MCQ Quiz

Question 1 of 21

Smith manages two funds: a mature fund entering its harvesting period and a new fund in its investment period. To improve the reported performance of the new fund and attract investors, Smith's supervisor directs her to reallocate expenses from the new fund to the mature fund. This reallocation does not affect the firm's consolidated results. Smith complies. Smith's action is most likely:

The firm's overall consolidated performance remains accurate.
The reallocation is disclosed in the footnotes of the annual report.
It misrepresents the specific performance of the individual funds.

Question 2 of 21

A consultant hires an external subadviser after reviewing only its five-year return record and GIPS compliance. The consultant does not review personnel, process, controls, or whether the stated style actually drove the returns. Under Standard V(A) Diligence and Reasonable Basis, the weakest step is most likely:

The consultant's use of GIPS as one input in the review.
The consultant's assumption that performance and GIPS compliance alone create a reasonable basis for selection.
The consultant's preference for a manager with an established track record over a newer firm.

Question 3 of 21

A quantitative manager uses a proprietary risk model she did not build. She understands the model's assumptions, stress-tests it periodically, and knows the market environments in which it performs poorly. A client later loses money during one of those difficult environments. Which statement best matches Standard V(A) Diligence and Reasonable Basis?

The loss itself shows the model never had a reasonable basis.
A model can satisfy V(A) even if it later underperforms, provided the manager understood and monitored its limitations.
Quantitative methods satisfy V(A) only if they are designed personally by the recommending manager.

Question 4 of 21

Stefansson recommends a complex performance attribution system solely because the sales presentation was impressive. She does not review the other four candidates or test if the calculation methodology aligns with her firm's specific investment strategy. Has Stefansson violated Standard V(A) Diligence and Reasonable Basis?

She lacked a reasonable basis for the recommendation and failed to investigate alternatives.
Software selection is an operational decision, not an investment recommendation.
Relying on vendor representations is standard industry practice.

Question 5 of 21

Cannon, a quant analyst, reads a blog post about a new market factor. Under pressure to improve performance, he immediately incorporates this factor into the firm's live trading models without testing it on the firm's specific data or history. Has Cannon violated Standard V(A) Diligence and Reasonable Basis?

The blog was written by a reputable CFA charterholder.
He failed to establish a reasonable basis for the new factor through his own testing.
Continuous improvement of models is required by the Competence standard.

Question 6 of 21

Young, a portfolio manager, presents performance data for his firm's managed portfolios in marketing materials. He displays gross-of-fee returns with a footnote disclosing that advisory fees must be deducted to obtain actual performance. He also compares these returns (which include reinvested dividends) against the price appreciation of the S&P 500 Index. Regarding his presentation of performance, Young most likely:

S by presenting gross-of-fee returns, as net-of-fee returns are mandatory for all retail communications.
S by using a benchmark that is not comparable to the portfolio's return methodology.
Did not violate the Standards because he included a footnote regarding fees and the S&P 500 is a widely recognized standard.

Question 7 of 21

Thompson runs a stress test on mortgage securities. He insists on including a 'negative housing price' scenario, even though historical data shows prices have never fallen. His manager argues it's too dire. Thompson runs the test, finds high risk, and recommends against purchase. Has Thompson acted appropriately?

He based his analysis on a scenario that contradicts all available historical data.
Diligence requires testing assumptions outside of historical norms (stress testing).
His model inputs were subjective and not grounded in empirical evidence.

Question 8 of 21

Hawke, a corporate finance manager, rushes to price several IPOs to beat a tax loophole deadline. Lacking resources to research each company fully, she prices them based solely on their relative size compared to peers, intending to justify the valuation later. Has Hawke violated Standard V(A) Diligence and Reasonable Basis?

The time constraint was an external factor beyond her control.
Relative valuation is a widely accepted industry standard for pricing new issues.
She failed to exercise diligence and thoroughness in analyzing the specific investments.

Question 9 of 21

An analyst receives information from company management that supports her investment thesis. She does not seek contrary information because she believes too much skepticism would slow coverage and reduce access. Under Standard V(A) Diligence and Reasonable Basis, the stronger concern is that she most likely:

Placed too much weight on management access and failed to investigate information that could challenge her conclusion.
Used issuer information rather than only third-party sources.
Spent too little time building a valuation model with more than one output scenario.

Question 10 of 21

Mastakis, a junior analyst, writes a report predicting stable interest rates. The firm's investment committee reviews it and, based on their collective expertise, revises the conclusion to predict rising rates. Mastakis disagrees with the change but acknowledges the committee's view has a reasonable basis. Must she dissociate from the report?

An analyst must never sign a report that contradicts their personal opinion.
The committee's intervention compromises her independence and objectivity.
The group consensus has a reasonable basis, even if she disagrees with the conclusion.

Question 11 of 21

Jergens manages a registered collective investment scheme (CIS) established in 2017. In marketing materials, he presents a continuous performance history from 2010 to 2018. The data from 2010–2016 is accurate but was generated by a composite of separate accounts managed with a similar strategy before the CIS was formed. Jergens does not disclose that the 2010–2016 data represents a different legal entity. Jergens has most likely:

S by failing to disclose the change in entity status for the historical period.
S because performance records from separate accounts can never be linked to a pooled fund.
With the Standards because the investment strategy remained consistent across the entire period.

Question 12 of 21

A research director adopts a third-party analyst's buy report because the analyst has a strong reputation. She never reviews the assumptions, data quality, or time horizon behind the report before distributing it to clients. Which conclusion is most accurate?

