CFA Practice Question

CFA Practice Question

Gladstone Partners follow the manufacturing industry and are well known in the market for their analytical acumen. Several institutional clients rely on their reports for managing their portfolios. Gary Fontana is a senior analyst with Gladstone. While revising a report due immediately, he ran short of time and based on his past experience, revised the industry sales figure for the upcoming quarter by 2%. The manufacturing industry shows cyclicality during the year and drops by an average of 2% in the fall quarter before ramping up in the winter and summer. However, the 2% average drop masks the variability in year to year changes in the fall output. Over the past ten years, the fall change has fluctuated between -7% and +6%.
A. Gary has properly accounted for the expected change in fall output based on the past experience.
B. Gary has violated Standard V (A) - Diligence and Reasonable Basis, by not researching the upcoming quarter more than he did.
C. Gary has violated Standard I (C) and Standard V (A).
Explanation: Gary has violated Standard V (A) by not exercising due diligence and thoroughness before releasing his report. While reducing the fall sales by an average of 2% may be justifiable as a possible scenario, the wide fluctuation from year to year in the fall quarter indicates that a more precise estimate is needed. Economic conditions are always changing and even though the average change of 2% may be correct over the long term, it may not accurately represent the near-term change.

User Contributed Comments 4

User Comment
cjyoung316 Why hasn't Misrepresentation been violated?
Kathkun Misrepresentation is any untrue statement or omission of fact or any statement that is otherwise false and misleading.

This question concerns a sales forecast, not a report on facts. His forecast is justifiable, but not sufficiently diligent.
msoentoro But he said exact number of 2% to revise the industry sales figure, isn't it he is not suppose to mention any exact number to the client, especially when he has not do reasonable diligence? thus, he violate 1(c)
mikus @Kathkun - good reasoning!
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