Free CFA Level I Ethical and Professional Standards Practice Questions
Ethical and professional standards is the highest-weighted single topic on the CFA Level I exam at 15-20% (CFA Institute). Questions test the Code of Ethics, Standards of Professional Conduct, and the Global Investment Performance Standards (GIPS).
A fundamental reason why trust is essential in the investment management profession is that:
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Correct Answer: C
Solution
C is correct.
Trust is essential because clients typically cannot evaluate the quality of investment advice they receive due to information asymmetry — they lack the expertise and information the professional possesses. This creates a fiduciary relationship where the professional must act in the client's best interest.
Question 2
Medium
Under GIPS, a 'carve-out' is best defined as:
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Correct Answer: B
Solution
B is correct.
A carve-out under GIPS is a segment of a larger multi-asset portfolio that is separated and presented as a single-asset strategy composite. For example, the equity portion of a balanced fund could be carved out and presented as part of an equity composite. GIPS requires that carve-outs have their own cash allocation and be separately managed with dedicated cash to be included in composites.
Question 3
Hard
Under GIPS, which of the following statements about verification is most accurate?
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Correct Answer: B
Solution
B is correct.
GIPS verification is a quality control process performed at the firm level by an independent third party.
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