Báo cáo ôn tập — Mock Test 1

Because this bond has 10 years until maturity, its price will tend to be more volatile than that of shorter-term bonds and its yield will include a maturity risk premium. The bond is AAA rated and the bond is actively traded, so default risk and liquidity risk are likely to be minimal.

When we order the prices from least to greatest ($28, $30, $32, $32, $34, $36), we observe that the median is $32. (T i p: This is all that is needed to identify the inaccurate choice.) The range is $36 – $28 = $8. The mean is also $32, so the MAD = (|$28 – $32| + |$30 – $32| + |$32 – $32| + |$32 – $32| + |$34 – $32| + |$36 – $32|) / 6 = 2.

The test statistic is $\frac{0.1452\sqrt{150-2}}{\sqrt{1-0.{1452}^2}}=1.785$ 

The researcher should reject the null hypothesis at the 10% significance value but not at the 5% significance level.

The coefficient of determination, or ${\mathrm{R}}^2$ , is the percentage of the total variation in the dependent variable that is explained by the variation in the independent variable. The standard deviation of the regression residuals is the standard error of estimate, or SEE. The F-statistic can be used to test the statistical significance of the slope coefficient in a simple linear regression.

All the information needed to calculate the covariance is contained in a joint probability function. The covariance is calculated as:

$\mathrm{Cov}({\mathrm{R}}_{\mathrm{A}},{\mathrm{R}}_{\mathrm{B}})=\mathrm{P}({\mathrm{R}}_{\mathrm{A}1}-{\mathrm{R}}_{\mathrm{B}1})[{\mathrm{R}}_{\mathrm{A}1}-\mathrm{E}({\mathrm{R}}_{\mathrm{A}}\left)\right][{\mathrm{R}}_{\mathrm{B}1}-\mathrm{E}({\mathrm{R}}_{\mathrm{B}}\left)\right]+\mathrm{P}({\mathrm{R}}_{\mathrm{A}2}-{\mathrm{R}}_{\mathrm{B}2})[{\mathrm{R}}_{\mathrm{A}2}-\mathrm{E}({\mathrm{R}}_{\mathrm{A}}\left)\right][{\mathrm{R}}_{\mathrm{B}2}-\mathrm{E}({\mathrm{R}}_{\mathrm{B}}\left)\right]+ \mathrm{P}({\mathrm{R}}_{\mathrm{A}3}-{\mathrm{R}}_{\mathrm{B}3})[{\mathrm{R}}_{\mathrm{A}3}-\mathrm{E}({\mathrm{R}}_{\mathrm{A}}\left)\right][{\mathrm{R}}_{\mathrm{B}3}-\mathrm{E}({\mathrm{R}}_{\mathrm{B}}\left)\right]$

where $\mathrm{E}\left({\mathrm{R}}_{\mathrm{A}}\right)=\left({\mathrm{R}}_{\mathrm{A}1},{\mathrm{R}}_{\mathrm{B}1}\right){\mathrm{R}}_{\mathrm{A}1}+\mathrm{P}\left({\mathrm{R}}_{\mathrm{A}2},{\mathrm{R}}_{\mathrm{B}2}\right){\mathrm{R}}_{\mathrm{A}2}+\mathrm{P}\left({\mathrm{R}}_{\mathrm{A}3},{\mathrm{R}}_{\mathrm{B}3}\right){\mathrm{R}}_{\mathrm{A}3}$

and $\mathrm{E}\left({\mathrm{R}}_{\mathrm{B}}\right)=\left({\mathrm{R}}_{A1},{\mathrm{R}}_{\mathrm{B}1}\right){\mathrm{R}}_{\mathrm{AB}1}+\mathrm{P}\left({\mathrm{R}}_{\mathrm{A}2},{\mathrm{R}}_{\mathrm{B}2}\right){\mathrm{R}}_{B2}+\mathrm{P}\left({\mathrm{R}}_{\mathrm{A}3},{\mathrm{R}}_{\mathrm{B}3}\right){\mathrm{R}}_{B3}$

To compute the expected return and variance of a port f ol i o of these two assets, we would need to know the weights of the assets in the portfolio.

