Quiz Chartered Financial Analyst Level 2

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of
studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey's
work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and
takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a
small stock he has tried repeatedly to convince the investment director to add to the monitored list. While
the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated
5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a
paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on
Koral. She has concluded that the stock is undervalued and consensus earnings estimates are
conservative. However, she has not filed a report for Samson, nor does she intend to. She said she has
purchased the stock for herself and advises her colleagues to do the same. After she gets back to the
office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to
supplement her income. The dinner crowd includes many analysts and brokers who work at nearby
businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house
discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker's star analyst
has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next
morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks
to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and
positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management clients.
Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons wanted to
reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon
after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers
Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate
supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the
Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey uses a
simple linear regression to estimate the relationship between GDP growth and Zenith's sales growth. Next
she uses a consensus GDP estimate from a well-known economic data reporting service and her
regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens
to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities.
Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the fixed-
income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I
work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online
placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is
a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial
instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester. As
both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
During the lunch conversation, which CFA Institute Standard of Professional Conduct was most likely


violated?

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market
volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the
quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-expenses-paid week of
golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance
officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While
Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the
president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record
of paying dividends for the past 46 quarters. The company plans to announce this information in about a
week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on


the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which
she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing
their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of
her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to
Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says his
company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a
40% premium over the market price. Clark contacts a friend and relates the information about Dex and
Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy
program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide
owns shares, by approximately 5% because the orders were large in relation to the average daily trading
volume of the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create
additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of
5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park
made for her last month, but Park knows from researching it that the trade received the best possible
execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it
would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata
portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary
beneficiary.
By accepting the trip from Quadrangle, has Harris complied with the CFA Institute Code and Standards?

Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the
world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis
specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included
in Gillis's portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support


Binaria's weakening currency. He is asking currency specialists from several of the largest foreign
exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location,
Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the
capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds
are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions
interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of
important trends in the emerging market currencies she follows. Gillis talks to local government officials and
reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with
Gillis's interpretation, form the basis of most of Gillis's weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed
reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip.
After hearing the finance minister's proposals in person, however, she decides that the reforms are poorly
timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her
return. Before issuing the recommendation, she liquidates the long position in her personal account but
does not take a short position.
Gillis's supervisor, Steve Howlett, CFA, has been reviewing Gillis's personal trading. Howlett has not seen
any details of the Binaria currency trade but has found two other instances in the past year where he
believes Gillis has violated Trent's written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors
spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when
the forward rates do not accurately reflect the interest differential between two countries, Trent places
trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the
exchange markets, its transactions costs are very low, and Trent is often able to take advantage of
mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients,
Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless
profits until the market pricing returns to equilibrium."
According to CFA Institute Standards of Professional Conduct, Gillis may accept the invitation to attend the
conference in Binaria without violating the Standards:

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of
studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey's
work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and
takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a
small stock he has tried repeatedly to convince the investment director to add to the monitored list. While
the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated
5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a
paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on
Koral. She has concluded that the stock is undervalued and consensus earnings estimates are
conservative. However, she has not filed a report for Samson, nor does she intend to. She said she has
purchased the stock for herself and advises her colleagues to do the same. After she gets back to the
office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to
supplement her income. The dinner crowd includes many analysts and brokers who work at nearby
businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house
discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker's star analyst
has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next
morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks
to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and
positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management clients.
Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons wanted to
reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon
after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers
Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate
supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the
Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey uses a
simple linear regression to estimate the relationship between GDP growth and Zenith's sales growth. Next
she uses a consensus GDP estimate from a well-known economic data reporting service and her
regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens
to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities.
Garvey takes notes that include the following three statements made by Bloomquist:


Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the fixed-
income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I
work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online
placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is
a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial
instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester. As
both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
Does Garvey's acceptance of the gifts from Koons and Jones violate Standard 1(B) Independence and
Objectivity?

