## CFA I: QUANTITATIVE METHODS

What is the difference between the inflation premium and the inflation rate?

Which of the following sentences better represent the difference between the inflation rate and the inflation premium?

• a) The inflation premium is an extra return that compensates investors for expected inflation.
• b) The inflation premium is monitored by central banks and it impacts the real value of money over time.
• c) The inflation rate represents the additional return that investors demand to compensate for the loss of purchasing power due to inflation.

What is the difference between an ordinary annuity and an annuity due?

How can we calculate the value of an annuity due taking the value of an ordinary annuity, if both annuities have the same number of years, and the same value year after year?

• a) We need to divide the value of the ordinary annuity by the gross rate of return.
• b) We need to add the gross rate of return to the value of the ordinary annuity.
• c) We need to multiply the value of the ordinary annuity by the gross rate of return.

In statistics, within the measures of central tendency we can find the median, the mode, and the mean, and inside this last measure, we can differentiate between arithmetic, geometric, weighted, and harmonic mean. Mark the correct sentence regarding the main advantages of the arithmetic mean?

• a) Given a population or a sample, both the sample mean and the population mean are unique, as it happens with the population or the sample mode.
• b) It uses all the information about the size and magnitude of observations.
• c) It is less sensitive to outliers than other measures of central location, such as the median or the mean.

How are expected values and variances calculated in ex-ante scenarios?

Suppose that you have estimated the probability distribution of a hedge fund for next year considering three different scenarios. There is a 40% probability of generating a 30% return (optimistic scenario), a 25% probability of generating a 5% return (flat scenario), and a pessimistic scenario with a negative return of 10%. Calculate with these inputs, the expected value and the standard deviation of this hedge fund?

• a) 9.75% and 17.5%.
• b) 7.75% and 14.75%.
• c) 10.75% and 21.75%.

What are the main limitations of Pearson correlation analysis?

The Pearson correlation coefficient is a number between -1 and +1 that measures the consistency or tendency for two investments to act in a similar way. It is used to determine the effect on portfolio risk when two assets are combined. Which of the following sentences better represents the limitations of the correlation analysis implemented through the Pearson correlation coefficient?

• a) It is unreliable if outliers are present, it does not measure inverse relationships, and the existence of correlation does not imply causation.
• b) It does not measure linear relationships, it is subject to spurious correlation, and it can be calculated only with data expressed in return terms.
• c) It does not measure nonlinear relationships, it is unreliable if outliers are present, and the existence of correlation does not imply causation.

Why is the lognormal distribution so relevant in applied finance?

The lognormal distribution is extensively used in applied finance. Which of the following sentences is more appropriate in relation to this well-known distribution?

• a) It is useful for simulating financial asset returns because it has no negative values, and positive skewness.
• b) It is useful for representing the returns of underlying assets in some option pricing models (e.g., BSM).
• c) It is completely described by two parameters: mean and variance of the associated normal distribution.

## CFA I: ECONOMICS

How can we determine if a firm is facing a perfectly competitive environment or an imperfectly competitive environment?

Under profit-maximizing conditions, firms can be classified as operating in either a perfectly competitive or an imperfectly competitive environment. Which of the following sentences help us to differentiate between both environments?

• a) In a perfectly competitive environment, firms face a perfectly inelastic, vertical demand curve, so the firm’s MR (Marginal Revenue) and the price of its product are identical.
• b) In a perfectly competitive environment, firms face a perfectly elastic, horizontal demand curve, so the firm’s MR (Marginal Revenue) and the price of its product are identical.
• c) In a perfectly competitive environment, firms face a negative-slope demand curve, so the firm’s MR (Marginal Revenue), is less than the price of its product.

How to differentiate between factors that affect short-term and long-term growth, and factors that affect only the short-term growth?

When analyzing and understanding business cycles, we distinguish between factors affecting the short-term growth, and factors affecting both the short-term and the long-term growth. Which one of the following factors affect both the short-term and the long-term growth?

• a) Political Developments.
• b) Changes in Technology.
• c) Fiscal and Monetary Policy.

How to differentiate between fiscal policy and monetary policy?

Which of the following sentences better reflects the difference between monetary and fiscal policy?

• a) Fiscal policy is related changes in government spending and target interest rates with an objective of affecting the level of aggregate expenditures.
• b) Fiscal policy is related changes in government spending and taxes with an objective of affecting the level of aggregate expenditures.
• c) Fiscal policy is related changes in taxes and target interest rates with an objective of affecting the level of aggregate expenditures.

