Ethical & Professional Standards - 2 - Free MCQ Practice Test with solutions,

Elena Kovacs, CFA, is a senior equity analyst covering the pharmaceutical sector. While conducting due diligence on BioNova Corp, she reviews the company's publicly filed clinical trial disclosures, recent FDA correspondence published on the agency's website, and a conversation with a former BioNova scientist who confirms that a mid-stage trial was discontinued - information not yet publicly announced. Kovacs combines these data points to issue a strong buy recommendation on BioNova.

Kovacs's actions are most likely:

David Huang, CFA, covers the consumer discretionary sector at an asset management firm. After publishing a favorable research report on RetailMax Inc., Huang receives a luxury watch valued at USD 4,500 from RetailMax's investor relations team as a token of appreciation. Huang does not inform his employer of the gift and continues to cover RetailMax.

Huang's actions most likely violate which CFA Institute Standard?

An investment firm is seeking Global Investment Performance Standards (GIPS) compliance. The firm's performance director reviews the policies governing composite construction and makes the following statement: "Under GIPS, we are required to include all portfolios meeting a composite's definition, but we may exclude smaller accounts to reduce administrative burden."

The statement is most likely:

Sarah Okonkwo, CFA, manages a large-cap growth mutual fund with a clearly defined investment mandate. A new high-net-worth investor, whose personal financial profile reflects a conservative, income-focused approach, purchases shares in the fund. When evaluating the suitability of a proposed technology sector trade for the fund, Okonkwo should most appropriately assess suitability based on:

Marcus Bell, CFA, is an equity trader at a hedge fund. Bell learns that the fund intends to purchase 500,000 shares of TechCore Systems for a client account the following morning. Before executing the client order, Bell purchases 10,000 TechCore shares in his personal brokerage account, anticipating the price increase that the large client order will generate. Bell executes the client order the next day.

Bell most likely violates which CFA Institute Standard?

Priya Nair, CFA, publishes a research report on FinCorp Holdings. The report's valuation section reproduces verbatim three paragraphs of financial analysis and all supporting tables from a report previously published by a third-party research provider, without any attribution or citation. Nair's supervisor considers this acceptable because the third-party research was purchased through the firm's subscription service.

Nair's action most likely violates:

A portfolio valued at USD 1,000,000 at the beginning of the period generates the following sub-period returns prior to each external cash flow:

• Sub-period 1: +6.0%
• Sub-period 2: −4.0%
• Sub-period 3: +10.0%

The GIPS-compliant time-weighted return (TWR) for the full period is closest to:

James Liu, CFA, is a portfolio strategist who upgrades the sector rating for healthcare from neutral to overweight in a written research report. Before distributing the report to all clients, Liu telephones five high-net-worth clients and verbally communicates the upgrade, allowing them to trade ahead of the report's general distribution. Liu justifies this practice by noting that high-net-worth clients pay higher advisory fees.

Liu's actions most likely violate:

Fatima Al-Hassan, CFA, covers the energy sector. While reviewing public earnings transcripts, satellite imagery data (commercially available), and supply chain reports filed with regulators, she also receives a phone call from a logistics manager at PetroLink Corp who mentions, in passing, that a minor equipment shipment was delayed - a fact not yet disclosed publicly but that Al-Hassan assesses as unlikely to be price-sensitive. Al-Hassan incorporates all of this information into a sell recommendation.

Al-Hassan's conduct is most likely:

A compliance consultant at an investment management firm explains GIPS verification to a new employee. The consultant states: "A GIPS verification is performed by an independent third party and confirms that every individual composite return presented by the firm has been calculated accurately and in accordance with GIPS standards."

The consultant's statement is most accurately described as:

Anna Petrov, CFA, is a sell-side analyst at a brokerage firm. She personally holds 15,000 shares of CloudBase Technologies, a company she covers. Petrov initiates coverage with a buy rating without informing her employer or disclosing her ownership position in the published report.

To comply with Standard VI(A) - Disclosure of Conflicts, Petrov should most appropriately:

Christopher Adeyemi, CFA, is a portfolio manager who, outside of his professional duties, is convicted of tax evasion involving the deliberate falsification of personal income records. Adeyemi argues that the conduct occurred entirely in his personal capacity and is unrelated to his investment management responsibilities.

Which of the following best describes whether a CFA Institute Standard has been violated?

A six-member fixed income investment team at Meridian Capital, led by portfolio manager Sandra Lee, CFA, is acquired by Apex Asset Management. The entire team - including all six investment professionals - joins Apex. The investment process, risk models, and decision-making framework are replicated in full at Apex, and Meridian Capital confirms in writing that it will provide supporting documentation for all historical performance records.

Under GIPS, the team's prior performance record is most likely:

WealthStream Advisors is marketing its investment capabilities to prospective institutional clients. In its pitch book, the firm presents performance data from its three highest-performing composites while omitting four underperforming composites that were terminated in the prior two years. The firm's chief investment officer states that presenting only active, strong-performing composites is a more relevant reflection of current capabilities.

