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2018LevelIMockExamThemorningsessionofthe2018LevelICharteredFinancial s®MockExaminationhas120questions.Tobestsimulatetheexamdayexperience,candidatesareadvisedtoallocatea ageofoneandahalfminutesperquestionforatotalof180minutes(3hours)forthissessionoftheexam.FinancialReporting CorporatePortfolio AlternativeByaccessingthismockexam,youagreetothefollowingtermsofuse:ThismockexamisprovidedtocurrentlyregisteredCFAcandidates.Candidatesmayviewandprinttheexamfor alexamprepara-tiononly.Thefollowingactivitiesarestrictlyprohibitedandmayresultindisciplinaryand/orlegalaction:accessingorpermittingaccessbyanyoneotherthancurrently-registeredCFAcandidates;copying,postingtoanywebsite,ing,distributingand/orreprintingthemockexamforanypurpose©2017CFAInstitute.s2018LEVELIMOCKEXAM AndrewSmith,CFA,worksfranite,acommercialbankthatalsohasasizeablesellsideresearchdivision.Smithispresentingfinancingsolutionstoapotentialbusinessclient,DynamicMaterialsCorp.Aspartofhispresentation,SmithmentionsthatGranitewillinitiateresearchcoverageonDynamic.IsSmith’sarrangementmostlikelyappropriatewithregardstotheCFAStandards?No,becauseSmithcannotoffertoprovideresearchcoverageonacompanyifthey eacorporatefinanceclient.No,becauseGranitecannotprovideresearchcoverageonacorporatefinanceclientasthisconstitutesaviolationofresearchindependence.AiscorrectbecauseunderStandardI(B)membersandcandidatesmustprotecttheirAiscorrectbecauseunderStandardI(B)membersandcandidatesmustprotecttheirindependenceandobjectivity.Agreeingtoprobjectiveresearchcoverageofacompanydoesnotconstituteaviolationofthisstandardprovidedtheystwritingthereportisfreetocomeupwiththeirownindependentconclusion.SmithcanagreetoprovideresearchcoveragebutcannotcommitGranite’sresearchdepartmenttoprovidingafavorablemendation.Bisincorrectbecauseprovidingresearchcoverageinthissituationdoesnotconsti-tuteaviolationoftheCodeandStandardsaslongastheindependenceofthisresearchisnotcompromised.Cisincorrectbecauseprovidingresearchcoverageinthissituationdoesnotconsti-tuteaviolationoftheCodeandStandardsaslongastheindependenceofthisresearchisnotcompromised.GuidanceforStandardsI–VIILOSbStandardI(B)–IndependenceandDuringanon-sitecompanyvisit,MarshaWard,CFA,accidentallyoverheardtheChiefExecutiveOfficer(CEO)ofStargazer,Inc.,discussingthecompany’stenderoffertopurchaseDynamicaEnterprises,aretailerofStargazerproducts.AccordingtotheCFAInstituteStandardsofProfessionalConduct,Wardmostlikelycannotusetheinformationbecause:itrelatestoatenderitwasoverheardandmightbeconsideredshedoesnothaveareasonableandadequatebasisfortakinginvestmentAAiscorrectbecausetradingontheinformationisrestrictedasitrelatestoatenderoffer;itisclearlymaterial,nonpublicinformation[StandardII(A)].Bisincorrectbecausetheinformationcouldbeconsideredtocomefromareliablesinceitconcernsatenderoffer.CCisincorrectbecausetheinformationismaterialandisnonpublicsothatitshouldnotbeusedasthebasisfortakinginvestmentaction.Thereissimplynotenoughinformationprovidedtodetermineifthereisareasonableandadequatebasisforinvestmentaction.GuidanceforStandardsI–VIILOSaStandardII(A)–MaterialNonpublicWhichofthefollowingisnotincludedintheninemajorprovisionsoftheGlobalInvestmentPerformanceStandards(GIPS)?InputData,CalculationMethodology,andRealFundamentalsofCompliance,CompositeConstruction,andCalculationMethodology,CompositeConstruction,andAlternativeCCiscorrectbecauseAlternativeAssetsisnotamongtheninemajorprovisionsorsec-PresentationandReporting,RealEstate,PrivateEquity,andWrapFee/SeparayManagedAccount(SMA)Portfolios.AisincorrectbecausetheseareincludedintheninemajorprovisionsoftheBisincorrectbecausetheseareincludedintheninemajorprovisionsoftheGlobalInvestmentPerformanceStandards(GIPS)LOSdWhichofthefollowingleastlikelyreflectsthetwoprimaryprinciplesoftheCFAInstituteRulesofProcedureforProceedingsRelatedtoProfessionalityofPublicdisclosureofdisciplinaryFairprocesstothememberandBiscorrectbecausethetwoprinciplesoftheRulesofProcedureforProceedingsRelatedBiscorrectbecausethetwoprinciplesoftheRulesofProcedureforProceedingsRelatedtoProfessionalConductare ityofproceedingsandfairprocesstothemem-berandcandidate.AisincorrectbecausethetwoprinciplesoftheRulesofProcedureforProceedingsRelatedtoProfessionalConductare ityofproceedingsandfairprocesstothememberandcandidate.CisincorrectbecausethetwoprinciplesoftheRulesofProcedureforProceedingsRelatedtoProfessionalConductare ityofproceedingsandfairprocesstothememberandcandidate.CodeofEthicsandStandardsofProfessionalConductLOSaSectionInordertoachievecompliancewithGIPSStandards,itis mendedthatadoptthebroadest,mostmeaningfuldefinitionoftheprovideexistingclientsacompliantpresentationapplicabletotheirportfo-lio,ataminimumofabi-annualbasis.definethefirmbyincludingallgeographicalofficesoperatingunderthesamefirmname.Aiscorrect.TheFundamentalsofCompliance Aiscorrect.TheFundamentalsofCompliance mendthatfirmsshouldadoptthebroadest,mostmeaningfuldefinitionofthefirm.Bisincorrect,firmsare mendedtoprovideeachclient,onanannualbasis,acompliantpresentationofthecompositeinwhichtheclient’sportfolioisincluded.Cisincorrect,thescopeofthedefinitionshouldincludeallgeographicalofficesoperatingunderthesamebrandnameregardlessoftheactualnameoftheinvestmentmanagementLOSbWhichofthefollowingisnotacomponentoftheCFAInstituteCodeofPromotefinancialintegrityandseektopreventandpunishabusesinthefinancialmarkets.Placetheintegrityoftheinvestmentprofessionandtheinterestsofclientsabovetheirown alinterests.Practiceandencourageotherstopracticeinaprofessionalandethicalman-nerthatwillreflectcreditonthemselvesandtheponentsoftheCFACodeofEthics.BisincorrectbecauseplacingtheintegrityoftheinvestmentprofessionandtheinterestsofclientsabovetheirownalinterestsisoneofthesixcomponentsoftheCodeofEthics.CisincorrectbecausepracticingandencouragingotherstopracticeinaprofessionalandethicalmannerthatwillreflectcreditonthemselvesandtheprofessionisoneofthesixcomponentsoftheCodeofEthics.CodeofEthicsandStandardsofProfessionalConductLOSbJiroSato,CFA,deputytreasurerforMayCollege,managestheStudentScholarshipTrust.SatoissuedaRequestforProposal(RFP)fordomesticequitymanagers.Pamel ters,CFA,agoodfriendofSato,introduceshimtorepre-sentativesfromCapitalInvestments,whosubmittedaproposal.SatoselectedCapitalasamanagerbasedonthefirm’sexcellentperformancerecord.Shortlyaftertheselection,Peters,whohadoutstandingperformanceasanequityman-agerwithanotherfirm,acceptedalucrativejobwithCapital.WhichoftheCFAcharterholdersviolatedtheCFAInstituteStandardsofProfessionalConduct?BothviolatedPetersviolatedNeitherviolatedCiscorrectbecausemembersshouldusereasonablecareandjudgmenttomaintainindependenceandobjectivity[StandardI(B)].ThereisnoindicationofinappropriatebehaviorCiscorrectbecausemembersshouldusereasonablecareandjudgmenttomaintainindependenceandobjectivity[StandardI(B)].Thereisnoindicationofinappropriatebehaviorinselectionoftheequitymanagerorintheacceptanceofemploymentwiththatmanager;bothdecisionswerebasedontheexcellentperformancerecordsofthemanagerandthemember,respectively.Aisincorrectbecausethereisnoindicationofinappropriatebehaviorinselectionoftheequitymanagerorintheacceptanceofemploymentwiththatmanager;bothdecisionswerebasedontheexcellentperformancerecordsofthemanagerandthemember,respectively.BisincorrectbecausethereisnoindicationthatPetersorSatoviolatedStandardI(B)byPetersjoiningCapital.GuidanceforStandardsI–VIILOSaStandardI(B)–IndependenceandUmiGrabbo,CFA,isahighlyregardedportfoliomanagerforAtlanticAdvisors,amid-sizedmutualfundfirminvestingindomesticsecurities.Shehaswatchedthehedgefundboomandonnumerousoccasionssuggestedthatherfirmcre-atesuchafund.Seniormanagementhasrefusedtocommitresourcestohedgefunds.Attractedbypotentialhigherfeesassociatedwithhedgefunds,Grabboandseveralotheremployeesbegindevelopmentoftheirownhedgefundtoinvestininternationalsecurities.Grabboandhercolleaguesarecarefultoworkonthefunddevelopmentonlyontheirowntime.BecauseAtlanticmanagementthinkshedgefundsareafad,shedoesnotinformhersupervisoraboutthehedgefundcreation.AccordingtotheStandardsofPracticeHandbook,GrabboshouldmostlikelyaddresswhichoftheStandardsimmedia Disclosure PriorityofAdditionalCompensationAAiscorrectbecauseaccordingtoStandardVI(A)–Disclosures,GrabbodisclosetoheremployerherhedgefunddevelopmentasthisactivitycouldpossiblyinterferewithherresponsibilitiesatAtlantic.Insettingupahedgefund,Grabbowasnotactingforthebenefitofheremployer.SheshouldhaveinformedAtlanticthatshewantedtoanizethehedgefundandcometosomemutualagreementonhowthiswouldoccur.BisincorrethehedgefundwilltradeininternationalsecuritieswhileAtlantictradesindomesticsecuritiessoitisunlikelytheirinvestmentswill witheachother.Additionally,policiesandproceduresneededtoaddressStandardVI(B)–PriorityofTransactionswillberequiredinthefuture,butarenotneededatthepresenttime,asthefundisnottrading.CCisthehedgefundwilllikelyprovideGrabboadditionalinthefuture[StandardIV(B)],butcurrentlysheisnotreceivingadditionalcompensationasthefundisstillindevelopment.Thiswill,however,needtobeaddressedinthefuture.GuidanceforStandardsI–VIILOSaStandardIV(B)–AdditionalCompensationArrangements,StandardVI(A)–DisclosureofStandardVI(B)–PriorityofTransactionsReikoKimisaki,CFA,isaninvestmentadvisorforanationalsocialsecurityfundinafrontiermarketwithaverylimitedandilliquidcapitalmarket.Thelaborforceisyoungwithaninvestmenttimehorizonof25to30years.Shehasbeenaskedtosuggestwaystoincreasetheinvestmentreturnoftheoverallportfolio.Aftercarefulassessmentofthefund’spreviousinvestmenthistoryandavailableassetclasses,sheconsidersinvestmentinprivateequity.WhatisKimisaki’slow-estprioritytoavoidanyCodeofEthicsandStandardsofProfessionalConductviolationspriortomakingthisinvestment AssesstherisktoleranceoftheyzetheexpectedreturnsofprivateequityintheDetermineiftheInvestmentPolicyStatementallowsforalternativeBBiscorrectbecausepriortoundertakingysiswithregardtoexpectedreturns,anadvisormustdeterminesuitabilityofaninvestmentclassincludingwhetheritfitswithintheclient’srisktoleranceandifitislowableassetclassaspertheclient’sInvestmentPolicyStatement.OnlyoncethesefactorshavebeendeterminedshouldsheAisincorrectbecauseassessingriskofaclientisakeyroleindetermininginvestmentCisincorrectbecausebeforeintroducinganewassetclass,itmustbedeterminedifthatassetclassis