What are the main roles of central banks?

According to the CFA Institute, we can determine seven roles accomplished by Central Banks all over the world. Which of this roles is specifically associated to helping to prevent bank runs?

• a) Monopoly supplier of the currency.
• b) Banker to the government and other banks.
• c) Lender of last resort.

How is the term “Geopolitics” defined according to the CFA Institute?

In the CFA level I curriculum, there is a reading dealing with Geopolitics. Which of the following sentences better defines this important concept?

• a) It is the study of how international relations and politics affect geography.
• b) It is the study of how geography affects politics and international relations.
• c) It is the study of how geography and politics affect economics.

What are the main restrictions to trade that can be imposed by governments?

There is a great variety of trade restrictions that governments can impose private corporations. Which of the following trade restrictions is based on stipulation that some percentage of the value added or components used in production should be of domestic origin?

• a) Domestic Content Provisions.
• b) Voluntary Export Restraints (VERs).
• c) Export Subsidies.

## CFA I: FINANCIAL STATEMENT ANALYSIS

What are the six main phases of a financial analysis, according to the CFA Institute?

Analysts work in a variety of positions within the investment management industry, and the CFA Institute establishes six phases in the process of financial analysis. Which one of these phases is responsible for creating adjusted financial statements, common-size statements, ratios and graphs?

• a) Collect input data.
• b) Process data.
• c) Analyze/interpret the processed data.

What is the difference between the input method and the output method in revenue recognition?

When a firm sells products or services that will be delivered over a long period of time, (e.g., two years), and the firm knows the amount of money it will collect at the end of the transaction, the revenue can be recognized in each period according to two potential methods. Which of the following sentences represents the difference between the output and the input method?

• a) In the Input method, revenue is recognized based on the proportion of total costs that has been incurred in the period. On the other side, in the Output method, revenue is recognized according to units produced or milestones achieved.
• b) In the Input method, revenue is recognized based on the proportion of total sales that has been generated in the period. On the other side, in the Output method, revenue is recognized according to total costs incurred through the period.
• c) In the Input method, revenue is recognized based on the units produced in the supply chain through the period. On the other side, in the Output method, revenue is recognized according to the proportion of sales to cash flows generated in the period.

How should we report intangible assets?

Intangible assets are those lacking physical form, such as patents and trademarks. Regarding the reporting of intangible assets in the balance sheet, we need to remember some relevant rules. Which of the following sentences is correct?

• a) Intangible assets must be reported as separated identifiable assets, and we can use either the cost model or the revaluation model for reporting according to US GAAP.
• b) Intangible assets cannot be reported as separated identifiable assets, and we can use either the cost model or the revaluation model for reporting according to US GAAP.
• c) Intangible assets can be reported as separated identifiable assets, and we can use either the cost model or the revaluation model for reporting according to IFRS.

What are the main linkages between financial statements?

When financial analysts review the different financial statements reported by companies. It is crucial to understand how these financial statements are linked. Mark the correct sentence in relation to these linkages.

• a) The income statement, the cash flow statement, and the shareholder’s equity statement can be considered as “flow” statements, while the balance is considered as a “stock” statement.
• b) The balance sheet and the shareholder’s equity statement are elaborated according to the cash principle, while the income statement and the cash flow statement are elaborated according to the accrual principle.
• c) The income statement, the cash flow statement, and the shareholder’s equity statement can be considered as “stock” statements, while the balance is considered as a “flow” statement.

How are sources and uses of cash for mature and for new companies?

Evaluation of the cash flow statement should involve an overall assessment of the sources and uses of cash between the three main categories (operating, investing, and financing activities) as well as an assessment of the main drivers of cash flow within each category. Mark the correct sentence regarding where the major sources and uses of cash flow are between the mentioned three categories.

• a) For mature companies, financing activities should be the primary source of cash. For new companies, investing cash flows may be negative for some period.
• b) For mature companies, investing activities should be the primary source of cash. For new companies, financing cash flows may be negative for some period.
• c) For mature companies, operating activities should be the primary source of cash. For new companies, operating cash flows may be negative for some period.

Which accounting method is less likely to suffer from an inventory write-down?