This practice most likely violates:

Under the Global Investment Performance Standards (GIPS), investment management firms are required to use a specific return calculation methodology for reporting composite performance. Which of the following best explains the required methodology and the rationale for its use?

Thomas Reinhardt, CFA, operates in a foreign jurisdiction where local securities law permits analysts to share material nonpublic information with domestic institutional investors under a formal regulatory disclosure framework. The CFA Institute Code and Standards prohibit trading on or facilitating the use of material nonpublic information.

Under Standard I(A) - Knowledge of the Law, Reinhardt should most appropriately:

Under Standard II(B) - Market Manipulation, which of the following best describes the scope of prohibited activities?

Rachel Kim, CFA, presents a portfolio proposal to a prospective client. During the meeting, Kim states: "Based on our proprietary model, this strategy will generate a minimum annual return of 12%, as it has done consistently over the past five years." Kim makes no distinction between the historical track record and the forward-looking projection, and does not disclose that past performance does not guarantee future results.

Kim's communication most likely violates:

Horizon Asset Management directs client brokerage to Apex Securities in exchange for equity research that Horizon's portfolio managers use exclusively in managing client portfolios. The research is not available for purchase elsewhere and directly supports investment decision-making. The arrangement is disclosed to clients in Horizon's Form ADV and client agreements.

Under Standard III(A) - Loyalty, Prudence, and Care, this arrangement is most likely:

A GIPS-compliant investment firm is reviewing its portfolio valuation policies. The firm currently values portfolios at cost unless a portfolio is liquidated, at which point fair market value is recorded. The compliance officer is evaluating whether this policy meets GIPS input data requirements.

Under GIPS, the firm's valuation policy is most likely:

NorthStar Securities structures its analyst compensation as follows: base salary is fixed, but annual bonuses are determined by a formula that weights investment banking revenue generated from companies the analyst covers at 40%. The head of research argues that tying analyst pay to investment banking is standard industry practice and does not compromise research quality as long as analysts disclose the arrangement in each report.

This compensation structure most likely violates:

A GIPS-compliant firm receives a significant new discretionary account funded on March 15. The firm's performance measurement periods run on a calendar-month basis. The firm's compliance officer is determining when the new account must be included in the appropriate composite and how terminated portfolios should be treated in historical records.

Under GIPS, the most appropriate treatment is:

Victor Chen, CFA, manages a discretionary portfolio for a long-standing client under an investment policy statement (IPS) specifying a moderate risk tolerance and a 60/40 equity-bond allocation. The client contacts Chen to inform him that she has recently retired and wishes to shift to a more conservative, income-focused strategy. Before Chen adjusts the portfolio's allocation, he should most appropriately:

Portfolio manager Derek Stone, CFA, receives a telephone tip from a corporate insider at Pinnacle Corp indicating that the company will announce a transformative acquisition the following morning. Before the announcement, Stone purchases 20,000 shares of Pinnacle in his personal brokerage account. He then executes a larger buy order in Pinnacle shares for his managed client accounts later the same day, after the insider information prompted his decision to trade.

Stone's actions most likely violate:

A GIPS-compliant firm calculates the time-weighted return for a portfolio using the following sub-period returns:

• Sub-period 1: +8.0%
• Sub-period 2: −5.0%

There are no other sub-periods in the measurement period. The time-weighted return for the full period is closest to:

Geoffrey Marsh, CFA, is presenting a new investment product to a group of retail clients. He states: "This fund has returned 18% annually for the past three years and will continue to deliver at least 15% per year going forward based on our proprietary model. Investing now guarantees you superior returns." No risk disclosures or caveats are provided during the presentation.

Marsh's conduct most likely violates:

The entire seven-member emerging markets equity team at Sterling Investments, including portfolio managers, analysts, and the risk officer, leaves to join Nova Capital Management. Nova replicates Sterling's systematic emerging markets process, including all quantitative screening models and trading protocols, without material modification. Nova obtains written confirmation from Sterling that it will make available all supporting performance records for the prior five years.

Under GIPS, the team's prior performance record is most likely:

Isabella Ferreira, CFA, is a portfolio manager who learns that her firm's parent company has acquired a 12% equity stake in EuroTech Holdings, a company held in several of Ferreira's client portfolios. Ferreira recognizes that the ownership stake creates a potential conflict of interest that may affect her objectivity when recommending EuroTech to clients. Ferreira decides to address the conflict at the next scheduled annual client review meeting.

Under Standard VI(A) - Disclosure of Conflicts, Ferreira's approach is most likely:

Carla Mende, CFA, manages a large institutional equity portfolio on a discretionary basis. Her client has granted her full proxy voting authority. Mende's firm does not have a formal written proxy voting policy, and Mende has historically abstained from all proxy votes, stating that proxy voting is an administrative function unrelated to investment management.

Mende's practice most likely violates:

An investment management firm is preparing its first GIPS-compliant performance presentation for a prospective pension fund client. The compliance team is reviewing mandatory disclosure requirements. A junior analyst proposes that the firm only needs to disclose total firm assets and composite assets, noting that individual portfolio details are confidential and not required by GIPS.

The junior analyst's assessment of GIPS disclosure requirements is most likely: