Use
of information within the rm can be relied upon unless the Smith has reason to believe the
source lacks a sound basis.
Fred Stroh is an international equity analyst for EmerWorld Capital Management (ECM). Stroh
has been studying the opportunities associated with the rumors of proposed joint ventures
involving U.S. rms and rms partially owned by the government in a recently democratized
country. Clients of Stroh have called him to ask about the investment possibilities. This
concerns Stroh somewhat as he has had great di culty in nding and acquiring reliable
information about the quality and accessibility of the inputs and labor in local markets.
Furthermore, there is still considerable uncertainty about which U.S. rms will be o ered
partnerships, what the conditions of those partnerships will entail, and the accounting rules
that will govern the new ventures. However, Stroh is con dent that there will be demand for
the output in local and international markets.
Stroh begins his investigation and e-mails an old friend who was an entrepreneur in the U.S.
and moved to the recently democratized country when he went into partial retirement.
Although Stroh had not been in contact with the friend for several years, the friend writes back
and says that this is a great time to invest in the country. He says that there will be national
elections soon, and it seems that a pro-business chief executive for the country will be elected.
The friend includes website URL addresses which link to reports from reputable news sources
concerning the election. Stroh goes to those sites and sees that recent opinion polls in the
country show that the pro-business candidate has a majority in the polls taken and is believed
to be able to easily win the election.
Stroh calls his friend, and asks if the labor costs and input availability in the country gave the
country a comparative advantage in some areas. The friend says yes, and that APX Corp. is
planning to partner with the country's government to expand a plant for making car parts. APX
is also in talks to make a tender o er for a French glass manufacturing rm, which was one of
the few non-nationalized and foreign owned rms in the country. None of APX's intentions
were known to outsiders of the rm. Stroh asks his friend how sure he is of the information,
and the friend says that he has been hired as a consultant for APX and has been a negotiator
in the tender o er dealings, which are going well. Stroh warns his friend that he may be saying
too much, and his friend says that there are no rules in the country associated with trading on
this type of information. The friend says he has some other useful information, but rst asks if
Stroh thought investing in APX was a good idea. Stroh responds by saying that based on the
information just provided, and his training as an analyst and a CFA charterholder, the analysis
would indicate that his friend should buy APX. The friend then says that IMI Corp. has decided
not to enter into any partnerships in the country. Stroh then asks about how sure his friend
was of IMI withdrawing from partnering in the country, and the friend says that although he
has no contacts in IMI, it was his own research that lead to that conclusion. Stroh corroberated
his friend's research ndings.
Stroh continues his investigation. In his research he nds through public documents that APX
has purchased the land next to the car parts plant. Some of APX's managers are already
working in the parts plant itself. He also nds that APX representatives have been visiting the
headquarters of the French glass manufacturer. In public documents, APX is projecting a big
increase in its production of engine parts and windshields.
Stroh calls the CFO of IMI and during the conversation learns that IMI has decided to withdraw
its bid to be a joint venture partner, but that the formal announcement of the withdrawal will
not occur for another week. The CFO declines to give a reason. Stroh also nds that o cial
statistics verify the friend's assertion that the country's labor and raw material supplies do
give it a comparative advantage in the types of activities APX is seeking to engage in.
Not wanting to miss an opportunity, Stroh completes his industry analysis and concludes that
EmerWorld will issue a buy recommendation on APX. In the recommendation he says that APX
is planning on expanding its production of car parts and windshields by acquiring new
manufacturing plants in a country that o ers great cost advantages, but does not mention his
gathering the information concerning the land acquisition and the APX managers working in
the existing plant because he wants to conceal his research methods. Stroh also says the
advantages to APX are exceptionally good because a new pro-business chief executive will
soon be elected. Upon the announcement of IMI to not partner in the country, Stroh issues a
sell recommendation on IMI. Stroh says in the sell recommendation that IMI's management
does not seem competent because it will not be capitalizing on the opportunities in the
country and apparently cannot recognize a good opportunity when it sees one.
Question #27 - 32 of 50 Question ID: 1228415
Which of the following pieces of information would Stroh have been able to use to trade
upon?
A) The labor and materials comparative advantage of the country.
B) IMI withdrawing from partnering in the country.
C) The plan by APX to partner in the car parts production in the country.
Explanation
All of the pieces of information related to APX purchasing the other company, APX
partnering in the car parts industry, and IMI withdrawing from partnering in the country are
all insider information and therefore cannot be used to trade upon. The only information
that can be used is the information pertaining to the labor and materials comparative
advantage since this was public information that Stroh could verify based on publicly
available statistics.
The statement Stroh made in his recommendation of APX concerning the election of a pro-
business chief executive was:
A) appropriate because it did not relate directly to the rms themselves.
B) appropriate because it was based on information from the public websites of