An inventory write-down or an inventory impairment is defined as an accounting term that recognizes when your inventory’s market value falls below the book value, but it still considered sellable. Under an scenario of inventory increasing costs, which of the following inventory accounting methods is less likely to suffer an inventory write-down?

• a) FIFO.
• b) LIFO.
• c) WAC.

## CFA I: CORPORATE ISSUERS

What is the difference between Public Equity and Private Equity?

For-profit corporations can be public or private. Which of the following sentences better explain the difference between private equity and public equity?

• a) Public equity belongs to companies that are listed on an Exchange.
• b) Public equity belongs to companies with a relatively high number of shareholders (usually more than 50).
• c) Public equity in some countries is related to stock exchange listing, while in others is related to the number of shareholders.

What are the main differences between debt and equity financing used by corporations?

When comparing debt financing to equity financing used by corporations, there are some key differences. Which of the following sentences represents differential characteristics of debt financing?

• a) Legal repayment option, discretionary payments, and finite term commitments.
• b) Residual asset claim, tax-deductible expenses, and finite term commitments.
• c) Tax-deductible expenses, legal repayment option, and finite term commitments.

What is the difference between contract and agency relationships in corporate finance?

When analyzing the relationships between the different stakeholders in corporations, such as governments, customers, shareholders, bondholders, suppliers, managers, board of directors, and employees, we can find different types of relations, such as contractual or agency (principal-agent) relationships. Which of the following can be considered as an agency relationship?

• a) Managers vs. employees.
• b) Shareholders vs. board of directors.
• c) Suppliers vs. corporation.

What is the main difference between the operating cycle and the net operating cycle?

When dealing with relevant periods in each company, such as the reception of inventory from suppliers, the reception of cash from clients or the payment of cash to suppliers, we define two relevant periods expressed in days, the operating cycle and the net operating cycle, what is the main difference between both cycles.

• a) The net operating cycle subtracts the number of days of inventory (DOH).
• b) The net operating cycle subtracts the number of days of payables (DPO).
• c) The net operating cycle subtracts the number of days of receivables (DSO).

What are the main types of capital investments in Corporate Finance?

In the Corporate Issuers (Corporate Finance) area, we define capital investments as those with a life longer than one year, so they are included in the long-term portion of balance sheets. Which of the following types of capital investments is associated to machine replacement and infrastructure improvement?

• a) Going Concern Projects.
• b) Regulatory / Compliance Projects.
• c) Expansion Projects.

How do we compute the cost of capital of companies using weighted averages?

In order to determine the cost of capital of corporations, we take the different components of capital and calculate a weighted average known as WACC (Weighted Average Cost of Capital). Which of the following sentences is correct regarding the calculation of WACC?

• a) It is a marginal cost.
• b) The marginal cost of ordinary equity is the only component that is not adjusted by taxes.
• c) The main components of cost of capital are debt, equity, and accounts payable.

## CFA I: EQUITY INVESTMENTS

What are the main functions of financial systems?

Financial systems help people to achieve their goals. This can be illustrated through the functions of financial systems. Which one of the following lists represents the main functions of financial systems?

• a) Saving, borrowing, raising capital, and managing risks.
• b) Saving, borrowing, managing portfolios, and inflation reduction.
• c) Raising capital, borrowing, managing investments, and economic growth.

What is the first world’s security market index?

Nowadays, security market index are extensively used by investors around the world, and there is huge variety of indices. Which of the following sentences represents the first world’s security market index?

• a) DJRA (1884).
• b) DJIA (1878).
• c) DJCA (1891).

What is the relationship between informationally efficient markets and active vs. passive investments?

According to the EMH (Efficient Market Hypothesis) proposed by Nobel Prize winner Eugene Fama, informationally efficient markets are those in which asset prices reflect new information quickly and rationally. Mark the correct sentence in terms of active vs. passive investments, and efficient vs. inefficient markets.

• a) If we suppose market are efficient, prices should react only to unexpected or surprise events, and passive investments are preferred to active investments because of lower costs.
• b) If we suppose market are efficient, prices should react only to unexpected or surprise events, and active investments are preferred to passive investments as they can outperform on a risk-adjusted basis.
• c) If markets are either efficient or inefficient, passive investment is always preferred to active investment, because they can outperform on a risk-adjusted basis.

What are the different voting processes we can find in equity securities?

A key difference between debt and equity securities is the voting rights that are implicit in equities. Which of the following represents a voting process in which each share represents one vote?