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market
volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the
quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-expenses-paid week of
golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance
officer and, based on their approval, accepts the trip.
Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While
Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the


president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record
of paying dividends for the past 46 quarters. The company plans to announce this information in about a
week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on
the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which
she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing
their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of
her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to
Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says his
company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a
40% premium over the market price. Clark contacts a friend and relates the information about Dex and
Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy
program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide
owns shares, by approximately 5% because the orders were large in relation to the average daily trading
volume of the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create
additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of
5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park
made for her last month, but Park knows from researching it that the trade received the best possible
execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it
would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata
portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary
beneficiary.
Has either Harris or Clark violated Standard 11(A) Integrity of Capital Markets: Material Nonpublic
Information?

Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the
world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis
specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included
in Gillis's portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support
Binaria's weakening currency. He is asking currency specialists from several of the largest foreign
exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location,
Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the
capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds
are a principal export of Binaria), with an estimated market value of $500.


Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions
interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of
important trends in the emerging market currencies she follows. Gillis talks to local government officials and
reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with
Gillis's interpretation, form the basis of most of Gillis's weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed
reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip.
After hearing the finance minister's proposals in person, however, she decides that the reforms are poorly
timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her
return. Before issuing the recommendation, she liquidates the long position in her personal account but
does not take a short position.
Gillis's supervisor, Steve Howlett, CFA, has been reviewing Gillis's personal trading. Howlett has not seen
any details of the Binaria currency trade but has found two other instances in the past year where he
believes Gillis has violated Trent's written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors
spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when
the forward rates do not accurately reflect the interest differential between two countries, Trent places
trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the
exchange markets, its transactions costs are very low, and Trent is often able to take advantage of
mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients,
Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless
profits until the market pricing returns to equilibrium."
Given that Gillis's weekly reports to clients are market summaries rather than specific investment
recommendations, what are her record-keeping obligations according to CFA Institute Standards of
Professional Conduct? Gillis must:

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of
studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey's
work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and
takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a
small stock he has tried repeatedly to convince the investment director to add to the monitored list. While
the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated
5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a
paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on
Koral. She has concluded that the stock is undervalued and consensus earnings estimates are
conservative. However, she has not filed a report for Samson, nor does she intend to. She said she has
purchased the stock for herself and advises her colleagues to do the same. After she gets back to the
office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to
supplement her income. The dinner crowd includes many analysts and brokers who work at nearby
businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house
discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker's star analyst
has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next
morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks
to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and
positive attitude, and offers her two tickets to a Yankees game as a bonus.


The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management clients.
Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons wanted to
reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon
after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers
Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate
supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the
Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey uses a
simple linear regression to estimate the relationship between GDP growth and Zenith's sales growth. Next
she uses a consensus GDP estimate from a well-known economic data reporting service and her
regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens
to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities.
Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the fixed-
income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I
work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online
placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is
a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial
instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester. As
both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
Did Garvey violate Standard 11(A) Material Nonpublic Information when she purchased Vallo and Metrona?

Maria Harris is a CFA® Level 3 candidate and portfolio manager for Islandwide Hedge Fund. Harris is
commonly involved in complex trading strategies on behalf of Islandwide and maintains a significant
relationship with Quadrangle Brokers, which provides portfolio analysis tools to Harris. Recent market
volatility has led Islandwide to incur record-high trading volume and commissions with Quadrangle for the
quarter. In appreciation of Islandwide's business, Quadrangle offers Harris an all-expenses-paid week of
golf at Pebble Beach for her and her husband. Harris discloses the offer to her supervisor and compliance
officer and, based on their approval, accepts the trip.