reliable news agencies.
C) not appropriate because of the way it was mentioned in the recommendation.
Explanation
According to Standard V(B), Communication with Clients and Prospective Clients, investment
analysis and recommendations should clearly di erentiate facts from opinions. Although it
is a widely held opinion that the pro-business candidate would win, no one can predict the
future. None of the other reasons are valid.

With respect to the given information and the sell recommendation of IMI, which of the
following statements would NOT be allowable in the sell recommendation under the
Standards?
A) IMI is now abandoning its plan to partner in the country.
B) IMI’s executives cannot recognize a good opportunity when they see it.
C) Research indicated IMI was likely to withdraw from any partnership agreements
within the country.
Explanation
Stroh has no reasonable basis for saying that IMI's executives cannot recognize a good
opportunity when they see it. The CFO of IMI did not give a reason for their not partnering in
the country. IMI may have better opportunities elsewhere. Had the CFO said that the
statistics concerning comparative advantages were not valid, for example, Stroh might have
more of a basis to be critical of the management. The other statements are facts that Stroh
can provide adequate support for.
When Stroh answered his friend's question concerning whether the friend should invest in
APX, Stroh was in violation of all of the following Standards EXCEPT:
A) Standard III(B) Fair Dealing.
B) Standards VII(B) Reference to CFA Institute, the CFA Designation, and the CFA
Program.
C) Standard III(C) Suitability.
Explanation
The Standard III(B) indicates that members shall deal fairly and objectively with all clients
when disseminating recommendations and material changes. Fair dealing requires that
members make every e ort to treat all clients, whether they are individuals or institutions,
in a fair and impartial manner. By essentially making a recommendation to his friend rst,
Stroh breached the standard because he disadvantaged his clients in favor of his friend.
Also, Stroh still had to verify what the friend said about the comparative advantage was true.
Standard V(A), Diligence and Reasonable Basis, and that the investment would be
appropriate for his friend Standard III(C), Suitability. Mentioning his training, which included
the CFA designation, was not inappropriate.

