June 2014 CFA Level II Mock Examination
Afternoon Session
(Note: This session has 11 cases, given 198 minutes, while the actual exam has 10 cases, given 180 minutes)
Study Session 1, 2 – Ethical and Professional Standards (1-12)  Q=12
Better Investments, founded by Ardy Sobhani, CFA, five years ago, is an investment adviser serving mostly middle-income clients along with several high-net worth clients. Sobhani initially worked alone, but bcause of rapid growth, Better has expanded to 20 employees today. Better continues to add new clients and recently hired a junior analyst, Shigeru Miyagawa.
session下载Miyagawa is registered for Level I of the CFA exams. He recently learned that Sobhani has been an instructor with a CFA exam prep program for many years so he asks Sobhani if he can provide any tips on the exam. Sobhani responds, "Our prep course providers looked at the curriculum readings and based on this analysis we do not think you should worry about exotic over-the-counter (OTC) derivatives being tested. Instead focus on the core body of knowledge. CFA Institute has a heavier weighting on equ
ities and fixed-income analysis, and I am sure the exam will always have a similar emphasis." Miyagawa replies, "when I took the practice exam it seemed to have more weight on alternative investments."
Joli Poundston, a longtime client of Better, is in her late 60's and in poor health. She plans to retire in two years and insisted that Sobhani sell all of her stock holdings during a market low point last year. Poundston then insisted Sobhani invest her assets only in bonds and cash to preserve her capital and reduce her risk exposure. After watching the stock market increase recently, Poundston calls Sobhani to request some equity exposure in her portfolio. Sobhani drafts a note to Poundston telling her "there is no better time to invest in the stock market than right now. With stocks approaching all-time highs it is foolish not to own stocks and miss out on an opportunity to reap the rewards of a growing market. I recommend that you invest at least 60% of your assets in stocks to take advantage of what is, in my opinion, a rising market environment for the next couple of years."
The next day Sobhani is surprised to see a securities industry regulator appear at his office. The regulator indicates a complaint has been received about Better and asks to see all client investment records so an initial assessment of the issue can be made. Sobhani makes available those client files kept on site covering the past seven years, as required by local legal statutes. For files older than seve
n years, he refers the regulator to the clients' brokers. Sobhani asks Miyagawa to respond to any other requests from the regulator and to make careful notes on any comments or
recommendations the regulator has concerning compliance issues. The firm's compliance policies and procedures were finalized at the firm's inception and Sobhani plans to use what he learns from this visit to reflect in these documents any regulatory changes over the past five years.
In a meeting with Spencer Purce, a prospective client who recently sold his business for over $100 million, Sobhani learns Purce plans to quit working. Purce asks for ideas on how to invest his sale proceeds to build wealth within a trust structure, so that he can pass capital on to his twin sons, who are 19 year-old students. Sobhani tells Purce: "Considering your objectives specifically, I looked at infrastructure projects in developing countries for clients interested in diversifying their portfolios with long-duration projects, consistent cash flow, high operating margins, and a positive correlation to inflation. These types of investments require large up front cash injections, patience and the ability to accept a long cash out period. But, there are several benefits to this type of investment that I think are important for you, including diversification, exposure to rapidly growing economies, and returns, which are currently in the 8-12% range, based on my review of similar investments."
Sobhani advises two clients to diversify their portfolios into real estate. He refers them to a licensed attorney who specializes in real estate investments. Sobhani is paid a referral fee by the attorney, which he fully discloses once a client makes an investment. The attorney offered both clients the opportunity to invest in a loan secured by mortgages on three commercial warehouses. One of the clients buys into the lucrative deal, but Sobhani recommends the other client defer his investment because of liquidity constraints. But, when the liquidity issues are finally resolved, the investment is no longer available.
Reviewing the firm's bank account, Sobhani notices several unauthorized credit card payments for thousands of dollars. Janis Wilder, Sobhani's personal assistant, confesses to obtaining a credit card in Sobhani 's name and using this card to fund her personal travels. Local law requires investment advisors to inform their regulators of any employee theft. But, because Wilder is Sobhani's cousin, he verbally reprimands her; "From now on I will hold the checkbook and if you ever do something like this again I will report you to the regulators."
Question 1
When discussing the CFA examination, did either Sobhani or Miyagawa violate Standard VII–Responsibilities as a CFA Institute Member or CFA Candidate?
A.No.
B.Yes, both Sobhani and Miyagawa violated the Standard.
C.Yes, Sobhani violated the Standard.
Question2
Which of Sobhani's statements to Poundston least likely violates the CFA Institute Standards of Professional Conduct? His statement regarding:
A.the market forecast.
B.investment timing.
C.asset allocation.
Question3
With regard to his actions related to the regulatory visit, Sobhani most likely violated the CFA Institute Standards of Professional Conduct concerning which of the following?
A.Compliance policies and procedures.
B.Client record storage.
C.Junior analyst regulatory interaction.
Question4
Sobhani's advice to Purce with regards to a potential investment is most consistent with the CFA Institute Standards of Professional Conduct concerning which of the following?
A.Performance Presentation
B.Diligence and Reasonable Basis
C.Suitability
Question5
Concerning his advice related to real estate investments, did Sobhani most likely violate the CFA Institute Standards of Professional Conduct?
A.Yes, with regard to Fair Dealing.
B.Yes, with regard to Referral Fees.
C.No.
Question6
With regard to his actions related to Wilder, Sobhani least likely violated the CFA Institute Standards of Professional Conduct concerning which of the following?
