Mock Exam © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd November 2015 11:50 AM LEVEL 2016 Mock Exam 1—Questions Subject Ethical and Professional Standards Quantitative Methods Economics Financial Reporting and Analysis Corporate Finance Portfolio Management Equity Fixed Income Derivatives Alternative Investments Total minutes Questions 1–18 19–32 33–44 45–68 69–77 78–85 86–97 98–109 110–115 116–120 Minutes 27 21 18 36 13 12 18 18 180 © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd November 2015 11:50 AM Questions 1–18 Ethical and Professional Standards Giles Stafford, CFA, is the chief investment officer of a small investment management firm in a country that already has strict regulations on the way that performance is reported In most cases the regulations are stricter than the Global Investment Performance Standards (GIPS®), and he decides that since he is complying with the local regulations he will claim GIPS compliance Which of the following statements best describes the situation? A As long as the local regulations are generally stricter, satisfying the local regulations is sufficient to claim GIPS compliance B Stafford must ensure that all the requirements of GIPS are followed before his firm can claim compliance If there are differences between the local laws and the GIPS, the differences must be disclosed C If the country where Stafford is working cannot be persuaded to use the GIPS as its national standard for presenting performance, then a firm operating in that country cannot claim GIPS compliance Answer: B LOS 4c Stafford must meet the local laws and regulations but must make full disclosure of the conflict in the compliant presentation ABC Investment Managers decides to calculate and present performance in compliance with GIPS® Which of the following is most accurate? A ABC Investment Managers must wait five years before they can claim GIPS compliance and in the meantime build up five years of compliant data B ABC Investment Managers may present noncompliant data for the past five years as long as they disclose that it is noncompliant and all future data is compliant with GIPS C ABC Investment Managers must present five years’ historic data (or data from inception of the firm or composites if their existence is less than five years) that is compliant with GIPS Answer: C LOS 4b Five years of compliant data must be presented Each subsequent year ABC must add compliant data until they have built up to providing 10 years’ data © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd 4 November 2015 11:50 AM Thomas Jewitt, CFA, works for MidWest Brokerage, a firm that specializes in providing brokerage services to private clients Occasionally he refers his clients to MidWest’s personal financial planning department, a subsidiary of MidWest brokerage, for which he receives referral fees He does not disclose this arrangement to his clients Which of the following statements best describes Jewitt’s actions? A Jewitt has violated the CFA Institute Standards because he has not disclosed the arrangement to his clients B Jewitt is in compliance with the CFA Institute Standards because this is an internal arrangement within MidWest C Jewitt has violated the CFA Institute Standards; under the Standards, he is not permitted to receive fees for internal referrals Answer: A LOS 2b Jewitt has violated Standard VI(C) since the Standard does not distinguish between third‐party and internal arrangements All referral fees are permitted but must be disclosed to clients Even though it is not a regular occurrence he still needs to disclose the arrangement to his clients at the time of referral Valery de Picarde, CFA, is the director of a major Karamba‐owned investment management firm’s branch in Indopulo Karamba is known as the world’s center of investment management with securities laws stricter than the CFA Institute Code and Standards In Indopulo, an emerging market, the local securities laws and regulations are embryonic They are very vague regarding the definition of insider trading and have no provision regulating soft dollars De Picarde’s client is a citizen of Karamba but residing in and doing business in Indopulo The client and de Picarde’s business dealings are under the jurisdiction of the laws of Indopulo Which is the most appropriate action for de Picarde to follow when dealing with this client? A De Picarde should follow the laws of Karamba since they are stricter that the laws of Indopulo B De Picarde does not need to comply with the laws of Karamba since the client is not resident there, and can therefore take full advantage of soft‐dollars arrangements but not insider trading opportunities C As a CFA Institute member, de Picarde must comply with the CFA Institute Code and Standards regarding insider trading and soft dollars, as they are stricter than the laws of Indopulo Answer C LOS 2a According to Standard I(A) the rule of thumb is that members must comply with the stricter of the applicable laws (in this case Indopulo’s laws) and the Code of Standards © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd November 