Stroh attempted to maintain the con dence of his research methods by not revealing them in
his report. By doing so, Stroh:
A) is exercising discretion in order to maintain a competitive edge.
B) may have violated the standards related to known limitations of his analysis and
material misrepresentation by omitting the source of his information and other
f h l d hi l i
C) is neither helping nor harming the consumers of his report, as long as he reaches
logical conclusions from the information the sources provide.
Explanation
Standard V(A), Diligence and Reasonable Basis, and Standard V(B), Communication with
Clients and Prospective Clients. Known limitations of the analysis and conclusions should be
documented in research reports. Material misrepresentations should also be avoided by
including all pertinent information and by distinguishing between opinion and fact in the
analysis and conclusions of a report. Stroh may have violated the standards related to
known limitations in his analysis by rushing to provide a recommendation. Stroh felt
somewhat unable to perform an analysis given the lack of essential data, but completed a
report where the conclusions are largely driven by information derived from conversations
that were not included or referenced in the report. These missing facts may also be
construed as material misrepresentation. However, at no time should material nonpublic
information be used for, or reported in, recommendations that are produced by Stroh or
ECM.
With respect to Stroh's recommendations, the mosaic principle could play a role with respect
to the use of which piece of information?
A) The partnering of APX with the government’s car parts operations.
B) The comparative advantage of the country in manufacturing.
C) The purchase of the glass manufacturing company in the country.
Explanation
Stroh could not use the information concerning the car parts partnering, the purchase of the
glass manufacturing company, or IMI's withdrawal from partnering because some or all of
this information was passed on to him via insiders with the information being material
nonpublic information and therefore cannot be traded upon. The Mosaic principle could
only play a role in the material public information regarding the comparative advantage of
the country.
Nancy Westfall is an individual investment advisor who uses mutual funds for her clients. She
typically chooses funds from a list of 40 funds that she has thoroughly researched. The Craigs,
a married couple that is a client, asked her to consider the Eligis fund for their portfolio.
Westfall had not previously considered the fund because when she rst conducted her
research three years ago, Eligis was too small to be considered. However, the fund has now
grown in value, and after doing thorough research on the fund, she nds the fund has suitable
characteristics to be included in her acceptable list of funds. She puts the fund in the Craigs'
portfolio but not in any of her other clients' portfolios. The fund ends up being the poorest
performing fund in the Craigs' portfolio. Has Westfall violated any Standards? Westfall has:
A) not violated the Standards.
B) violated the Standards by not dealing fairly with clients.
C) violated the Standards by not having a reasonable and adequate basis for making
the recommendation.
Explanation
Because Westfall performed the same degree of research as she did for the other funds on
her list, she provided a reasonable and adequate basis for her recommendation. There is
not enough information given about the Eligis fund and how it ts in with the other funds on
Westfall's list to determine whether or not the standard on Fair Dealing was broken. It was
the Craigs who wanted the Eligis fund and Westfall found it to be acceptable for them and
thus added it to her list of acceptable funds. If the Eligis fund was found to possess unique
characteristics that were not found in any of the other funds on Westfall's list and the Eligis
fund was suitable for some of Westfall's other clients and Westfall hadn't added it to their
portfolios after their periodic review then a violation of fair dealing would have occurred.

An analyst writes a report and includes the forecasts of an econometric model developed by
the rm's research department. The analyst identi es the source of the forecast and includes
all the relevant statistics concerning the model and his opinion of the model's accuracy. With
respect to Standard V(A), Diligence and Reasonable Basis, the analyst has:
A) complied with the Standard.
B) violated the Standard by including quantitative details in a report.
C) violated the Standard by not testing the model himself.
Explanation
Including quantitative details in a report is not a violation of the Standard. The analyst has
more of an obligation to give an opinion on the accuracy of the model than withhold such an
opinion. Although the analyst should use reasonable care to verify information included in a
report, retesting models developed by the research department of a rm is not explicitly
required.
Steve Jones is a portfolio manager for Gregg Advisors. Gregg has developed a proprietary
model that has been thoroughly researched and is known throughout the industry as the
Gregg model. The model is purely quantitative and screens stocks into buy, hold, and sell
categories. The basic philosophy of the model is thoroughly explained to clients. The director
of research frequently alters the model based on rigorous research—an aspect that is well
explained to clients, although the speci c alterations are not continually disclosed. Portfolio
managers then make speci c sector and security holding decisions, purchasing only securities
that are indicated as "buys" by the model. Jones thoroughly understands the model and uses
it with all of his clients. Jones is:
A) violating the Standards in not disclosing all alterations of the model to clients, but
not in purchasing stocks without a thorough research basis.
B) violating the Standards in purchasing stocks without a thorough research basis

and in not disclosing all alterations of the model to clients.
C) not violating the Standards either in purchasing stocks without a thorough