For a positively skewed distribution, the mode is less than the median, which is less than the mean. The opposite is true for a negatively skewed distribution; the mode is greater than the median, which is greater than the mean.

Jackknife resampling involves calculating multiple sample means, each with one of the observations removed from the sample, and using the standard deviation of these sample means as an estimate of the standard error of the sample mean.

Because it takes more U.S. dollars to buy a Canadian dollar today, the USD has depreciated. To determine the percentage depreciation of the USD, the USD must be the base currency (CAD/USD). Thus, the exchange rate yesterday is 1 / 0.85 = 1.1765 CAD/USD. The exchange rate today is 1 / 0.89 = 1.1236 CAD/USD. The percentage depreciation in the USD is 1.1236 / 1.1765 − 1 = −0.045, or −4.5%.

Black swan risk refers to an unanticipated event with low likelihood (e.g., a pandemic or war) that would have a substantial short-term impact.

The crowding-out effect is when the government runs a deficit and must borrow more, which increases the demand for loanable funds. This causes interest rates to increase. At the higher rates, firms invest less in physical capital. The effect of expansionary fiscal policy is reduced by the crowding-out effect.

Total variable costs = £4,000,000 − £3,000,000 = £1,000,000. The firm should continue to operate in the short run because total revenue is greater than total variable costs. The firm should shut down in the long run because total revenue is less than total costs.

Oligopolists are highly dependent upon the actions of their rivals when making business decisions. The actions of one producer can have a large impact on the others. In oligopolies, the number of sellers is small, barriers to entry are high, products may be similar or differentiated, and firms may use product quality or features to differentiate their products. Economic profits may be zero in long-run equilibrium in the absence of collusion.

The arbitrage-free one-year forward rate is computed as follows:

$\mathrm{Spot} \mathrm{rate} \times \raisebox{1ex}{$(1+{\mathrm{i}}_{\mathrm{price} \mathrm{currency}})$}\!\left/ \!\raisebox{-1ex}{$(1+{\mathrm{i}}_{\mathrm{base} \mathrm{currency}})$}\right.=1.34 \times (1.03 / 1.05) = 1.3145 \mathrm{USD}/\mathrm{CHF}.$

The kinked demand curve model is based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a decrease in price will be followed. A firm believes that for price increases above the kink in the demand curve, demand for its product is elastic and the firm will lose market share.

The long-run average total cost curve indicates economies of scale in any output range where it slopes down and diseconomies of scale in any output range where it slopes up. Short-run cost curves are drawn assuming a constant scale of production. All costs are variable in the long run, so there is no long-run average fixed cost curve.

To slow inflation, the central bank will use contractionary monetary policy. The central bank can increase the required reserve ratio, sell government securities in the open market, or increase the target for the policy rate.

The economy is in the contraction phase of the business cycle. Consumer staples (which are items like everyday household products) tend to be less sensitive to business cycle contractions than durable goods like industrial machinery or discretionary services such as travel.

The increase in the tax rate will increase both the DTLs and the DTAs. Because the DTLs are larger, they will have a greater effect on tax expense. Using the relationship that tax expense = tax payable + ΔDTL – ΔDTA, and knowing the DTLs will increase  by more than the DTAs, the net impact of the changes is to increase tax expense.

Potentially dilutive securities are included in the diluted earnings per share (EPS) calculation only if their exercise would dilute (reduce earnings per share to less than) basic EPS. Because these options may only be exercised at $40 per share, and the average market price for the year is $38, the options are antidilutive and the diluted EPS calculation should not include them. Dilutive securities that are not immediately exercisable are included in the calculation of diluted EPS.

With finance leases under both IFRS and U.S. GAAP, the right-of-use (ROU) asset and the lease liability have the same value at inception and both are zero at the end of the lease. The lessee amortizes the ROU asset, typically using the straight-line method, and treats the lease liability as if it were an amortizing loan. As a result, during the life of the lease, the ROU asset and lease liability will have different values. For an operating lease under U.S. GAAP, the ROU asset and the lease liability have equal values throughout the life of the lease.

