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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)have a reasonable and adequate basis for the recommendation.
B)
do all of these.
C)support a recommendation with appropriate research and investigation.
D)exercise independence and thoroughness.


Answer and Explanation

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

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An analyst receives a research report from a colleague. The colleagues 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 & Poors. The analyst finds 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 V(A) if she does not first verify the data in the table is accurate.
B)no particular standard because this is appropriate activity.
C)Standard II concerning the obligations to the capital markets.
D)Standard I(C) concerning the use of the work of others.


Answer and Explanation

Since the data in the table supposedly comes from Standard & Poors, 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.

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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)short selling assets that have had a good previous year to all clients.
B)
none of these choices.
C)short selling assets that have had a good previous year to clients with a low tolerance for risk.
D)an increased allocation of Treasury bills (T-bills) for all portfolios of assets that have increased dramatically in the previous year.


Answer and 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 different 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.

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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 III(C), Suitability.
B)Standard V(B), Communication with Clients and Prospective Clients.
C)
none of the Standards listed here.
D)Standard V(A), Diligence and Reasonable Basis.


Answer and 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.

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