• a) Proxy voting.
• b) Statutory voting.
• c) Cumulative voting.

What are the main elements in a Company Research Report?

When financial analysts elaborate Company Research Reports there are three main elements, which one of these elements is related to the determination of the business model, the analysis of revenue and revenue drivers, the analysis of operating profitability and working capital, and the analysis of capital investments and capital structure?

• a) Company Analysis: Forecasting.
• b) Industry and Competitive Analysis.
• c) Company Analysis: Past and Present.

What is the meaning of the acronym PESTLE?

When referring to the different steps in the industry and competitive analysis, after defining the industry, do some industry surveys, and analyze the industry structure, we focus on external influences, such as the competitive analysis or the “PESTLE” influences on the industry. The acronym PESTLE stands for:

• a) Political, Economic, Social, Technological, Legal and Environmental.
• b) Political, Environmental, Social, Technological, Legal and Emissions.
• c) Public, Economic, Sustainable, Technical, Legal and Environmental.

## CFA I: FIXED INCOME

What is the difference between money markets and capital markets?

When dealing with fixed-income securities, we can classify them as money market or capital market securities. Mark the correct sentence regarding this classification.

• a) Treasury bills, commercial paper, consols, and certificates of deposits are classified as money market instruments.
• b) The difference between money markets and capital markets depends on maturity as of today.
• c) The difference between money markets and capital markets depends on maturity at issuance.

What are the principal repayment structures in fixed-income securities?

When dealing with the main repayment structures of fixed-income securities, we can find different methods for amortization. Mark the correct sentence regarding repayment structures of bonds.

• a) Bullet bonds are based on the French Amortization Method, and in this type of repayment structure, annuities are made up of interest only.
• b) Fully amortized bonds are based on the American Amortization Method, and in this type of repayment structure, annuities are made up of interest and principal.
• c) Partially amortized bonds are based on the French Amortization Method, and in this type of repayment structure, the bond includes a balloon payment.

What is the meaning of “fallen angels” in terms credit quality in fixed-income securities?

Which of the following sentences better explains the concept of a “fallen angel” in terms of creditworthiness of bonds, according to the CFA Institute?

• a) Fallen angels are high-yield (speculative grade) bond issuers whose credit quality has deteriorated in the last 12 months.
• b) Fallen angels are formerly investment-grade issuers whose credit quality has deteriorated since the time of issuance.
• c) Fallen angels are formerly speculative-grade issuers whose credit quality has improved, significantly, since the time of issuance.

What is the main difference between committed and uncommitted lines of credit?

Lines of credit are a relevant way of external loan financing for companies. Which of the following sentence better represents the main difference between committed and uncommitted lines of credit?

• a) Uncommitted lines of credit are more reliable, more flexible, and cheaper than committed lines of credit, and firms can have it as a primary source of funding.
• b) Uncommitted lines of credit are less reliable, less flexible, and cheaper than committed lines of credit, and firms cannot have it as a primary source of funding.
• c) Uncommitted lines of credit are less reliable, more flexible, and cheaper than committed lines of credit, and firms cannot have it as a primary source of funding.

When analyzing fixed-income securities, issuers can be either public or private. Which of the following sentence is true according to the CFA Institute?

• a) Public issuers use accrual-based principles (GAAP) while private issuers use cash-based principles.
• b) Private issuers use accrual-based principles (GAAP) while public issuers use cash-based principles.
• c) Both public and private issuers use accrual-based principles (GAAP).

What is the relationship between the discounting rate and the coupon rate in Bonds?

When dealing with plain vanilla fixed-income securities, there is a clear relationship between the discounting rate of the cash flows and the coupon rate reflecting the trading price (below, above or at par). If the coupon rate is lower than the discounting rate in percentage terms, we conclude that:

• a) The bond is trading below par or at a discount.
• b) The bond is trading above par or at a premium.
• c) The bond is trading at par.

## CFA I: DERIVATIVES

What is the difference between a firm commitment and a contingent claim?

When dealing with derivatives, we classify them into contingent claims and firm commitments. Which of the following sentences better represent the difference between them?

• a) Firm commitments can be used to take either a long or a short position. Futures and options are examples of firm commitments.
• b) In a firm commitment, both counterparties face an obligation to the other counterparty. Futures and forwards are examples of firm commitments.
• c) In a firm commitment, only one of the counterparties faces an obligation to the other counterparty. Forwards and options are examples of firm commitments.