2015 11:50 AM James Richards, CFA, who is a quantitative analyst at Chelsea Investments, a money management firm, has recently been working on a quantitative risk management model for a convertible arbitrage strategy Richards recently attended a CFA Institute conference where he learned that High Finance, a competing investment advisory firm, is also developing a similar model but approaching it from a different angle He did not agree with the main assumptions of the High Finance model although he admitted that its new methodology is innovative Upon returning to his office, Richards adopted High Finance’s quantitative techniques but kept the original assumptions from his model The results are promising, and Jane Seamore, the CEO of Chelsea Investments, is pleased with Richards’s research She appears in public seminars to present the new methodology and to win client mandates Which of the following complies with the CFA Institute Standards? A Richards or Seamore must credit High Finance for having developed the model B Richards should not have misappropriated the quantitative techniques from High Finance C Seamore does not need to refer to either Richards or High Finance developing the model in an oral presentation Answer: A LOS 2b Standard I(C): Misrepresentation says Richards or Seamore must acknowledge the original source of the quantitative techniques, although Richards can take credit for the final results Richards is employed by Chelsea Investments; therefore, the intellectual property of research work generally belongs to the employer, unless specified differently Catherine Vieira, CFA, has been recently recruited to head the Asian research department in Hong Kong of a Paris‐based brokerage firm The firm employs many analysts spread across different countries in Asia, some of whom are members of CFA Institute and subject to the CFA Institute Standards Vieira thinks that the firm’s compliance procedures need to be significantly upgraded to adequately deal with current global requirements Which is the best course of action for Vieira according to the CFA Institute Standards? A Vieira should not delegate supervisory duties until the compliance procedures are upgraded B Vieira should seek to improve the compliance procedures before she accepts supervisory responsibility C Vieira may only accept supervisory responsibility after notifying her employer she is not happy with the compliance procedures Answer: B LOS 2b If the compliance procedures are inadequate, she should not accept responsibility until reasonable procedures are in place Standard IV(C) states that supervisory responsibility remains with the supervisor, although the actual supervision duties can be delegated Members can rely on reasonable procedures to detect and prevent violations to applicable statutes, regulations and provisions of the Code and Standards © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd 6 November 2015 11:50 AM Which of the following actions is least likely to support an information barrier (firewall)? A Limit the number of people in the firm who have access to material nonpublic information B Place securities on a restricted list when the firm has access to material nonpublic information C Limit the number of major institutional clients who regularly receive “special investment tips” prior to information being made public Answer: C LOS 2c Firewalls are intended to block the dissemination of material nonpublic information Choice C is still dissemination and therefore in violation of Standard II(A) William Johnson, CFA, is a stock analyst covering the oil sector Through his contacts in the oil industry, he has accumulated and analyzed several pieces of nonpublic information Although none of the information is material, Johnson reached the conclusion that one of the companies he covers has discovered a new oil field, which will probably have a major impact on future earnings According to the CFA Institute Standards, Johnson: A Should urge the oil company to make the information public immediately B Is allowed to use the information to make investment recommendations and decisions C Is not allowed to make investment recommendations or take actions based on this information Answer: B LOS 2b Each individual piece of information is nonmaterial so Johnson does not violate the Code and Standards; his action is permissible under the “mosaic” theory © Wiley 2016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd 7 November 2015 11:50 AM ... Alternative Investments Total minutes Questions 1 18 19 –32 33–44 45–68 69–77 78–85 86–97 98 10 9 11 0 11 5 11 6 12 0 Minutes 27 21 18 36 13 12 18 18 18 0 © Wiley 2 016 All Rights Reserved Any unauthorized copying... constitute an infringement of copyright Mock Exam Questions with Solutions.indd November 2 015 11 :50 AM Questions 1 18 Ethical and Professional Standards Giles Stafford, CFA, is the chief investment officer... 2 016 All Rights Reserved Any unauthorized copying or distribution will constitute an infringement of copyright Mock Exam Questions with Solutions.indd November 2 015 11 :50 AM James Richards, CFA,