Mowers has lower fixed asset and inventory turnover ratios than HomeSpace, suggesting Mowers uses assets less efficiently. Although Mowers's debt-to-equity and interest coverage ratios indicate that Mowers is more solvent (more able to pay its long-term debt) than HomeSpace, these ratios do not necessarily indicate that Mowers's total debt is lower. The ratios given also do not indicate which firm carries more inventory.

Steps in the financial statement analysis framework are:

• State the objective and context.
• Gather data.
• Process the data.
• Analyze and interpret the data.
• Report the conclusions or recommendations.
• Update the analysis.

Preparing and presenting financial statements are tasks related to financial reporting, rather than financial statement analysis.

Scenario analysis is based on specific alternatives, such as the impact changing a supplier will have on earnings. Sensitivity analysis is based on "what if" questions such as "what will be the effect on net income if sales increase by 3% rather than the estimated 5%". Sensitivity analysis does not specifically consider what has caused sales to increase or the likelihood of this happening. Simulation is a technique in which probability distributions for key variables are selected and a computer is then used to generate a distribution of values for outcomes.

The interest coverage ratio will be higher under FIFO because cost of goods sold is lower, resulting in higher earnings before interest and taxes. Inventory turnover will be lower because a company using FIFO will have lower cost of goods sold and higher inventory compared to the LIFO method. Total asset turnover will be lower using FIFO because higher inventory will result in higher total assets.

When a non-GAAP (adjusted or "pro forma") measure is presented, both U.S. GAAP and IFRS require reconciliation with the comparable GAAP measure.

An auditor's disclaimer of opinion means the auditor is unable to express an opinion about whether the financial statements are presented fairly. An adverse opinion means the auditor believes that the financial statements are not presented fairly. A qualified opinion means the auditor believes the financial statements are presented fairly but make exceptions to the applicable accounting principles that the auditor will describe in its report.

A right-to-use asset and an equal lease liability are reported on the balance sheet at the inception of all long-term leases of significant value under both U.S. GAAP and IFRS.

Operating margin (EBIT / Revenue) increased from 1,000 / 3,000 = 0.333 in 20X1 to 1,500/ 3,600 = 0.417 in 20X2. Financial leverage (Total assets / Total equity) decreased from 5,000 / 4,000 = 1.25 in 20X1 to 6,000 / 5,000 = 1.20 in 20X2. The effective tax rate [(EBT − Net income) / EBT] increased from 0.200 in 20X1 to 0.305 in 20X2.

IFRS allows interest paid to be reported as either CFO or CFF, and dividends received to be classified as either CFO or CFI.

Impairment reduces the fixed asset's carrying value, thereby decreasing its depreciation expense over its remaining useful life. Because the fixed asset's carrying value is lower and sales are not affected, the fixed asset turnover ratio will be higher in future years.

Secondary sources of liquidity are those that can potentially change a company's normal operations significantly, such as liquidating assets, renegotiating debt agreements, or filing for bankruptcy. A revolving line of credit is typically a reliable source of short-term financing. Secured loans are those backed by specific collateral and are not necessarily an indicator of financial distress.

Although equity holders face the most ESG risk, long-term debt investors face more ESG risk than short-term debt investors.

Replacement projects that maintain the business are normally made without much detailed analysis. The main issue that must be considered is whether existing operations should continue. If the answer is yes, management must decide whether existing procedures or processes should be maintained.

A capital structure with twice as much debt as equity has two-thirds debt and one-third equity. The after-tax cost of debt is 7% × (1 – 0.20) = 5.6%. WACC = 2/3 × 5.6% + 1/3 × 9% = 3.73% + 3% = 6.73%.

Principal-agent conflicts are those between shareholders (as principals) and management and the board of directors (as agents). An example of an action that may represent a principal-agent conflict is "empire building" that results from management compensation structures that are tied to the size of the firm, rather than being better aligned with shareholders' interests.

Issuing new debt while increasing dividends to common shareholders represents a conflict between shareholders' interests and creditors' interests.