research basis or in not disclosing all alterations of the model to clients.
Explanation
Jones and Gregg are using reasonable judgment in not continually disclosing all of the
alterations of the model. It is acceptable to use a pure quantitative model as a sole basis for
purchasing stocks, as long as it is thoroughly researched.
An analyst notices that for most years that a given class of assets has an abnormally high rate
of return, the asset class often has an abnormally low rate of return the next year. Based upon
this information, according to Standard V(A), Diligence and Reasonable Basis, the analyst can
recommend:
A) an increased allocation of Treasury bills (T-bills) for all portfolios of assets that
have increased dramatically in the previous year.
B) neither of these choices.
C) short selling assets that have had a good previous year to all clients.
Explanation
An analyst should not make a recommendation based only upon a statistical anomaly.
Furthermore, none of the other choices would be appropriate. Clients with low risk
tolerance should not short sell assets. The analyst cannot make a recommendation to all
clients because each client has di erent characteristics and portfolios. The one answer that
may have some merit is to increase the allocation of T-bills in portfolios that have had
recent, dramatic increases. This would be for the purposes of maintaining a balanced
portfolio. But the decision to rebalance must be made on a case-by-case basis and not for all
portfolios.
Bella Brown is an experienced generalist securities analyst employed by Lang & Co., a major
U.S. brokerage rm whose clients have a high regard for her research and stock selection
abilities. She was visited recently by a Lang managing director who said, "Please take a look at
SpecChem Inc., the specialty chemical producer. They are going to need an investment banker
soon and, because we make a market in their stock, we will be one of the rms considered for
this business. I had lunch with SpecChem's Treasurer today, who told me that their European
problems are being resolved and that earnings results are de nitely looking good. He likes us
and is expecting you to call him for details." The managing director then left Brown's o ce,
saying, "It would be great if you could rate the stock a 'Buy'."
In a subsequent hour-long telephone discussion with the Treasurer, Brown obtained some
useful information concerning recent company trends and developments as well as
SpecChem's overall view of the outlook for sales and earnings during the next several
quarters. Brown began thinking quite positively about the company and its prospects. She
then reviewed some general source material on the chemical industry and read the Standard
& Poor's Stock Guide on SpecChem Inc. That afternoon, she wrote a report recommending
purchase of the stock, shown below as Exhibit B. In accordance with Lang's routine procedures
for pre-dissemination review of Research Department recommendations, the report has been
sent to the rm's Director of Research, who is aware of the circumstances under which it was
prepared.
Exhibit B
LANG & COMPANY Company Report
Industrial: Specialty Chemicals Equity Research
Rating: Buy
SpecChem Inc. (NYSE: SCM)
We are initiating coverage of SpecChem Inc. with this report.

Earnings, up to 51% in the rst quarter, are expected to be up again in the quarter
ending June 30. Higher sales, better margins, an improved geographic sales mix, and
savings from reduced pension expense are all contributing to this year's gains.
Although European production is up only modestly year-over-year, successful cost
reduction e orts are limiting the adverse e ects of weak volume and pricing. A possible
plant closure in September could improve plant utilization by 10%, accompanied by
potentially dramatic margin improvement. However, a $30 million after-tax special
charge could be taken at the time of the closure.
We expect a moderate increase in second half 2014 sales. Although management looks
for European demand to remain slow, it feels that U.S. sales could be above
expectations if auto-related demand strengthens. Management is also optimistic about
receiving a sizable U.S. government contract in the next few months.
Based on the factors noted above, our con dence level concerning earnings levels over
the balance of the year is high.
We think SpecChem stock is undervalued and believe it can easily reach the low 100s on
the strength of continuing earnings momentum. The downside is estimated to be in the
mid-80s. There is plenty of room for upside earnings surprises if volume and prices
improve, which would take the stock up strongly. Purchase is recommended.
Analyst: Bella Brown
Research Department
This report is based upon information which we consider reliable, but we do not represent
that it is accurate, and it should not be relied upon as such. We, or persons involved in the
preparation or issuance of this material, may, from time to time, have long or short positions
in the securities of the company mentioned herein.
Under the CFA Institute Code and Standards, it is the responsibility of the Director of Research,
a CFA Institute member to:
A) exercise reasonable supervision over those subject to their supervision or

authority to prevent any violation of applicable statues, regulations or provisions
f h C d dS d d
B) not knowingly participate or assist in any violation of laws, rules, or regulations.
C) both of these.
Explanation
The Director of Research, as a CFA Institute member, is bound by the Standards of

