Reading 2-III: Standards of Professional Conduct & Guida

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Q4.Carol Hull, CFA, is an investment advisor whose prospective client, Frank Peters, presents special requirements. To construct an investment policy statement for Peters, Hull inquires about Peters’ investment experience, risk and return objectives, and financial constraints. Peters states that he has a great deal of investment experience in the capital markets and does not wish to answer questions about his tolerance for risk or his other holdings. Under Standard III(C), Suitability, Hull:

A) may accept Peters’ account but may only manage his portfolio to a benchmark or index.

B) must decline to enter into an advisory relationship with Peters.

C) is permitted to manage Peters’ account without any knowledge of his risk preferences.

Q5.Karen Jackson is a portfolio manager for Super Selection. Jackson is friendly with David James, president of AMD, a rapidly growing biotech company. James has provided Jackson with recommendations in the biotech industry, which she buys for her own portfolio before buying them for her clients. For three years, Jackson has also served on AMD's board of directors. She has received options and fees as compensation.

Recently, the board of AMD decided to raise capital by voting to issue shares to the public. This was attractive to board members (including Jackson) who wanted to exercise their stock options and sell their shares to get cash. When the demand for initial public offerings (IPO) diminished, just before AMD's public offering, James asked Jackson to commit to a large purchase of the offering for her portfolios. Jackson had previously determined that AMD was a questionable investment but agreed to reconsider at James' request. Her reevaluation confirmed the stock to be overpriced, but she nevertheless decided to purchase AMD for her clients' portfolios.

Did Jackson violate Standard III(C) concerning Portfolio Recommendations and Actions?

A) Yes, she did not consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client.

B) Yes, she did not deal fairly with all clients.

C) No.

Q6.According to CFA Institute Standards of Professional Conduct, when a client asks her portfolio manager to change the current investment strategy of the client’s portfolio, the manager should:

A) examine whether the strategy is appropriate for the client and explain the implications of the new strategy before implementing the strategy.

B) explain the implications of the new strategy after the member manager implements the strategy.

C) obey the client's request without question.