What are the main differences between futures and forwards?

When dealing with derivatives, we classify them into contingent claims and firm commitments. Futures and forwards are two of most well-known derivatives. Which of the following sentences is correct in relation to the differential characteristics between futures and options?

• a) Futures are an exchange-traded firm commitment derivative, while forwards are OTC (Over The Counter) contingent claims.
• b) Futures are an OTC firm commitment derivative, while forwards are OTC (Over The Counter) firm commitment derivatives.
• c) Both futures and forwards are firm commitment derivatives, but forwards are OTC while futures are exchange-traded derivatives.

What are the main operational advantages of derivatives compared to stop markets?

Derivative transactions offer a number of operational advantages to cash or spot markets in many instances. Which of the following sentences better reflects these operational advantages of financial derivatives?

• a) Lower transaction costs, lower upfront cash requirement, leverage, and short positions.
• b) Lower risk, higher performance, leverage, and short positions.
• c) Lower transaction costs, lower upfront cash requirement, higher maturity, and longer duration.

How can arbitrage opportunities appear when dealing with financial derivatives?

In finance, the market efficiency establishes that market prices should not allow for the possibility of riskless profit or arbitrage in the absence of transaction costs. Which of the following sentences do NOT represent a clear situation of arbitrage with derivatives?

• a) Two assets with identical future cash flows trade at different prices.
• b) An asset does not trade at the present value of its future expected cash flows.
• c) An asset does not trade at the future value of its future expected cash flows.

How do we value forward commitments at maturity?

Suppose investment company Omicron owns 25,000 common non-dividend paying shares of company ABC with a spot price of \$154.58. Omicron enters into a forward contract with a financial intermediary to sell forward 25,000 shares at a forward price of \$150 per share in 11 months. Calculate the value per share at maturity of the forward position if the spot price of ABC at maturity is \$165.

• a) +15\$.
• b) -15\$.
• c) 0\$.

What are the main differences between futures and forwards in terms of cash flows?

Futures and forwards are derivatives contracts with a lot of similarities, although forwards are OTC contracts while futures are ETD contracts. What are the main differences between both derivatives in terms of their cash flow patterns?

• a) Daily settlement and short positions.
• b) Short positions and margin requirements.
• c) Daily settlement and margin requirements.

## CFA I: ALTERNATIVE INVESTMENTS

What is the difference between alternative and traditional investments?

There are different ways to classify investments. One of these classifications differentiates between traditional and alternative investments. Which one of the following sentences includes examples of traditional investments?

• a) Stocks, bonds, cash (deposits), real estate, and commodities.
• b) Long-only stocks, long-only bonds, cash(deposits) and real estate.
• c) Long-only publicly traded stocks, long-only publicly traded bonds, and cash (deposits).

What is the difference between the IRR and the MOIC in alternative investment performance?

Suppose a private equity (PE) firm makes an initial investment in company Epsilon of \$5 million. Then, at the end of the first year, the firm needs to place additional capital for an amount of \$2.5 million, and at the end of the fourth year, another additional capital investment of \$1.5 million. Finally, the position is sold at the end of the sixth year for \$15 million. Calculate the value of the IRR and the value of the MOIC.

• a) IRR is 9.4% and MOIC is 1.37x.
• b) IRR is 10.4% and MOIC is 1.67x.
• c) IRR is 11.4% and MOIC is 1.97x.

What is the difference between MBOs (management buyouts) and MBIs (management buyins)?

Within private equity strategies, the CFA Institute differentiates among leverage buyouts, venture capital, and growth capital. Leverage buyouts can be segregated into MBOs and MBIs. Which of the following sentences better reflects the main difference between both types of leverage buyouts?

• a) In MBOs (Management BuyOuts), the current management team is being replaced and the acquiring team will be involved in managing the company. In MBIs (Management BuyIns), the current management team is part of the group of investors buying the company.
• b) In MBIs (Management BuyIns), the current management team is being replaced and the acquiring team will be involved in managing the company. In MBOs (Management BuyOuts), the current management team is part of the group of investors buying the company.
• c) In MBIs (Management BuyIns), the current management team has the intention of taking the company private, and that’s why leverage is a key element. In MBOs (Management BuyOuts), the current management team has the intention of taking the company public.

What are the key reasons for investing in Real Estate?