Dual-class structures may create conflicts among different groups of shareholders.

If a company's return on invested capital is greater than its weighted average cost of capital, the company's management is increasing the value of the firm and shareholders' wealth. Book value of total capital may increase (e.g., by additional borrowing) even if management is not creating value for shareholders. Changes in a company's stock value (and therefore its market capitalization) are a function of expectations about the profitability of its future investments.

An abandonment option gives management the ability to discontinue a project if the present value of the incremental cash flows from exiting the project exceeds the present value of the incremental cash flows from continuing it.

Timing options allow for investment delays in the hope of obtaining better information in the future.

Fundamental options refer to projects for which the payoff depends on the price of an underlying asset.

Price discrimination is setting different prices to different identifiable groups of customers. Peak and off-peak pricing is an example. Penetration pricing is setting a low price temporarily to grow market share and achieve greater scale. Cost-based pricing is setting prices based on production costs plus a profit margin.

Depreciation is an accounting expense that does not represent a cash outflow but is a tax deductible expense that reduces tax outflows. The impact of the depreciation tax shield is critical to include in any capital allocation process. Cash flows received earlier have a greater present value than those received later. Because return on equity (ROE) may be negative early in a project's life, a manager whose performance is evaluated based on ROE may be hesitant to take on a project even with a positive NPV.

The dividend payments are effectively double-taxed because dividends are paid out of already taxed corporate earnings. Dividends paid are not tax deductible by the corporation that distributes them.

Scenario analysis regarding inflation and interest rates would be most useful for a consumer lending company, which would likely be hurt by increasing inflation (from reduced asset values) and increasing interest rates (although lending rates will be higher, consumer defaults will also increase). A food manufacturer or a pharmaceutical company would likely be less exposed to interest rate risk, and more likely to be able to pass inflationary cost increases through to their product prices.

General and administrative expenses tend to be relatively fixed and are less sensitive to changes in sales volume than cost of goods sold or distribution expenses, which are more appropriately modeled based on a forecast of sales.

With settlement of two business days, November 6 is the last trading day investors can buy the shares and receive the dividend payable on November 22. November 7 is the ex-dividend date, or the first date that the shares trade without the dividend, because shares that are purchased on November 7 would settle on November 9, after the holder-of-record date.

Shares purchased in the open market when IPO shares begin trading have actually underperformed in the long run on a risk-adjusted basis, not outperformed. The January and earnings surprise effects are among the market anomalies that have been identified.

Margin = 0.60 × $50 = $30 (equity)

Interest on loan = 0.10 × $20 (debt) = $2

(75 − 50 − 2) / 30 = 76.67%

Putable shares are more valuable, other things equal, because the shareholder has the right to exercise. Firms may have different classes of common shares with varying degrees of voting power. Preferred dividends are not contractual obligations. A firm that fails to pay a scheduled preferred dividend is said to be in arrears, but not in default.

Larger numbers of market participants and a greater amount of available information tend to make markets more efficient. Arbitrage trading increases market efficiency but can be impeded by restrictions on short selling. Higher transactions costs tend to make markets less efficient.

Indexes of small-cap or mid-cap stocks are classified as style indexes. Sector indexes are defined based on industry sectors. Multi-market indexes refer to those that include stocks from more than one country.

Even if asset prices are semistrong-form efficient so that neither fundamental nor technical analysis can add value, the portfolio manager can add value by matching the portfolio asset allocation to the client's needs and risk tolerance, based on capital market expectations.

Bidders in a sovereign debt auction can submit either competitive or non competitive bids. An investor submitting a non-competitive bid agrees to accept the price determined in the auction and always receives securities, regardless of the auction outcome (similar to a market order in equity trading). Competitive bidders specify both an acceptable price and the number of securities to be purchased (specifying a price is similar to a limit order).

The actual price change depends on both the duration and convexity of the bond. While the convexity of an option-free bond is always positive, the convexity of a callable bond may be negative, so the convexity adjustment may be positive or negative.

Ratings for a company's bonds may be notched up or down relative to that of its senior unsecured debt, based on an individual bond's seniority and protective covenants.

