Another great Schweser question. all, his, companies, question, industry

cyber21

Using as his universe all companies in the steel industry, Reynold Anderson analyses the performance of stock prices for the industry. He succeeds in developing a regression model with excellent statistical control measures. The extrapolation from the model shows low risk variance of the securities in this industry. Without the inclusion of nonsteel stocks in the portfolio, Anderson concludes that, based on these results, every portfolio can use the steel industry securities to diversify and lower its risk. He persuades his clients to change their current portfolios. Anderson states that, as the model’s results show, some particular industries, such as car manufacturers, have underpriced stocks, and investors should take advantage of it. Anderson has violated the Standards because he:
A)
does not consider the suitability of the investment.
B)
is not clear enough about the model results.
C)
does not distinguish the opinion, based on his model, from the fact.
Your answer: A was incorrect. The correct answer was C) does not distinguish the opinion, based on his model, from the fact.
While any of the answers can be shown to violate CFA Institute Standards, this cannot be determined conclusively from the information given. However, the scenario clearly indicates that Anderson does not distinguish between opinion and fact in communicating to his clients. Therefore, he violates the Standards on this basis.
A is B but B is not C but A is C?

YouCanDoIt

It should be A and C, and anyhow his conclusion is factually wrong, because it depends on the Covariance of the Steel Assets with the portfolio assets, regardless of how low the variance of the steel assets is within their own industry.

homie

Boy, that’s some ethics question! I would have picked option A for sure.
This is why I continue to read that section on a daily basis!

edgeon

C. uses words such as “every portfolio” but the model is against “nonsteel” inclusive portfolios. Therefore, he must say that it is his opinion that “every portfolio will diversify risks”… but that was not the case here.

JRossSter

paraguay…take a rest!!!
go for a 45 mins run as i am about to do…
keep mind sane…

islandgyrl

A is B but B is not C but A is C?
????
u what?