Alternative investments, as opposed to traditional investments, have some specific characteristics that make them specially relevant for any investment portfolio. Real estate is a type of alternative investment with a long tradition among investors all over the world. Which of the following sentences better represents the main reasons for investing in Real Estate?

• a) Diversification benefits, inflation hedge, higher returns, income generation, and liquidity.
• b) Diversification benefits, liquidity, higher returns, income generation, and capital appreciation.
• c) Diversification benefits, inflation hedge, capital appreciation, income generation, and fixed rents.

How is the ownership structure in Raw Land, Farmland and Timberland?

Natural resources, as part of the alternative investments asset class, have some unique products and characteristics, the ownership of these assets can be either institutional or individual. Which of the following natural resources have owners that are mainly institutional?

• a) Farmland.
• b) Timberland.
• c) Raw land.

How do hedge fund managers implement leverage in their investment vehicles?

Leverage is an important characteristics that differentiates mutual funds from hedge funds. How can hedge fund managers introduce leverage in their investment vehicles?

• a) Derivatives, borrowing, and short selling.
• b) Long and short positions, success fees, and derivatives.
• c) Borrowing, short selling, and cryptocurrencies.

## CFA I: PORTFOLIO MANAGEMENT

What can we say about the performance of traditional asset classes in the long run?

If we consider data from the US market through a long period of time (1926 – 2017), which one of the following sentence is correct?

• a) Small company stocks show the highest return and risk, while treasury bills show the lowest return and risk.
• b) Large company stocks show the highest return and risk, while treasury bills show the lowest return and risk.
• c) Commodities show the highest return and risk, while real estate assets show the lowest return and risk.

What is the CAL (Capital Allocation Line) in Portfolio Theory?

In portfolio theory we use different graphical representations to illustrate the key concepts. Which of the following sentences better represents the CAL (Capital Allocation Line?

• a) A line describing the combination of expected return and beta available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
• b) A line describing the combination of expected return and variance of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.
• c) A line describing the combination of expected return and standard deviation of return available to an investor from combining the optimal portfolio of risky assets with the risk-free asset.

How can we reduce risk through diversification in a portfolio basis?

Which of the following performance measures represents the ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security of this portfolio?

• a) Volatility ratio.
• b) Diversification ratio.
• c) Naïve ratio.

What are the main elements of an Investment Policy Statement (IPS)?

Portfolio planning can be defined as a program developed in advance of constructing a portfolio that is expected to define the client’s investment objectives. The written document governing this process is the investment policy statement (IPS). The main elements of an IPS can be classified into objectives and constraints. Mark the correct sentence in relation to objectives and constraints of a default IPS?

• a) Objectives are usually specified in terms of risk and return, while constraints are specified in terms of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances.
• b) Objectives are usually specified in terms of risk and diversification, while constraints are specified in terms of liquidity, profitability, legal and regulatory factors, and unique circumstances.
• c) Objectives are usually specified in terms of risk and return, while constraints are specified in terms of liquidity, time horizon, diversification, legal and regulatory factors, and risk management.

What is the main difference between cognitive errors and emotional biases?

In general, behavioral biases come in two forms: cognitive errors and emotional biases. Both forms of bias, regardless of their source, may cause decisions to deviate from what is assumed by traditional finance theory. What is the main difference between both types of biases?

• a) Cognitive errors are behavioral biases resulting from faulty reasoning, and they can be corrected through better information, education, and advice. Emotional biases are behavioral biases resulting from reasoning influenced by feelings, and they can difficult to correct, so we must recognize them, and adapt to them.
• b) Cognitive errors are behavioral biases resulting from faulty reasoning, and they can difficult to correct, so we must recognize them, and adapt to them. Emotional biases are behavioral biases resulting from reasoning influenced by feelings, and they can be corrected through better information, education, and advice.
• c) Emotional biases are behavioral biases resulting from faulty reasoning, and they can be corrected through better information, education, and advice. Cognitive errors are behavioral biases resulting from reasoning influenced by feelings, and they can difficult to correct, so we must recognize them, and adapt to them.

What is the main difference between cognitive errors and emotional biases?

The risk management is the process of identifying the level of risk an organization wants, measuring the level of risk the organization currently has, taking actions that bring the actual level of risk to the desired level of risk, monitoring the new actual level of risk so that it continues to be aligned with the desired level of risk. What is the relationship between risk driver, risk position, and risk exposure?

• a) The risk driver equals the risk exposure times the risk position.
• b) The risk position equals the risk driver times the risk exposure.
• c) The risk exposure equals the risk driver times the risk position.

## CFA I: ETHICAL AND PROFESSIONAL STANDARDS

What is the main difference between Codes of Ethics and Standards of Conduct?

Ethical conducts are relevant to balance moral principles and industry practices in any kind of business. Mark the correct sentence in terms of the relationship between a Code of Ethics and Standards of Conduct.

• a) Codes of Ethics are commitments to upholding the law, while Standards of Conduct serve as a benchmark for the minimally acceptable behavior for community members.
• b) Standards of Conduct are elements that any Code of Ethics must include.
• c) Codes of Ethics are a set of moral principles designed to provide guidance for behavior, while Standards of Conduct serve as a benchmark for the minimally acceptable behavior for community members.

What are the two CFA Institute institutions responsible for both the Code and Standards?

All CFA Institute members and candidates enrolled in the CFA Program are required to comply with the Code of Ethics and with the Standards of Professional Conduct. The two CFA Institute institutions responsible for enforcement of both the Code and Standards are:

• a) PSP and DCP.
• b) PCP and DRC.
• c) PRP and DSC.

What is the meaning of the Standard I-A of Professionalism “Knowledge of the Law?

Roberto Velasco, passed the CFA levels I and II in his first attempt, and he recently registered for the Level III exam. Roberto works for a global investment firm known as Alpha Searchers, and his company adopted the Code of Ethics and the Standards of Professional Conduct three years ago. Which one of the following is most likely a violation of the Code of Ethics and Standards of Professional Conduct?

• a) The local law regarding the use of material and nonmaterial public information is being developed and local regulators reported that it will be ready for application in 4 months. Roberto buy stocks of company Delta for the client accounts using material nonpublic information, because he is sure to sell those stocks before the new regulation is in place.
• b) The local law regarding, trading on new bond issues establish that local investment firms have to register all trades during the first two months of the life of the issue and report that information to the local regulator. Roberto has strictly followed this rule although it has not found information relating these types of trades neither in the Code of Ethics nor in the Standard of Professional Conduct.
• c) Roberto updates his LinkedIn profile with information relating his new status as a candidate for the CFA level III exam.

What is the meaning of the Standard I-B of Professionalism “Independence and Objectivity?

Amelia Bulonska is a highly respected technology sector analyst with Dadu&Fefe and has been asked by another investment firm to be the key spokesperson for a conference it is organizing. This investment firm has offered to pay her all expenses, plus bringing 3 all-expenses paid companions and a golf outing at Pebble Beach which is close to the accommodation. What should Bulonska do to avoid violating Standard I(B)?

• a) Bulonska should accept only the offer that the host company will pay for the expenses related to the conference.
• b) Bulonska should accept only the offer that the host company will pay the expenses related to the conference while taking 3 colleagues with her.
• c) Bulonska should accept the full offer.

What is the meaning of the Standard I-C of Professionalism “Misrepresentation”?

Robert Swatz is a financial advisor who is trying to get a new client and to do so, he says, “I only have a 4-year track record, but I’ve averaged a 34% return on my clients’ accounts”. This sentence is true, but Swatz does not mention to the prospectthat he has few clients, and that this high average is mainly because one of his clients took a strong position in derivatives against the recommendation of Swatz and the operation finally went very well, removing that operation the average profitability of the accounts of his clients would be 5%. Has Swatz violated the Standards?

• a) Yes, since the statement misrepresent the track record.
• b) No, since the statement is true.
• c) No, since the adviser is not promising that the client will earn a 34% return in the future.

What is the meaning of the Standard I-D of Professionalism “Misconduct”?

Cooper is an advisor with W&W Investment Firm and he manages accounts of wealthy clients. This Investment Firm has a policy for advisors to correct within 15 days, all trades with some kind of error and the difference between the trade price and the current price is charged to the advisor´s personal account through an internal error account. Cooper buys a stock for a client and the price of the stock increases the first week and yet Cooper asks the Firm to charge the difference to his personal account because the purchase was in error, and the Firm does so. The advisor then sells the stock and tells the client that he is giving him a gift or no-risk trade.

• a) Cooper´s actions are appropriate because the bank is not harmed by Cooper´s actions.
• b) Cooper´s actions violate the CFA Institute Code and Standards.
• c) Cooper´s actions are appropriate because Cooper is acting for the benefit of the client.