Harris has lunch that day with C. K. Swamy, CFA, her old college roommate and future sister-in-law. While
Harris is sitting in the restaurant waiting for Swamy to arrive, Harris overhears a conversation between the
president and chief financial officer (CFO) of Progressive Industries. The president informs the CFO that
Progressive's board of directors has just approved dropping the company's cash dividend, despite its record
of paying dividends for the past 46 quarters. The company plans to announce this information in about a
week. Harris owns Progressive's common stock and immediately calls her broker to sell her shares in
anticipation of a price decline.
Swamy recently joined Dillon Associates, an investment advisory firm. Swamy plans to continue serving on
the board of directors of Landmark Enterprises, a private company owned by her brother-in-law, for which
she receives $2,000 annually. Swamy also serves as an unpaid advisor to the local symphony on investing
their large endowment and receives four season tickets to the symphony performances.
After lunch, Alice Adams, a client, offers Harris a 1 -week cruise as a reward for the great performance of
her account over the previous quarter. Bert Baker, also a client, has offered Harris two airplane tickets to
Hawaii if his account beats its benchmark by more than 2% over the following year.
Juliann Clark, a CFA candidate, is an analyst at Dillon Associates and a colleague of Swamy's. Clark
participates in a conference call for several analysts in which the chief executive officer at Dex says his
company's board of directors has just accepted a tender offer from Monolith Chemicals to buy Dex at a
40% premium over the market price. Clark contacts a friend and relates the information about Dex and
Monolith. The friend promptly contacts her broker and buys 2,000 shares of Dex's stock.
Ed Michaels, CFA, is director of trading at Quadrangle Brokers. Michaels has recently implemented a buy
program for a client. This buy program has driven up the price of a small-cap stock, in which Islandwide
owns shares, by approximately 5% because the orders were large in relation to the average daily trading
volume of the stock. Michaels' firm is about to bring shares of an OTC firm to market in an
IPO. Michaels has publicly announced that, as a market maker in the shares, his trading desk will create
additional liquidity in the stock over its first 90 days of trading by committing to minimum bids and offers of
5,000 shares and to a maximum spread of one-eighth.
Carl Park, CFA, is a retail broker with Quadrangle and has been allocated 5,000 shares of an
oversubscribed IPO. One of his clients has been complaining about the execution price of a trade Park
made for her last month, but Park knows from researching it that the trade received the best possible
execution. In order to calm the client down. Park increases her allocation of shares in the IPO above what it
would be if he allocated them to all suitable client accounts based on account size. He allocates a pro rata
portion of the remaining shares to a trust account held at his firm for which his brother-in-law is the primary
beneficiary.
According to the Standards of Practice, with respect to the two offers from Adams and Baker, Harris:

Martha Gillis, CFA, trades currencies for Trent, LLC. Trent is one of the largest investment firms in the
world, and its foreign currency department trades more currency on a daily basis than any other firm. Gillis
specializes in currencies of emerging nations.
Gillis received an invitation from the new Finance Minister of Binaria, one of the emerging nations included
in Gillis's portfolio. The minister has proposed a number of fiscal reforms that he hopes will help support
Binaria's weakening currency. He is asking currency specialists from several of the largest foreign
exchange banks to visit Binaria for a conference on the planned reforms. Because of its remote location,
Binaria will pay all travel expenses of the attendees, as well as lodging in government-owned facilities in the
capital city. As a further inducement, attendees will also receive small bags of uncut emeralds (as emeralds
are a principal export of Binaria), with an estimated market value of $500.
Gillis has approximately 25 clients that she deals with regularly, most of whom are large financial institutions


interested in trading currencies. One of the services Gillis provides to these clients is a weekly summary of
important trends in the emerging market currencies she follows. Gillis talks to local government officials and
reads research reports prepared by local analysts, which are paid for by Trent. These inputs, along with
Gillis's interpretation, form the basis of most of Gillis's weekly reports.
Gillis decided to attend the conference in Binaria. In anticipation of a favorable reception for the proposed
reforms, Gillis purchased a long Binaria currency position in her personal account before leaving on the trip.
After hearing the finance minister's proposals in person, however, she decides that the reforms are poorly
timed and likely to cause the currency to depreciate. She issues a negative recommendation upon her
return. Before issuing the recommendation, she liquidates the long position in her personal account but
does not take a short position.
Gillis's supervisor, Steve Howlett, CFA, has been reviewing Gillis's personal trading. Howlett has not seen
any details of the Binaria currency trade but has found two other instances in the past year where he
believes Gillis has violated Trent's written policies regarding trading in personal accounts.
One of the currency trading strategies employed by Trent is based on interest rate parity. Trent monitors
spot exchange rates, forward rates, and short-term government interest rates. On the rare occasions when
the forward rates do not accurately reflect the interest differential between two countries, Trent places
trades to take advantage of the riskless arbitrage opportunity. Because Trent is such a large player in the
exchange markets, its transactions costs are very low, and Trent is often able to take advantage of
mispricings that are too small for others to capitalize on. In describing these trading opportunities to clients,
Trent suggests that "clients willing to participate in this type of arbitrage strategy are guaranteed riskless
profits until the market pricing returns to equilibrium."
Regarding Gillis's transactions in the Binaria currency, the Standards have been violated by:

Glenda Garvey is interning at Samson Securities in the summer to earn money for her last semester of
studies for her MBA. She took the Level 3 CFA® exam in June but has not yet received her score. Garvey's
work involves preparing research reports on small companies.
Garvey is at lunch with a group of co-workers. She listens to their conversation about various stocks and
takes note of a comment from Tony Topel, a veteran analyst. Topel is talking about Vallo Engineering, a
small stock he has tried repeatedly to convince the investment director to add to the monitored list. While
the investment director does not like Vallo, Topel has faith in the company and has gradually accumulated
5,000 shares for his own account. Another analyst, Mary Kennedy, tells the group about Koral Koatings, a


paint and sealant manufacturer. Kennedy has spent most of the last week at the office doing research on
Koral. She has concluded that the stock is undervalued and consensus earnings estimates are
conservative. However, she has not filed a report for Samson, nor does she intend to. She said she has
purchased the stock for herself and advises her colleagues to do the same. After she gets back to the
office, Garvey purchases 25 shares of Vallo and 50 shares of Koral for herself.
Samson pays its interns very little, and Garvey works as a waitress at a diner in the financial district to
supplement her income. The dinner crowd includes many analysts and brokers who work at nearby
businesses. While waiting tables that night, Garvey hears two employees of a major brokerage house
discussing Metrona, a nanotechnology company. The restaurant patrons say that the broker's star analyst
has issued a report with a buy rating on Metrona that morning. The diners plans to buy the stock the next
morning. After Garvey finishes her shift, restaurant manager Mandy Jones, a longtime Samson client, asks
to speak with her. Jones commends Garvey for her hard work at the restaurant, praising her punctuality and
positive attitude, and offers her two tickets to a Yankees game as a bonus.
The next morning, Garvey buys 40 shares of Metrona for her own account at the market open. Soon
afterward, she receives a call from Harold Koons, one of Samson's largest money-management clients.
Koons says he got Garvey's name from Bertha Witt, who manages the Koons' account. Koons wanted to
reward the analyst who discovered Anvil Hammers, a machine-tool company whose stock soared soon
after it was added to his portfolio. Garvey prepared the original report on Anvil Hammers. Koons offers
Garvey two free round-trip tickets to the city of her choice. Garvey thanks Koons, then asks her immediate
supervisor, Karl May, about the gift from Koons but does not mention the gift from Jones. May approves the
Koons' gift.
After talking with May, Garvey starts a research project on Zenith Enterprises, a frozen-juice maker.
Garvey's gathers quarterly data on the company's sales and profits over the past two years. Garvey uses a
simple linear regression to estimate the relationship between GDP growth and Zenith's sales growth. Next
she uses a consensus GDP estimate from a well-known economic data reporting service and her
regression model to extrapolate growth rates for the next three years.
Later that afternoon, Garvey attends a company meeting on the ethics of money management. She listens
to a lecture in which John Bloomquist, a veteran portfolio manager, talks about his job responsibilities.
Garvey takes notes that include the following three statements made by Bloomquist:
Statement 1: I'm not a bond expert, and I've turned to a colleague for advice on how to manage the fixed-
income portion of client portfolios.
Statement 2: I strive not to favor either the remaindermen or the current-income beneficiaries, instead I
work to serve both of their interests.
Statement 3: All of my portfolios have target growth rates sufficient to keep ahead of inflation.
Garvey is not working at the diner that night, so she goes home to work on her biography for an online
placement service. In it she makes the following two statements:
Statement 1: I'm a CFA Level 3 candidate, and I expect to receive my charter this fall. The CFA program is
a grueling, 3-part, graduate-level course, and passage requires an expertise in a variety of financial
instruments as well as knowledge of the forces that drive our economy and financial markets.
Statement 1: I expect to graduate with my MBA from Braxton College at the end of the fall semester. As
both an MBA and a CFA, I'll be in high demand. Hire me now while you still have the chance.
In her estimation of Zenith's future growth rate, what standard did Garvey violate?