Professional Conduct. Accordingly, "members shall not knowingly participate or assist in any
violation of such laws, rules or regulations" (Standard I(A): Knowledge of the Law). This
responsibility is applicable under the circumstances. As a supervisor, the director of
research has a responsibility to exercise reasonable supervision over subordinates to
prevent violations of laws, regulations, and the provisions of CFA Institute Standards of
Professional Conduct (Standard IV(C): Responsibilities of Supervisors).
Under the current circumstances, the Director of Research should:
A) allow the report to be distributed, as is.
B) require the report to be redone with a neutral or hold rating pending the outcome
of the awarding of the investment banking business.
C) require the report to be redone to ensure compliance with CFA Institute

Standards.
Explanation
Based on the current circumstances, the supervisor (Director of Research) must not allow
the report to be distributed. In this situation the overriding responsibility is to ensure that
diligence, thoroughness, and independence be exercised in forming the investment
judgment and in preparing the research report.

The research report, as shown, has several aspects which violate CFA Institute Standards of
Professional Conduct. Which of the following is NOT an apparent violation of CFA Institute
Standards?
A) The report violates guidelines on investment performance presentation.
B) The report does not adequately discuss the factors important to analysis,
recommendations, or action.
C) The report does not distinguish between fact and opinion.
Explanation
There is no attempt in the report to present data on the rm's performance as an

investment manager. Violations relating to the report itself include the following:
Though SpecChem's current and prospective earnings are mentioned, no real basis of
SpecChem's earnings power is discussed, nor are such factors as cash ow, operating
strength or nancial condition. Brown has violated Standard V(B): Communication
with Clients and Prospective Clients.
The report fails to disclose Lang's market-making activities with SpecChem. This
omission violates Standard VI(A): Disclosure of Con icts.
Brown is not separating fact from opinion in her comment, "There is plenty of room
for upside earnings surprises if volume and prices improve further, which would take
the stock up strongly." This is a violation of Standard V(B): Communication with Clients
and Prospective Clients. The above-noted comment could also be considered a
violation of Standard I(C): Misrepresentation.
As to the process by which Brown's report in Exhibit B came into being, which of the following
is least likely a procedural error in violation of CFA Institute Standards of Professional
Conduct?
A) Brown has violated the Standard relating to the prohibition against plagiarism.
B) Brown has violated the Standard relating to independence and objectivity.
C) Brown has violated the Standard relating to disclosure of basic characteristics.
Explanation
There is nothing to indicate that a violation of the Standard on Prohibition against
plagiarism has occurred. The word "process" violations include:
Brown's report and investment conclusions were in uenced by a senior member of

her rm. In addition, near total reliance was put on the information supplied by
SpecChem's management. She has violated Standard I(B): Independence and
Objectivity.
Brown showed a lack of diligence and thoroughness in forming her investment
decision and preparing the report. Her analysis was cursory at best; the report was
not objective nor was it based on adequate understanding of company fundamentals.
Standard V(A): Diligence and Reasonable Basis was violated by Brown.
A violation of Standard V(B): Communication with Clients and Prospective Clients has
also occurred. Brown failed to investigate SpecChem's basic investment
characteristics properly and did not communicate the company's investment
characteristics through the research report.
Brown has been invited to visit the world headquarters of SpecChem. Brown expects that the
information that she learns there will help her to ush out some of the ne details in her
research on SpecChem's stock. SpecChem plans to pay for all of Brown's expenses trip,
including meals, accommodations and lodging. In order to comply with the Code and
Standards, which of the following actions should Brown take? Brown should:
A) Pay for all her travel expenses.
B) Accept the reimbursement but disclose the total reimbursed expense-paid trip in
the report.
C) Accept the reimbursement if she is con dent that her report will still be objective.
Explanation
Brown's best solution to comply with Standard I(B)""Independence and Objectivity is to

avoid any perception of con ict of interest. Brown's rms should pay for all of her expenses.
Disclosing the trip is not enough to avoid a con ict of interest.