A.Knowledge of the Law
B.Conflicts of Interest
C.Misconduct
Study Session 1, 2 – Ethical and Professional Standards
The Omega Fund is managed by Trendwise, an investment firm advising individual clients, as well as, offering a variety of mutual funds. Omega has a large equity position in Cyclical Industries. At a recent
Omega investment committee meeting, the fund’s portfolio manager, Ileana Natali, CFA, stated that after conducting thorough research and analysis, she was firmly convinced the fund should sell its Cyclical shares. An Omega director advised Natali, “Don’t sell Cyclical. It’s a great stock, isn’t it Mr. Libra?” Glenn Libra, a director for both Omega and Cyclical, looked at the director, but did not respond. Hearing the director’s comment, Natali decided not to sell Cyclical as planned. In the following weeks the stock price rose dramatically.
One month later, Libra phoned Natali, requesting she vote Omega’s shares to re-elect him to the Cyclical board of directors. Natali then sent Libra an email saying, “I voted Omega’s shares for you, a step I feel is in the best interest of our fundholders.” Natali continued, “Please be aware we recently conducted a cost-benefit analysis and determined it is not worthwhile to vote all proxies. We are sending all clients a copy of our new proxy-voting policies which will explain, we may not
vote all proxies in the future.” Libra replied, “V oting proxies is an integral part of the management of investments. A fiduciary who fails to vote proxies may violate CFA Standards.” In response, Natali agreed to consult counsel and the CFA handbook regarding the new policies.
Natali’s supervisor at Trendwise asks her to evaluate a proposal from Brock Securities Brokerage. Bro
ck recently proposed a soft dollar arrangement with Trendwise. Trendwise claims compliance with the CFA Institute Soft Dollar Standards. In her evaluation, Natali noted Brock proposes a higher commission rate, an average of 4% versus the current 2–3% range Trendwise pays its current brokerage firm. In addition, Natali indicated Brock could possibly provide better trade execution than Trendwise’s present broker. Natali proposed to use Brock on a trial basis only for Omega transactions.
In a memorandum to Trendwise’s compliance officer, Natali states:  "I believe the proposed brokerage arrangement from Brock satisfies the two fundamental principles in the CFA Institute Soft Dollar Standards Trendwise must use in evaluating soft dollar arrangements:
Principle 1: All client commissions paid to a broker are the property of the client.
Principle 2: Trendwise must seek to obtain best execution, minimize transaction costs, and client brokerage should be used solely for research."
The following week Natali’s supervisor sent her a memo asking if the following firm policies needed any revisions to comply with the CFA Institute Research Objectivity Standards:
Policy 1. Base compensation for analysts is determined from the quality of research performed. Year-e
nd bonuses may be adjusted based on an analyst’s collaboration with investment banking and corporate finance teams.
Policy 2. In their relationships with corporate issuers, analysts are prohibited from either directly or indirectly promising favorable reports or threatening negative reports. Price targets may be agreed on with the issuers as long as all proper disclosure requirements are included in the report. Policy 3. In their relationships with corporate issuers, analysts are prohibited from sharing with or communicating to a subject company, prior to publication, any section of a research report. Additionally, the compliance or legal department must receive a draft research report before sections are shared with the subject company.
Policy 4. Ensure that covered employees do not share information about the subject company or security with any person who could have the ability to trade in advance of or otherwise disadvantage the firm’s clients.
Question7
With respect to her trade actions concerning Libra and Cyclical Industries, Natali least likely violated the CFA Institute Standards of Professional Conduct concerning:
A.Diligence and Reasonable Basis.
B.Loyalty, Prudence and Care.
C.Material Nonpublic Information.
Question 8
In their discussion of the Omega Fund's new proxy voting policy, whose statements are likely to be consistent with the CFA Institute Standards?
A.Natali's only.
B.Both Libra's and Natali's.
C.Libra's only.
Question 9
With regard to Brock's commission proposal, Trendwise should least likely take which of the following actions to prevent violations of Standard III(A) Loyalty, Prudence, and Care?
A.Seek the best execution for trades.
B.Ensure commissions paid are reasonable in relation to services provided.
C.Disclose soft dollar amounts paid.
Question 10
In her statement about evaluating soft–dollar arrangements, Natali is most likely correct with respect to:
A.Both Principles 1 and 2.
B.Principle 2.
C.Principle 1.
Question 11
Natali's best response to her supervisor's question regarding the firm's research objectivity Policies
1 and
2 would be which of the following?
A.Both Policies are consistent with the Research Objectivity Standards.
B.Policy 1 is inconsistent, while Policy 2 is consistent with the Research Objectivity Standards.
C.Both Policies are inconsistent with the Research Objectivity Standards.
Question 12
Natali's best response to her supervisor's question regarding the firm's research objectivity Policies
3 and
4 would be which of the following?
A.Both Policies 3 and 4 will need to be changed, as they are inconsistent with the Research
Objectivity Standards.
B.Policy 3 requires changes, but Policy 4 is consistent with the Research Objectivity Standards,
so it can remain unchanged.
C.Both Policies 3 and 4 should remain unchanged, as they are consistent with the Research
Objectivity Standards.
Study Session 16 17 –Derivative Investment (13-24)  Q=12
Mock Exam - PM
Erica Huang is a derivatives trading adviser for Eastern Funds Company and has expertise in forward and futures markets and contracts. She helps Eastern’s portfolio managers evaluate forward and futures contracts and make appropriate decisions when the use of these derivatives is required.
When working with the portfolio managers, who have varying levels of derivatives knowledge, Huang is asked for input on issues of both an analytical and a conceptual nature. Three managers have approached her with the requests and questions presented after the exhibit. Some of her

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