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How did you score in the CFA test?

The_right_answerFunds Europe recently invited readers to have a go at three sample questions that reflect the kind of effort necessary to pass the first stage of the professional CFA examination and, as promised, here are the answers.

The CFA Institute is a professional awards-giving body and recently announced the pass rate for its latest round of exams.

Candidates have to complete three levels to earn the CFA qualification. Just over half of the most recent candidates for Level III passed.

The below questions are taken from Level 1 sample questions and in the most recent sitting for this exam, 43% of candidates out of 79,507 passed. 

Questions & answers, with answers highlighted in bold

Question: Colin Gifford, CFA, is finalizing a monthly newsletter to his clients, who are primarily individual investors. Many of the clients’ accounts hold the common stock of Capricorn Technologies. In the newsletter, Gifford writes, “Based on the next six month's earnings of $1.50 per share and a 10% increase in the dividend, the price of Capricorn's stock will be $22 per share by the end of the year.”

Regarding his stock analysis, the least appropriate action Gifford should take to avoid violating any CFA Institute Standards of Professional Conduct would be to:
     •  separate fact from opinion
     •  include earnings estimates
     •  identify limitations of the analysis

Explanation: Although pro forma analysis may be standard industry practice, it is not required by the Standards of Professional Conduct. Earnings estimates are opinions and must be clearly identified as such. It is also important for investors to be able to identify limitations of analysis when making investment decisions.

Question: If the distribution of the population from which samples of size n are drawn is positively skewed and given that the sample size, n, is large, the sampling distribution of the sample means is most likely to have a:
     •  mean smaller than the mean of the entire population
     •  variance equal to that of the entire population
     •  distribution that is approximately normal 

Explanation: Given a population that has a finite variance and a large sample size, the central limit theorem establishes that the sampling distribution of sample means will be approximately normal, will have a mean equal to the population mean, and will have a variance equal to the population variance divided by the sample size.

Question: Eileen Fisher, CFA, has been a supervisory analyst at SL Advisers for the past 10 years. Recently, one of her analysts was found to be in violation of the CFA Institute Standards of Professional Conduct. Fisher has placed limits on the analyst's activities and is now monitoring all of his investment activities.

Although SL did not have any compliance procedures up to this point, to avoid future violations, Fisher has put in place procedures exceeding industry standards.

Did Fisher most likely violate any CFA Institute Standards of Professional Conduct?
     •   No, because she has taken steps to ensure the violations will not be repeated by the analyst
     •   Yes 
     •   No, because she is taking steps to implement compliance procedures that are more than adequate

Explanation: Under Standard IV(C)–Responsibility of Supervisors, a member should exercise reasonable supervision by establishing and implementing compliance procedures in place prior to the possibility of any violation occurring, which has not been done in this case.

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