lowableassetclassasdefinedbytheInvestmentPolicyStatement.GuidanceforStandardsI–VIILOScTheGlobalInvestmentPerformanceStandards(GIPS)weredevelopedforthebenefitof:prospectiveAiscorrect.TheGIPSstandardsbenefittwomaingroups:investmentmanagementfirmsAiscorrect.TheGIPSstandardsbenefittwomaingroups:investmentmanagementfirmsandprospectiveclients.GIPSpresentationsallowprospectiveclientstoknowthatthetrackBBisincorrectbecausetheGIPSstandardsbenefittwomaingroups:investmentman-agementfirmsandprospectiveclients.Whiletheymaybenefitregulatorsinsupervisingmarketinginformation,theGIPSstandardswerenotdevelopedwithregulatorsinmind.CisincorrectbecausetheGIPSstandardsbenefittwomaingroups:investmentmanagementfirmsandprospectiveclients.OnlyfirmsmanagingmoneycanclaimGIPSIntroductiontotheGlobalInvestmentPerformanceStandards(GIPS)LOSa MariamMusa,CFA,headofcomplianceatDunfieldBrokers,questionshercolleagueOmarKassim,aCFAcandidateandaresearch yst,abouthispur-chaseofsharesinacompanyforhisownaccountimmedia ybeforehepub-lishesa“buy” mendation.HedefendshisactionsbystatinghehasdonenothingwrongbecauseDunfielddoesnothaveany altradingpoliciesinplace.TheCFAInstituteCodeofEthicsandStandardsofProfessionalConductweremostlikelyviolatedby:onlyonlybothMusaandCiscorrectbecausebothMusaandKassimCiscorrectbecausebothMusaandKassimviolatedtheStandardsofProfessionalConduct.MusaviolatedStandardIV(C)–ResponsibilitiesofSupervisorsbynotensuringthatpolicieswereinplacetopreventviolationsoftheCodeandStandards(inthiscaseStandardVI(B)–PriorityofTransactions)bysomeonesubjecttohersupervision.Astheheadofcompliance,MusasupervisedKassimandmustmeethersupervisoryresponsibilitiesoutlinedintheStandardsofProfessionalConduct.KassimviolatedStandardVI(B)–PriorityofTransactionsinthathedidnotgivesufficientprioritytoDunfield’sclientsbeforetradingonhismendation.AisincorrectbecauseKassimalsoviolatedtheStandards(PriorityofTransactions)inthathedidnotgivesufficientprioritytoDunfield’sclientsbeforetradingonhisBisincorrectbecauseMusaalsoviolatedtheStandards(ResponsibilitiesofSupervisors)bynotensuringthatpolicieswereinplacetopreventviolationsoftheCodeandStandards(inthiscaseStandardVI(B)–PriorityofTransactions)bysomeonesubjecttohersupervision.GuidanceforStandardsI–VIILOSbStandardIV(C)–ResponsibilitiesofSupervisors,StandardVI(B)–PriorityofOliverOpdyke,CFA,worksforanindependentresearch anizationthatdoesnotmanageanyclientmoney.Inthecourseofhis ysisofRedRibbonMininghehearsrumorsthattheofRedRibbon,RichardLeisberg,hasrecentlybeendiagnosedwithlatestageAlzheimer’sdisease,afactnotpubliclyknown.ThefinalstageofAlzheimer’siswhenindividualslosetheabilitytorespondtotheirenvironment,theabilitytospeak,and,ultimay,theabilitytocontrolmovement.LeisbergisthecharismaticfounderofRedRibbon,andunderhisleadershipthecompanygrewto eoneofthelargestintheindustry.AccordingtotheCFAInstituteCodeofEthicsandStandardsofProfessionalConduct,themostappropriateactionforOpdykeisto:immediaypublisha mendationforRedRibbonconfirmthe’sdiagnosisbeforepublishinghisresearchencourageRedRibbonMiningmanagementtodisclosethe’smed-icalcondition.CiscorrectbecausemembersandcandidatesshouldmakereasonableeffortstoachieveCiscorrectbecausemembersandcandidatesshouldmakereasonableeffortstoachievepublicdisseminationofinformationthatismaterialandnonpublic,asrequiredbyStandardII(A)–MaterialNonpublicInformation.Thiseffortusuallyentailsencouragingtheissuercompanytomaketheinformationpublic.Inthiscase,ifthediagnosisisfactAisincorrectbecausemembersandcandidatesshouldmakereasonableeffortstoachievepublicdisseminationofinformationthatismaterialandnonpublic.Thiseffortusuallyentailsencouragingtheissuercompanytomaketheinformationpublic.Inpublishingasellmendationimmediay,theystwouldberelyinguponmaterialnonpublicinformationandbeinviolationofStandardII(A)–MaterialNonpublicBisincorrectbecausemembersandcandidatesmustnotknowinglyengageinanyconductthatmayinducecompanyinsiderstoprivaydisclosematerialnonpublicinfor-mationortotradeonsuchinformation.Theinformationaboutthe