Brown submits her report to the Director of Research for review, as required by Lang's
procedures. Although the Director of Research supports Brown's general conclusion, he is
somewhat more optimistic about SpecChem's near-term prospects, and based on his own
thorough investigation believes that the stock could touch $150. The Director of Research
changes the report to indicate a target price somewhat higher than originally predicted by
Brown. Brown is con dent that the Director of Research's conclusion has a reasonable basis,
but thinks that $150 is on the high side of what is likely. The Director of Research adds his own
name to the report to re ect his contribution.
In order to comply with CFA standards, must Brown request that her name be taken o the
report before it is disseminated?
A) No.
B) Yes, because the Director of Research has misrepresented his contribution.
C) Yes, because Brown should dissociate from the report.
Explanation
It is natural for di erent contributors to come to di erent conclusions based on the same
data. In this case, the Director of Research appears to have a reasonable basis for his target
price that is higher than Brown's. The Director of Research is free to issue a report that
di ers somewhat from Brown's conclusions as long as there is a reasonable basis. Brown
should not put her name on a report that di ers from her opinion. However, when a report
is a group e ort, not all members of the team may agree with every aspect of the report.
Brown could ask to have her name removed from the report, but since she is satis ed that
the conclusion has a reasonable basis, she does not have to disassociate from the report.
An analyst who routinely purges the les that support his research and recommendations:
A) may be violating Standard V(C), Record Retention.
B) is acting in accordance to Standard IV(A), Loyalty to Employer.
C) is acting in accordance to Standard III(E), Preservation of Con dentiality.
Explanation
According to Standard V(C), a member shall "maintain appropriate records" to support

recommendations. Neither of the other choices would apply to this action.

Janice Mel is a portfolio manager for Soprano Advisors. Soprano has developed a proprietary
model that has been thoroughly researched and is known throughout the industry as the
Soprano model. The model is purely quantitative and screens stocks into buy, hold, and sell
categories. The basic philosophy of the model is thoroughly explained to clients. The director
of research frequently alters the model based on rigorous research—an aspect that is well
explained to clients, although the speci c alterations are not continually disclosed. Portfolio
managers use the model to assist them in making portfolio decisions, but, based on their own
fundamental research, are allowed to purchase securities not recommended by the model.
This fact is not disclosed to the clients, because the head of marketing does not think it is
relevant. Which of the following statements regarding the portfolio manager's investment
decisions is CORRECT?
A) There is no violation of the Standards.
B) Soprano is violating the Standards by not disclosing the fundamental research

aspect of the investment process.
C) Mel is violating the Standards by using two investment processes that are in
con ict with each other.
Explanation
Soprano is violating the Standard on portfolio investment recommendations and actions by

excluding relevant factors of the investment process. The fundamental research aspect is
highly relevant to the process and should be disclosed to clients. It is acceptable for Mel to
use two investment processes that may be in con ict with each other and to use a process
that was not developed by her.

Preston Partners is an investment management rm that adopted the Code and Standards as
part of its policy manual. Gerald Smithson, CFA, has recently added the stock of Utah
Biochemical Company and Norgood PLC to all his client's investment portfolios. Shortly
afterwards Utah Biochemical and Norgood announced a merger that increased the share price
of both companies. Smithson contends he saw the president of Utah Biochemical dining with
the chairman of Norgood, but did not overhear their conversation. Smithson researched both
companies extensively and determined that each company was a good investment. He put in a
block trade for shares in each company. Preston's policies were not clear in this area as he
allocated the shares by starting with his largest client accounts and working down to the small
accounts. Some of Smithson's clients were very conservative personal trust accounts, others
were pension funds who had aggressive investment objectives. Which standard was NOT
broken?
A) Standard IV(C)--Responsibilities of Supervisors.
B) Standard V(A)--Diligence and Reasonable Basis.
C) Standard III(C)-- Suitability.
Explanation
Standard V(A)""Diligence and Reasonable Basis was not broken because Smithson
conducted thorough and diligent research. Standard III(C)-- Suitability, Smithson failed to
consider the needs of his conservative and aggressive clients. Standard IV(C)--
Responsibilities of Supervisors, Preston Partners didn't have policies explaining how to
allocate shares among clients.
Joni Black, CFA, works for a portfolio management rm. Black is a partner of the rm and is
primarily responsible for managing several large pension plans. Black has just nished a
research report in which she recommends Zeta Corporation as a "Strong Buy." Her rating is
based on solid management in a growing and expanding industry. She just handed the report
to the marketing department of the rm for immediate dissemination. Upon returning to her
desk she notices a news ash by CNN reporting that management for Zeta Corporation is
retiring. Black wishes she did not recommend Zeta Corporation as a "Strong Buy," but believes
the corporation is still a good investment regardless of the management. What course of
action for Black is best? Black:
A) may send out the report as written as long as a follow up is disseminated within a
reasonable amount of time re ecting the changes in management.
B) should revise the recommendation based on this new information.