Reliance on outside research still requires some investigation of the report's methodology and basis before it is used.
A respected source may be relied on without review so long as the recommendation is not changed.
Due diligence is unnecessary when the outside report comes from a regulated broker-dealer.

Question 13 of 21

A strategist tells clients that a recommendation was based on a macro model. In fact, the model signaled only a weak preference, and the strategist added a strong conviction call mainly because the trading desk wanted more client activity. What best describes the ethical problem?

The recommendation lacked a true analytical basis matching the strength of the conviction presented to clients.
The model should have been ignored entirely once it gave a weak signal.
The recommendation is acceptable because trading-related considerations are part of normal market color.

Question 14 of 21

A senior analyst asks a junior associate to update a report. The associate changes a key forecast assumption but does not document why. The senior analyst distributes the revised recommendation without reviewing the changed assumption. Which conclusion is most accurate?

The senior analyst may rely on the associate's work product without further review because the report was an internal update.
The report remains supported because a documented reason is unnecessary when the recommendation itself is unchanged.
A member distributing a recommendation must understand and be able to support material analytical changes in the underlying work.

Question 15 of 21

Ostrowski searches for a subadviser to handle international investments. He receives seven proposals but feels unqualified to judge their investment merit. He selects the firm with the lowest fees to minimize impact on his firm's bottom line. Has Ostrowski violated Standard V(A) Diligence and Reasonable Basis?

Minimizing costs is a fiduciary duty to the client.
He failed to investigate the qualifications and strategy of the subadviser.
He used a standardized Request for Proposal (RFP) process.

Question 16 of 21

A manager recommends a thinly traded security after reviewing only stale research from eighteen months ago because no newer coverage is available. She does not revisit the issuer's capital structure, industry conditions, or management changes. Under Standard V(A) Diligence and Reasonable Basis, the most accurate conclusion is:

The recommendation can still be supported because the absence of current coverage makes older research the best available evidence.
The recommendation is acceptable if the manager discloses that the analysis relied on historical material.
The age of the available research increases the need for fresh diligence rather than reducing it.

Question 17 of 21

Smithson, CEO of an investment firm, hires an accounting firm to audit its financial records. To maximize efficiency, he also hires the same accounting firm to provide consulting services on GIPS compliance and to verify the firm's GIPS performance history. The fees for the consulting work are five times higher than the audit fees. Smithson's engagement of the accounting firm for GIPS verification is most likely:

Appropriate because the accounting firm's deep knowledge of the business enhances the quality of the GIPS verification.
Inappropriate because the lucrative consulting fees compromise the independence required for a valid third-party verification.
Appropriate provided Smithson discloses the dual relationship to all prospective clients.

Question 18 of 21

Liakos rushes to create a volatility strategy for a client. She outsources components to trusted third parties. Each component is validated individually, but Liakos never tests how they interact as a whole system. The strategy collapses when the components work at cross-purposes during market stress. Has Liakos violated Standard V(A) Diligence and Reasonable Basis?

She failed to understand and test the interaction of the model's components.
She exercised due diligence by validating each individual component.
She relied on trusted third parties which is permitted under the Standards.

Question 19 of 21

Chandler selects five US equity managers for a pension client based on a rigorous database screen. Before delivering the report, she learns that one manager's entire investment team has quit. She delivers the original report without the update, reasoning the database was accurate at the time of screening. Has Chandler violated Standard V(A) Diligence and Reasonable Basis?

The client can be informed of the team departure during the next quarterly review.
Her recommendation was based on a thorough and objective process at the time of analysis.
She failed to exercise diligence by ignoring material new information known before delivery.

Question 20 of 21

A platform lender calculates Annualized Net Returns (ANR) for investors using a legacy computer code. An update to the code inadvertently excludes the worst-performing loans from the calculation, artificially inflating reported returns. The firm's compliance officer reviews policies but lacks the technical expertise to audit the code and relies on high-level summaries that fail to detect the error. When investors complain, customer service reps rely on the flawed system to confirm the numbers. The compliance officer has most likely:

S by failing to ensure the accuracy of the performance calculation system.
With the Standards as the error was technical and unintentional.
With the Standards because she is not expected to have technical coding expertise.

Question 21 of 21

A manager attends a brief issuer roadshow, skims the slide deck, and recommends the stock the same day because several well-known funds also appear interested. Which fact most directly weakens the reasonable-basis claim?

The issuer's management did not guarantee access after the offering.
Peer interest was considered before the manager built a discounted cash flow model.
The recommendation rested more on market enthusiasm than on the manager's own sufficiently diligent analysis.

Standard V(A) - Diligence and Reasonable Basis

First Principles Thinking: Integrity of Performance Data

First Principles Thinking: manager selection needs process-level diligence

First Principles Thinking: a failed outcome does not prove a failed process

First Principles Thinking: Tools are Investment Decisions

First Principles Thinking: Verification of Inputs

First Principles Thinking: Fair, Accurate, and Complete Presentation

First Principles Thinking: The Inductive Fallacy

First Principles Thinking: The Foundation of Advice

First Principles Thinking: diligence includes looking for disconfirming evidence

First Principles Thinking: Consensus vs. Coercion

First Principles Thinking: Transparency in Performance History

First Principles Thinking: reliance does not eliminate responsibility

First Principles Thinking: conviction must track support

First Principles Thinking: you own the recommendation you release

First Principles Thinking: Delegation is Not Abdication

First Principles Thinking: scarce information raises the diligence burden

First Principles Thinking: Independence and Objectivity

First Principles Thinking: Systemic Validity

First Principles Thinking: Currency of Information

First Principles Thinking: Reasonable Basis and Supervision

First Principles Thinking: crowd conviction is not analytical support