conditionismaterialandnonpublic.Bypublishingamendationbasedinpartoninformationprivaydisclosed,theystwouldberelyinguponmaterialnonpublicinformationandbeinviolationofStandardII(A)–MaterialNonpublicInformation.GuidanceforStandardsI–VIILOScStandardII(A)–MaterialNonpublicBasedonhissuperiorreturnhistory,VijayGupta,CFA,isinterviewedbytheFaithfulChurchtomanagethechurch’svoluntaryretirementplan’sequityportfolio.Eachchurchstaffmemberchooseswhethertooptinoroutoftheretirementplanaccordingtohisorherowninvestmentobjectives.Theplan lGuptathatstocksofcompaniesinvolvedinthesaleofalcohol,tobacco,gambling,orfirearmsarenotacceptableinvestmentsgiventheobjec-tivesandconstraintsoftheportfolio.Gupta lsthetrusteeshecannotreason-ablyexecutehisstrategywiththeserestrictionsandthatallhisotheraccountsholdsharesofcompaniesinvolvedinthesebusinessesbecausehebelievestheyhavethehighestalpha.Byagreeingtomanagetheaccountaccordingtothetrustees’wishes,doesGuptaviolatetheCFAInstituteStandardsofProfessionalYes,becausethemanagerwashiredbaseduponhispreviousinvestmentYes,becausetherestrictionsprovidedbytheTrusteesarenotinthebestinterestofthemembers.Aiscorrect.StandardAiscorrect.StandardII)–yt,Prudence,andCare,Gupta’sdutyofloyalty,prudence,andcareisowedtotheparticipantsandbeneficiaries(members)ofthepensionplan.Asachurchplan,therestrictionsareappropriategiventheobjectivesandconstraintsoftheportfolio.BBisincorrectbecausethisisirrelevantasthemanagerhasbeengivenaspecificmandatebythechurchtrustees.CisincorrectbecausetherestrictionsareappropriateandknowntothemembersastheyeachindividuallyoptintotheplangiventheobjectivesandconstraintsoftheGuidanceforStandardsI–VIILOSbStandardII)–oyt,Prudence,andEdoRonde,CFA,an ystforahedgefund,OneWorldInvestments,isattendingakeyindustryconferenceforthemicroelectronicsindustry.Atlunchinarestaurantadjacenttotheconferencevenue,Rondesitsnexttoatableofconferenceattendeesandisabletoreadtheirnametags.Ronderealizesthegroupincludestheofapubliclytradedcompanyinthemicroelectron-icsindustry,FuldaManufacturing,acompanyRondefollows.RondeoverhearsthecomplainaboutaproductiondelayproblemFulda’sfactoriesareexperiencing.ThementionsthatthedelaywillreduceFuldaearningsmorethan20%duringthenextyearifnotsolved.RonderelaysthisinformationtotheportfoliomanagerhereportstoatOneWorldexplainingthatinarecentresearchreporthe mendedFuldaasabuy.ThemanagerasksRondetowriteupanegativereportonFuldasothefundcansellthestock.AccordingtotheCFAInstituteCodeofEthicsandStandardsofProfessionalConductRondeshouldleastlikely:revisehisresearchleavehisresearchreportasitrequesttheportfoliomanagernotactontheAiscorrectbecauseRondeshouldrefusetofollowhissupervisor’srequest.IfRonderevisesAiscorrectbecauseRondeshouldrefusetofollowhissupervisor’srequest.IfRondereviseshisresearchreportbasedontheinformationheoverheardattheindustrycon-ferencehewouldviolateStandardII(A)–MaterialNonpublicInformation.Theproductiondelayinformationismaterialandconsiderednonpublicuntilitiswidelydistributed,soitshouldnotbeincludedinRonde’sresearchreportoractedonuntilitespublic.RondeshouldtrytoencourageFuldatomaketheinformationpublic.BisincorrectbecausetheproductiondelayinformationisconsideredmaterialandnonpublicuntilitiswidelydistributedandshouldnotbeincludedinRonde’sresearchreportoractedonuntilit