$3\mathrm{y}1\mathrm{y}=[{(1+{\mathrm{S}}_4)}^4/{(1+{\mathrm{s}}_3)}^3]-1$

This calculation requires the 3-year and 4-year spot rates.

The approximate percentage change in the bond's price is estimated as:

$-16.4(0.003) + 0.5(-168){(0.003)}^2 = -0.049956 = -4.9956\%.$

The required margin is the percentage discount rate that would make the bond price equal to its par value. The quoted margin is the percentage (of par) that the bond will pay. Because this bond is trading at a premium, the required margin must be less than the quoted margin.

In contrast with other ABS, a covered bond is not set up through a bankruptcy remote SPE. The assets (loans or mortgages) backing covered bonds remain on the issuing entity's balance sheet, and in the event of default the investors have dual recourse to the assets in the cover pool and the general assets of the issuer

The repo margin is the difference between the amount the lender of funds (buyer of the underlying bond) pays for it and its market price or value. This margin offers protection to the repo lender if the value of the bond decreases over the term of the repo agreement.

Cash flows to service CDOs are generated by the CDO collateral manager's buying and selling of debt obligations in the CDO asset portfolio.

The bonds are currently rated Ba1, which is the highest speculative grade (high yield) rating on Moody's ratings scale. A one-notch upgrade would result in a rating of Baa3, the lowest investment grade rating. An upgrade in the rating typically results in a higher bond price and therefore lower yield.

The par yield curve is constructed from the yields of hypothetical bonds at different maturities that would be trading at par given current spot rates.

The price value of a basis point is the change in price given a 1 basis point change in the discount rate. 

For a 1 bp increase:

N = 20; PMT = 35; FV = 1,000; I/Y = 7.01 / 2 = 3.505; CPT → PV = -999.29

$1,000 − $999.29 = $0.71.

For a 1 bp decrease:

N = 20; PMT = 35; FV = 1,000; I/Y = 6.99 / 2 = 3.495; CPT → PV = 1,000.7109

1,000.7109 – 1,000 = 0.7109

PVBP = (0.7103 + 0.7109) / 2 = 0.7106.

Because binomial pricing models use the concepts of replication and risk neutrality, the expected payoff is discounted at the risk-free rate.

An issuer may account for a pay-fixed interest rate swap as a cash flow hedge if it converts a fixed-rate liability to a floating-rate liability. An issuer may account for a pay-floating interest rate swap as a fair value hedge if its purpose is to decrease the volatility in balance sheet values of a fixed-rate liability recognized at market value.

When interest rates are negatively correlated with the price of the underlying asset, the mark-to-market cash flows on the futures contract will  require cash when interest rates are higher and provide cash when interest rates are lower.

Derivative contracts have low transaction costs compared to the purchase of the underlying assets, regardless of the leverage. Long or short positions may be used to hedge a portfolio. Derivative instruments provide price information and can help promote market efficiency.

A decrease in the risk-free rate will decrease the value of a call option and increase the value of a put option.

Relative to funds which incorporate more traditional asset classes, alternative investment funds will often have higher management fees, require higher capital commitments, and provide less detail on not only the returns earned but also on the positions held by the fund.

The vintage year of a private equity fund is the year the fund makes its first investment.

Relative value strategies involve buying a security and short selling a related security. The fixed income strategies mentioned are classified as relative value strategies. Event-driven strategies are designed to focus on acquisitions or restructuring events that create the potential for profit in the debt or equity of a corporation. Opportunistic strategies typically focus on commodity trading and macro-level events.

Tokenization is a possible application of distributed ledger technology. Algorithmic trading and robo-advisors do not require a distributed ledger.

A clawback provision allows limited partners to "claw-back" incentive fees paid on profitable deals if low or negative returns on subsequent investments result in overall returns below the target rate.

While returns on alternative investments may have less than perfect correlation with returns on traditional investments, they are unlikely to be negatively corrlated. Alternative investments tend to be less liquid and to require larger minimum investments compared to traditional investments.