C) should report the new information to her immediate supervisor so that they can
determine whether or not the marketing department should send out the report
i
Explanation
This question is related to Standard V(B) which states that CFA Institute members should use
reasonable judgment regarding the inclusion or exclusion of relevant factors in research
reports. The change in management was a relevant factor and must be disclosed before
dissemination.
An analyst receives a report from his research department that summarizes and interprets a
recent speech from the chairman of the U.S. Federal Reserve. The summary says that the
chairman thinks in ation is under control. Based upon this summary, the analyst says in his
next newsletter that in ation is under control. This is a violation of:
A) none of the Standards listed here.
B) Standard V(A), Diligence and Reasonable Basis, only.
C) Standard V(A), Diligence and Reasonable Basis, and Standard V(B), Communication
with Clients and Prospective Clients.
Explanation
The analyst should verify that the research department has interpreted the chairman's
speech correctly. The analyst must make it clear that the statement concerning in ation is
only an opinion. No one knows if that is true or not at any point in time. Based upon the
given information, we cannot say that the analyst is violating only one standard. The analyst
may also be violating plagiarism in accordance with Standard I(C), Misrepresentation. Hence,
the answer citing the two standards and not limiting violations to just those two standards is
the best answer.
Roger Halpert, CFA, prepares a company research report in which he recommends a strong
"buy." He has been careful to ensure that his report complies with the CFA Institute Standard
on research reports. According to CFA Institute Standards of Professional Conduct, which of
the following statements about how Halpert can communicate the report is most correct?
A) Halpert can transmit his report by computer on the Internet.
B) Halpert can make his report in person, by telephone, or by computer on the

Internet.
C) Halpert can make his report in person.
Explanation
A report can be made via any means of communication, including in-person

recommendation, telephone conversation, media broadcast, and transmission by computer
such as on the Internet.
Patricia Hoolihan is an individual investment advisor who uses mutual funds for her clients.
She typically chooses funds from a list of 40 funds that she has thoroughly researched. The
Burns, a married couple that are a client, asked her to consider the Hawkeye fund for their
portfolio. Hoolihan had not previously considered the fund because when she rst conducted
her research three years ago, Hawkeye was too small to be considered. However, the fund has
now grown in value, and cursory research uncovers no fundamental aws with the fund. She
puts the fund in the Burns' portfolio but not in any of her other clients' portfolios. The fund
ends up being the best performing fund on her list. Hoolihan has:
A) violated the Standards by not having a reasonable and adequate basis for making
the recommendation.
B) not violated the Standards.
C) violated the Standards by not dealing fairly with clients.
Explanation
Despite the fact the addition of the fund was successful, Hoolihan acted improperly in not
conducting the same degree of research as she did for the other funds on her list.

The following scenarios refer to recommendations made by two analysts.
Jean King, CFA, is a quantitative analyst at Quantlogic, Inc. King uses computer-
generated screens to di erentiate value and growth stocks based on accounting
numbers such as sales, cash ow, earnings, and book value. Based on her analysis of all
domestically traded stocks in the U.S. over the past year, King concludes that value
stocks as a class have underperformed growth stocks over that period. Using only this
analysis, she recommends that account executives at Quantlogic sell all value stocks
from the portfolios for which they have discretionary authority to trade and replace
these stocks with growth stocks.
James Capelli, CFA, is a fundamental analyst at Wheaton Capital Management, which