espublic.CisincorrectbecausetheinformationRondeoverheardattheindustryconferenceismaterialnonpublicinformationandshouldnotbeactedonuntilitespublic.GuidanceforStandardsI–VIILOScStandardII(A)–MaterialNonpublicWhatisthetheorythatbestdescribestheprocessbywhichfinancial combinematerialpublicinformationandnonmaterialnonpublicinformationasabasisforinvestment mendationsevenifthoseconclusionswouldhavebeenmaterialinsideinformationhadtheybeencommunicateddirectlytotheystbytheMosaicEconomicProbabilityAiscorrectbecausetheprocessbywhichfinancial Aiscorrectbecausetheprocessbywhichfinancial ystscombinematerialpublic dationsevenifthoseconclusionswouldhavebeenmaterialinsideinformationhadtheybeencommunicateddirectlyto ystbythecompanyisknownasMosaicBisincorrectbecauseeconomictheoryisageneraltermusedtodescribeanumberoffinancialandeconomicrelationshipsandisnotspecifictononpublicinformationCisincorrectbecauseprobabilitytheoryisastatisticalconceptthatisnotrelatedtononpublicinformation.GuidanceforStandardsI–VIILOSaStandardII(A)–MaterialNonpublicKenKawasaki,CFA,sharesabuildingwithanumberofotherprofessionalswhoarealsoinvolvedintheinvestmentmanagementbusiness.Kawasakimakesarrangementswithseveraloftheseprofessionals,includingaccountantsandlawyers,toreferclientstoeachother.Aninformalscoreiskeptontheexpec-tationthereferralswillequaloutovertime,eliminatingtheneedforanycashpayments.Kawasakinevermentionsthisarrangementtoclientsorprospectiveclients.DoesKawasaki'sagreementwiththeotherbuildingoccupantsmostlikelyviolateanyCFAInstituteStandardsofProfessionalConduct?Yes,relatedtoreferralYes,relatedtocommunicationwithBBiscorrectbecauseStandardVI(C)requiresdisclosureofanycompensation,consider-ation,orbenefitreceivedfromorpaidtoothersforthemendationofproductsorservices.Evenwithoutcashchanginghandsthearrangementprovidesforaquidproquoreferralofclientsandshouldbedisclosed.AisincorrectbecauseKawasakihasviolatedtheCisincorrectbecausethisStandardhasnotbeenviolatedasitrelatestodisclosuretoclientsofteralprinciplesoftheinvestmentprocessusedandnotdisclosureofanycompensation,consideration,orbenefitreceivedfromorpaidtoothersforthemendationofproductsorservicesasStandardVI(C)GuidanceforStandardsI–VIILOSbStandardV(B)–CommunicationwithClientsandProspectiveClients,StandardVI(C)–ReferralMeshackBradovic,CFA,wasrecentlyhiredasacredit reditratingagencywhosemajorclientsincludepubliclylistedcompaniesonthelocalstockexchange.Oneoftheclientsiscurrentlypreparingtoissueanewbondtofinanceamajorfactoryproject. ystsarespeculatingthatwithoutthenewfactorythecompanywillnotsurvivetheonslaughtofcompetitionfromincreasingimports;therefore,thecompanyiscountingonanupgradedcreditratingtoenhancethesubscriptionleveloftheissue.Bradovic’sresearchsug-geststhatthecreditworthinessofthecompanyhasseverelydeterioratedoverthelastyearduetonegativeoperatingcashflows.Withoutconductingexten-siveresearch,Bradovic’sbossputspressureonhimtoupgradethecreditratingtoaninvestmentgraderating.Bradovicreportsthistothefirm’scompliancedepartmentwhereheisencouragedtofollowhisboss’sadvice.WhatcourseofactionismostappropriateforBradovictopreventanyviolationoftheCFAInstituteCodeorStandards?QuithispositionwiththeUpgradetheratingbutnotehisobjectionsinDisassociatewiththecreditratingreport,thebondissueandtheAAistheboss’insistencethatallcreditratingsbegivenaninvestmentratingirrespectiveoftheysisundertakenindicatesasystemicdisregardforduediligence,reasonablebasis,andtruerepresentation.ThisshowsatotaldisregardfortheStandards,inparticularStandardV(A)–DiligenceandReasonableBasis.Bradovic’sbestcourseofactionconsequentlyistoresignasthecompany’scurrentpracticeofgivingfalsecreditratingsislikelytocontinue.Bisincorrectbecausebyupgradingthecreditreporthewouldbeparticipatinginamisrepresentation,evenwithanoteofobjection.ThiswouldviolatetheCodeandCisincorrectbecausebydisassociatingwiththisparticularcreditreport,bondissue,andclienthecanremovehimselffromasituationthatwouldlikelycauseamisrepre-sentationtothetruecreditworthinessofthebondissue.However,duetothesystemicnatureoftheviolationsashisbossalwaysinsistsonaninvestmentgraderating,itisevidentthatthecompanydoesnotintendtoactinanethicalmanner.Asthepracticeofgivingfalsecreditratingsislikelytocontinue,theystshouldquitthecompany.GuidanceforStandardsI–VIILOScStandardV(A)–DiligenceandReasonableManuelTacqueria,CFA,isasoleproprietorinvestmentadvisermanagingaccountsforadiversifiedgroupofclients.TacqueriaobtainshisinvestmentresearchthroughasubscriptionservicewithAlphaServices,alargefinancial anization.Tacquerianotesthattheresearchreportsaresoundbecausetheyareextremelydetailedandcomprehensive.Asaresult,Tacqueriafeelscomfortablerelyingsolelyuponthisresearchwhenmaking tionstoclients.TacqueriashouldmostlikelydowhichofthefollowinginordertoconformtotheCFAInstituteCodeofEthicsandStandardsofProfessionalUtilizeadditionalsourcesofthird-partyUndertakeandaddhisownresearchtotheexistingConductadditionalduediligenceonAlphaCiscorrectbecauseTacqueriaisinviolationofStandardV(A)–DiligenceandReasonableCiscorrectbecauseTacqueriaisinviolationofStandardV(A)–DiligenceandReasonableBasisasheisrequiredtoundertakeduediligenceeffortsonthethird-partyresearchhisnecessarystandards.AAisincorrectbecausetheCodeandStandardswouldnotrequirethisaction.TacqueriaisinviolationofStandardV(A)–DiligenceandReasonableBasisasheisrequiredtoundertakeduediligenceeffortsonthethird-partyresearchprovideronaregularbasistoensurethatthequalityofthisresearchcontinuestomeethisnecessarystandards.BisincorrectbecausetheCodeandStandardswouldnotrequirethisaction.TacqueriaisinviolationofStandardV(A)–DiligenceandReasonableBasisasheisrequiredtoundertakeduediligenceeffortsonthethird-partyresearchprovideronaregularbasistoensurethatthequalityofthisresearchcontinuestomeethisnecessarystandards.GuidanceforStandardsI–VIILOSbStandardV(A)–DiligenceandReasonableAfinancialcontractofferstopay€1,200permonthforfiveyearswiththepaymentmadeimmediay.Assuminganannualdiscountrateof6.5%,com-poundedmonthlythepresentvalueofthecontractisclosestto:ABCCCiscorrect.Usingafinancialcalculator:N=60;thediscountrate(I/Y)=6.%)=0.54166667;PMT=€1,200;Futurevalue=€0;Mode=Begin;Calculatepresentvalue(PV):PV=€61,662.62.Alternatively:Treatthestreamasanordinaryannuityof59periodsandaddthecurrentvalueof€1,200tothederivedanswer.Usingafinancialcalculator:N=59;thediscountrate(I/Y)=6.%)=0.54166667;PMT=€1,200;Futurevalue=€0;Mode=End;CalculatePV:PV=€60,462.62;TotalPV=€1,200+€60,462.62=€61,662.62.Aisincorrect.ThisisthePVofanannuitydueof5periods,.%interest,andpaymentsof14,400(1,200×12):N=5;thediscountrate(I/Y)=6.5;PMT=14,400;FV=0;Mode=Begin;CalculatePV=63,731.49.Bisincorrect.ThisisthePVofa60-monthordinaryannuity.N=60,thediscountrate(I/Y)=6.5/12;PMT=1,200,FV=0.Mode=End;CalculatePV:PV=61,330.41.TheTimeValueofMoneyLOSd,eSectionThefollowingtableshowsthediscreteuniformprobabilitydistributionofgrossprofitsfromthepurchaseofanoption:CumulativeDistributionTheprobabilityofaprofitgreaterthanorequalto$1andlessthanorequal$4isclosestABCCCiscorrect.Theproblemdealswiththediscreteuniformdistribution.Thismeansthatthe esareallequallylikely:P(x)=1/5=0.2.TherearetwowaystofindP(1≤X≤Thesumoffourprobabilitiesiscalculated:P(1),P(2),P(3)