clearlycanadian

Janet Coleman, a CFA Institute member, is an analyst at a regional brokerage firm. She is preparing a research report on Standard Power and Light. Due to deregulation, utility companies face increased competition. During the past year, three of the five 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 Standard's chief executive officer, Coleman learned that Standard expects to have a record amount of capital expenditures during the next year. Although Standard 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 Standard will be under pressure to cut its dividends within the next year to remain competitive. Coleman issues a research report in which she states:
"We expect Standard Power and Light will experience an initial decrease of $3 a share in its stock price when it cuts its dividend from $2 to $1 a share by the second quarter. We expect that Standard will strengthen its competitive position by using more internally generated funds to finance its investment opportunities. If investors buy the stock now at around $50 a share, their total return should be at least 20% on the stock."
Based on CFA Institute Standards of Professional Conduct, which of the following statements about Coleman's actions is CORRECT?

A) Coleman violated the Standards because she used material inside information.

B) Coleman violated the Standards because she failed to separate opinion from fact in her research report.

C) Coleman did not violate the Standards.

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Coleman's statement that Standard will cut its dividend from $2 to $1 a share is an opinion, not a fact. She should distinguish between facts and opinions in research reports.

andytrader

An analyst finds 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 fixed-income instruments and emphasizes the observed lack of correlation. He feels the stock would be of little value to investors whose portfolios are comprised primarily of equities. The clients with allocations of fixed 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) violated the Standard concerning fair dealings with all clients.

B) not violated the Standard.

C) violated the article in the Standard concerning facts and opinions.

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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.

andytrader

An analyst belongs to a nationally recognized charitable organization, which requires dues for membership. The analyst has worked out a deal that he provides money management advice in lieu of paying dues. For this arrangement to comply with the standards, the analyst needs consent from:

A) his supervisor in the organization only.

B) his supervisor in his regular place of work only.

C) both his supervisor in the organization and his regular place of work.

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An employee/employer relationship does not necessarily mean monetary compensation for services. If the analyst is performing services for the organization, then the analyst must treat the position as if he were an employee and obtain consent from both his supervisor in the organization and in his regular place of work.

andytrader

Bertrand Greene, CFA, is preparing a report on Blanding, Inc. Blanding's earnings have increased in each of the last six years by an average of 11.8%. Based on his analysis, Greene projects that Blanding's earnings will increase by 12.5% in each of the next two years. Greene will violate the Code and Standards if he states:

A) "Blanding's earnings will grow at 12.5% annually in each of the next two years."

B) "Blanding's earnings have been compounding at approximately 11.8% annually."

C) "I expect Blanding's earnings growth to increase to 12.5% annually in the next two years."

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Standard V(B) Communication with Clients and Prospective Clients requires members to distinguish between fact and opinion. "Blanding's earnings will grow at 12.5% annually in each of the next two years" states an uncertain future outcome as a fact and thus violates this Standard. Preceding the statement with "I expect..." identifies the forecast properly as an opinion.

andytrader

Standard V(B), Communication with Clients and Prospective Clients, least likely requires members to:

A) use reasonable judgment regarding the inclusion or exclusion of relevant factors in research reports.

B) make clear buy or sell recommendations on the securities covered in research reports.

C) disclose the general principles of investment processes used to analyze and select securities, and construct portfolios.

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There is no obligation to make buy or sell recommendations on securities that are covered by research reports.

andytrader

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 firm has no guidelines for testing new models. Tigra should most likely:

A) encourage her firm to develop detailed, written guidance that establishes minimum levels of testing for all computer-based models as required by Standard III(C) "Suitability."

B) encourage her firm 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."

C) report Bulow to the firm’s compliance department for violation of Standard V(A) "Diligence and Reasonable Basis."

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Tigra should encourage her firm 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 firm does not have rules discouraging this behavior.

andytrader

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) Smith reads a favorable review of the security in a widely read periodical.

B) For either of the reasons listed here.

C) Advisors' research department recommends a stock.

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Smith will be in violation if he acts solely on the basis of what he read in the periodical. Use of information within the firm can be relied upon unless the Smith has reason to believe the source lacks a sound basis.

andytrader

Several years ago, Hilton and Ross, a full service investment firm, managed the initial public offering of eCom, Inc. Now, eCom wants Hilton and Ross to underwrite its secondary public offering. 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 financial 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) Both Standard I(B) Independence and Objectivity and Standard V(A) Diligence and Reasonable Basis.

C) Standard I(B) Independence and Objectivity, only.

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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 influenced by senior management at Hilton and Ross.

andytrader

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) neither of these choices.

B) short selling assets that have had a good previous year to all clients.

C) an increased allocation of Treasury bills (T-bills) for all portfolios of assets that have increased dramatically in the previous year.

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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.

andytrader

An analyst writes a report and includes the forecasts of an econometric model developed by the firm’s research department. The analyst identifies 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) violated the Standard by including quantitative details in a report.

B) violated the Standard by not testing the model himself.

C) complied with the Standard.

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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 firm is not explicitly required.