focuses on regional stocks. His analysis of Branson Wireless includes the investment's
basic characteristics such as information about historical earnings, ownership of assets,
outstanding contracts, and other business factors. In addition to conducting both a
general industry analysis and a company nancial analysis, Capelli interviews key
executives at Branson. Based on his analysis, he concludes that the company's future
prospects are strong and issues a "buy" recommendation.
According to CFA Institute Standards of Professional Conduct, did King and Capelli have a
reasonable and adequate basis for making their recommendations?
A) Capelli has a reasonable basis for his recommendation, but King does not.
B) King has a reasonable basis for his recommendation, but Capelli does not.
C) Both King and Capelli have a reasonable basis for their recommendations.
Explanation
Capelli appears to have exercised diligence and thoroughness in making his

recommendation. King's recommendation is not based on thorough quantitative work
because the period used in her study is only one year. Also, her recommendation does not
consider the client's speci c needs and circumstances.

R02.7 Guidance For Standard V - Answers

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R02.7 Guidance For Standard V - Answers

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Question #1 of 50 Question ID: 1228424

B) violated the Standard by communicating the recommendation via e-mail.

C) ful lled all obligations.

(Study Session 1, Module 2.7, LOS 2-V.(A))

Question #2 of 50 Question ID: 1228442

A) make sure that the change is identical for both clients.

C) perform both of these functions.

(Study Session 1, Module 2.7, LOS 2-V.(B))

about Coleman's actions is most accurate?

C) Coleman did not violate the Standards.

(Study Session 1, Module 2.7, LOS 2-V.(B))

Question #4 of 50 Question ID: 1153567

C) not violated the Standards.

(Study Session 1, Module 2, LOS 2.a)

Question #5 of 50 Question ID: 1228426

o ce and issues a "buy" recommendation. Green:

(Study Session 1, Module 2.7, LOS 2-V.(A))

A) violated CFA Institute Standards of Professional Conduct because she

(Study Session 1, Module 2.7, LOS 2-V.(B))

Question #7 of 50 Question ID: 1228443

Prospective Clients, the analyst needs to mention:

A) the relationship of the historical beta and return only.

B) the relationship of the historical total risk to return only.

C) both the historical beta and total risk and return.

(Study Session 1, Module 2.7, LOS 2-V.(B))

A) distribute a detailed research report to clients with any recommendation.

B) analyze the investment's basic characteristics before recommending a speci c

Recommendations can be made in various contexts. For example, an analyst's rm may

(Study Session 1, Module 2.7, LOS 2-V.(C))

Question #9 of 50 Question ID: 1228427

In the process of recommending an investment, in order to comply with Standard V(A),

Diligence and Reasonable Basis, a CFA Institute member must:

B) support a recommendation with appropriate research and investigation.

C) have a reasonable and adequate basis for the recommendation.

Both of these are explicitly required by Standard V(A).

(Study Session 1, Module 2.7, LOS 2-V.(A))

Question #10 of 50 Question ID: 1228451

C) Tubbs has violated the Standards by failing to supervise adequately.

(Study Session 1, Module 2, LOS 2.a)

Question #11 of 50 Question ID: 1228429

analyst is potentially in violation of:

A) Standard I(C), Misrepresentation, concerning the use of the work of others.

C) no particular standard because this is appropriate activity.

(Study Session 1, Module 2.7, LOS 2-V.(A))

Question #12 of 50 Question ID: 1228450

(Study Session 1, Module 2, LOS 2.a)

A) a violation of Standard VI(A), Disclosure of Con icts.

B) not a violation of any Standard.

C) a violation of Standard V(A), Diligence and Reasonable Basis.

(Study Session 1, Module 2.7, LOS 2-V.(A))

Question #14 of 50 Question ID: 1228459

B) may use this information to support an investment recommendation.

C) may not act or cause others to act on this information.

(Study Session 1, Module 2, LOS 2.a)

B) only insist that the rst report be followed up by a revision.

(Study Session 1, Module 2.7, LOS 2-V.(A))

Question #16 of 50 Question ID: 1228434

A) encourage her rm to develop detailed, written guidance that establishes

(Study Session 1, Module 2.7, LOS 2-V.(A))

Question #17 of 50 Question ID: 1228441

A) may generally exclude more basic facts.

C) will de nitely include more basic facts.

(Study Session 1, Module 2.7, LOS 2-V.(B))