The multiple of invested capital is the ratio, over the life of the fund, of total capital returned and the value of remaining assets to total capital paid in. A disadvantage of this measure is that it does not consider the timing of cash inflows and outflows.

A direct investment in real estate often requires a high amount of initial capital to participate. Noncash depreciation and interest expense are typically tax deductible, and direct real estate investments can reduce the risk of a portfolio due to low correlations of returns with traditional investment vehicles.

Investment guidelines in an IPS will address policy execution, permitted asset types, and leverage to be deployed. Investment objectives refer to risk and return goals. The appendices typically include information such as baseline asset allocations and permitted deviations.

A life insurance company typically has low risk tolerance and high liquidity needs. Long investment horizons and low liquidity needs are typical of endowment funds and defined benefit pension plans.

The efficient frontier comprises the set of portfolios with the highest expected return for each possible level of portfolio risk, based on a universe of risky assets. The set of portfolios with the least risk for each possible value of expected returns is the minimum variance frontier.

Eliminating risks is not always possible or desirable. Instead a risk management framework should focus on managing and mitigating risks to achieve an optimal level of risk overall.

Smith's more steeply sloped utility curve indicates less willingness to assume more risk for more return. The optimal portfolio for the more risk averse Smith is less risky, and consequently has a lower expected return than Jones's optimal portfolio, given the risk- return trade-off offered along the CML.

When determining an investor's risk tolerance, an advisor must consider both the investor's ability and willingness to bear risk. Even though the investor has a high willingness to bear risk, his ability to take risk (based on his financial situation) is low, and this should take precedence. A portfolio that emphasizes bonds over stocks has less investment risk and is the most appropriate choice.

Investing funds differently based on their source is an example of mental accounting bias. The investor should make investment decisions for her overall portfolio based on portfolio risk, expected return, and her preferences.

A portfolio manager performs strategic asset allocation when she determines the portfolio weights in each of the appropriate asset classes that will best meet the investor's return and risk objectives. Tactical asset allocation is an active management strategy of deviating from the target asset allocation to take advantage of short-term opportunities.

Systematic risk (non-diversifiable or market risk) is the risk that cannot be diversified away. Unsystematic risk can be diversified away, and doing so can decrease the total risk of a portfolio.

The covariance of asset returns is given by the formula: ${\mathrm{Cov}}_{1,2}={\mathrm{\sigma }}_1{\mathrm{\sigma }}_2{\mathrm{\rho }}_{1,2}$, where ${\mathrm{\sigma }}_1$ is the standard deviation of returns for asset 1, ${\mathrm{\sigma }}_2$ is the standard deviation of returns for asset 2, and ${\mathrm{\rho }}_{1,2}$ is the correlation of returns for assets 1 and 2.

The process is termed risk budgeting, which is part of risk governance and of the overall process of risk management.

According to Standard IV(B) Additional Compensation Arrangements, an incentive offered by a client (such as a free vacation or a cash bonus) to inspire high performance is allowable, but if it is contingent on future performance, a member must get consent from her supervisor or compliance department.

Suitability is judged in an overall portfolio context and not on a security-by-security basis. For example, selling calls on shares that are held in the account can be a low-risk strategy designed to generate income (covered call writing).

According to Standard I(B) Independence and Objectivity, the member would be in violation because the nature of the compensation can be reasonably expected to influence the member's independence and objectivity.

Brief communications are permitted (as brief as a list of recommended securities) as long as these recommendations are supported by appropriate background reports that can be made available to clients upon request. Sending a recommended list to all clients, even though not every recommended security is suitable for them, is not a violation of the Standards.

Standard IV(C) Responsibilities of Supervisors requires that if a member cannot discharge compliance responsibilities because of a poor compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts an adequate system.

Standard V(A) Diligence and Reasonable Basis requires members and candidates to exercise diligence, independence, and thoroughness in making investment recommendations and taking investment actions. The Standard does not require all potentially negative future events to be included in a research report. Standard V(B) Communications With Clients and Prospective Clients requires analysts to use reasonable judgment in deciding which factors are important to their analysis, recommendations, and actions and to disclose these to clients and prospects. Ensuring that investment performance claims are fair, accurate, and complete is required by Standard III(D) Performance Presentation.

