2012 CFA Exam Level 1(SAMPLE) by T.SMITH Copyright 2010 T.SMITH Smashwords Edition Books are Available at http://about.me/CFACPAhttp://www.lulu.com/spotlight/CFA CPA
The author successfully passed the CFA (Chartered Financial Analyst), CPA (CertifiedPublic Accountant), and FRM (Financial Risk Manager) exams "WITHOUT ANYRETAKES".Based on a true experience, the author also wrote how to pass the CFA exams afterstudying for two weeks.CFA 2012 Study Notes2011 All rights reserved.These materials may not be copied without written permission from the author. Theunauthorized duplication of these notes is a violation of global copyright laws andthe CFA Institute Code of Ethics.Required CFA Institute disclaimer: “CFA and Chartered Financial Analyst aretrademarks owned by CFA Institute. CFA Institute (formerly the Association forInvestment Management and Research) does not endorse, promote, review, or warrant theaccuracy of the products or services.
QUESTIONS AND ANSWERS1. An AIMR member who lives in Atlantis, where some laws are stricter than the AIMR Code of Ethics and others are less strict, should follow: a. AIMR code, since the code is a strict set of rules. b. Atlantis’ laws, since the member resides in Atlantis. c. A combination of the two which results in a stricter set of laws. Answer: c. A member must always abide by the AIMR code (Standard I), unless the local laws in any given case are stricter, in which case, the stricter standard applies.1. Smirlee Montero is a fixed income analyst at a small investment firm. She has been studying the subject of “Body Language” in order to gauge the effectiveness of reading into the dispositions of people. Based on her own empirical tests carried out over the past two years involving 64 different subjects, she has concluded that during the meetings with analysts, a senior management official is usually more excited and waves hands quite often when the information like earnings report (which is released a couple of days later) is very favorable. On the other hand, if the earnings are short of expectations, the official tends to be sober and appears more introspective. There are other body signs which she uses to evaluate possible signals about the quality of information that is pending. In a recent meeting with Chronotron, Inc.’s quarterly analyst meeting, she concluded using her technique that Chronotron’s earnings are very likely much lower than projected earlier. This information was not actually released in the meeting whose main focus was on the company’s plans for the next quarter. In her report, Smirlee presented a detailed analysis of the publicly available information which supported her hunch and wrote, “Based on this and certain other observations, it is my opinion that Chronotron’s is not doing as well as we earlier estimated. Therefore, I would recommend selling this stock before the firm releases its earnings numbers”. Smirlee has: a. violated Standard V(A) – Prohibition against use of Material, Non-Public Information. b. violated Standard IV(A.2) – Research Reports by failing to distinguishing between fact and opinion. c. has not violated any Standards. Answer: c There is no evidence that in her report, Smirlee has tried to pass off an opinion as fact. While her new technique is unconventional, using it would be a violation of Standard IV(A.1) only if used in isolation. Since she has
diligently analyzed public information on Chronotron, she cannot be accused of not having a reasonable basis for recommendation. The AIMR Standard of Ethics do not prohibit a use of new techniques but rather encourage tempering them with more orthodox analysis2. John Cochrun is a reputed money manager who is also an AIMR member. John recently discovered that some employees at the firm where he is employed have been engaging in some questionable activity which could very well be construed as insider trading by the SEC. John, however, does not think the activity is egregious enough to be reported to the SEC. In any case, he does not want to be known as “the rat who blew the whistle”. By not reporting the criminal activity , John has: a. violated the AIMR code, standard I(B) – Fundamental Responsibilities. b. violated the AIMR code, standard III(B) – Duty to the Employer. c. has not violated the AIMR code. Answer: d The AIMR code does not require members to report legal violations to the appropriate authorities, as long as they don’t associate themselves with such activities.3. Spassky was assigned the task of managing the portfolio of Fisher 3 days ago when Anand, who was managing Fisher’s portfolio, retired. Fisher’s portfolio consists of some deep-in-the-money put options which will be exercised today, resulting in a cash flow of about $40,000. Spassky has not yet had a chance to meet Fisher in person to determine his needs, investment objectives and risk appetite. He did get a briefing from Anand about the portfolio and has a general idea about Fisher’s investment attitude. In fact, over the past two years, Fisher’s portfolio has generated handsome returns due to high-risk investments which Fisher prefers. Spassky’s problem is determining what he should do with the $40,000. According to the AIMR Code of Ethics, he should: a. “roll over” the put positions for another week or two till he can meet Fisher and discuss the reinvestment of the funds. b. invest the funds in a diversified portfolio with a risk profile similar to what Anand and Fisher have been maintaining over the past 3 months. c. invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine his needs, investment objectives and risk appetite. Answer: c In most cases, a portfolio manager must manage a portfolio based on the investment needs and objectives of the portfolio owner consistent with the willingness to bear risk. One exception to this rule is when a new portfolio manager takes over and has the task of reinvesting funds arising from the existing portfolio investments. Since