Standard VII(B) Reference to CFA Institute, the CFA Designation, and the CFA Program limits the use of the CFA designation to those who have passed all three levels of the CFA Program, have received their charters, and are dues-paying Charterholders in good standing. There is no designation for someone who has passed one or more levels of the exam, such as "Level II CFA." Candidates may state that they have completed one or more of the levels on their first attempts if that is true, and they can refer to themselves as a Level I, II, or III candidate if they are registered to take the next scheduled CFA exam at that level

The Code and Standards stipulate that members shall "make reasonable efforts to assure that performance information is a fair, accurate, and complete." Since it is obvious that most investors would assume that 1-year performance data was for the previous year, his method of reporting is neither reasonable nor fair, and he is in violation of the Standard. The fact that he has indicated the basis of the presentation in a footnote does not place him in compliance with the Standard.

A member or candidate may trade on material nonpublic information if it is permitted both in her country of residence and the country where she does business.

If a member rejects proposed sanctions, the matter is referred to a hearing by a panel of CFA Institute members.

Worth's statement about the outcome of the legislation and its effect on Transocean's earnings fails to distinguish fact from opinion and thus violates Standard V(B) Communication With Clients and Prospective Clients. Horwitz's "certainty" does not make his prediction a fact. His opinion about the legislation's prospects is not material nonpublic information. Worth did not disclose any confidential client information.

One of the recommended compliance procedures for Standard II(A) Material Nonpublic Information is to restrict proprietary trading when in possession of material nonpublic information. Restricting client trades, however, could provide a signal to the market; the firm should continue to accept unsolicited transactions in the securities. There should be an information "firewall" to prevent material nonpublic information received by the investment banking department from being shared with the brokerage and research departments.

Although she wrote the screening program herself, she created it as an employee of Global and may not take it with her without written permission from Global. In the absence of a no-compete agreement to the contrary, soliciting former clients is not necessarily a violation of the Standards. Using the knowledge and experience gained at a former employer is not a violation of the Standards.

The opinion of another analyst is least likely to be an appropriate basis for a recommendation. Recommendations must have a reasonable and adequate basis, supported by appropriate research and investigation. Quantitative rankings of securities are acceptable but the member must disclose to clients the basic process used to rank the securities.

According to the guidance for Standard III(C) Suitability, an advisor who receives an unsolicited trade request that is unsuitable should discuss the trade with the client before carrying it out. If the trade would have a material effect on the client's portfolio, the advisor should discuss with the client whether the IPS needs to be updated (e.g., to reflect a change in the client's goals or risk tolerance). If the client does not modify the IPS but still insists on making the trade, the advisor may follow her firm's policies (e.g., the firm might allow the trade to be executed in a new, unmanaged account) but may need to evaluate whether to continue her advisory relationship with this client.

According to Standard III(A) Loyalty, Prudence, and Care, if the costs of voting certain proxies exceed the benefits, the member or candidate can establish a policy to not vote all proxies. The member or candidate is required to inform clients of the proxy voting policy. Jackson has met these requirements and has not violated any Standards.

Timing the release of a ratings downgrade for maximum price impact is an attempt to distort market pricing and violates Standard II(B) Market Manipulation. A limit buy order (an order to buy a stock placed below its current price) does not suggest market manipulation. The Standard prohibits members from disseminating false or misleading information, but not from disseminating factual information as long as the intent is not to distort market pricing or mislead market participants.

Standard I(D) Misconduct states that members shall not engage in any professional conduct involving dishonesty, fraud, deceit or misrepresentation or commit any act that reflects adversely on their honesty, trustworthiness, or professional competence. Personal bankruptcy or a disorderly conduct arrest does not necessarily reflect poorly on professional competence.

Sever's responsibility of loyalty, prudence, and care is to the beneficiaries of (and current participants in) the Polar pension fund.

GIPS are voluntary standards for performance presentation by investment management firms.