CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Saunders, a mining analyst for Hokassen Investments, has completed his analysis of Okun Drilling & Mining for a wealthy client of Hokassen. He has concluded that, based on core samples and geological surveys of land owned or leased by Okun, the company has in excess of one million ounces of gold available to mine. Saunders drafts a research report stating the following: "Based on the fact that the company has one million ounces of gold to be mined, I recommend purchasing Okun stock for your portfolio." If Saunders presents his report to the wealthy client, he will have ______.
A. violated Standard V (A) Diligence and Reasonable Basis because he did not have a reasonable and adequate basis for his recommendation
B. violated Standard 3 (C) Suitability because he did not indicate the basic characteristics of the investment
C. complied with CFA Institute's Standards of Professional Conduct

User Contributed Comments 21

User Comment
szyrmer because the words "based on the fact that" are used.
Done Thanks szyrmer!
mtcfa I disagree w/ Zimmer. The real reason is that he is utilizing a sample and a survey, which is not adequate to make his claim. I agree that he should not use "based on the fact" as it is misleading, but the onus of the question is that the analyst did not base his estimates on anything more than core samples and surveys.
Misah Mining analyst made a sugestion based on samples and surveys. Why he did not have an adequate basis for his recomendation?
Doug The "based on fact" part is wrong, because it is not a proven fact that there is a million, although it is possible that there is a million. Additionally, the ANALYST concluded there was a million based on the samples. It did not say the chief mining expert concluded there was a million based on the samples.
captaz I think the problem is that he's basing his recommendation only on the amount of gold--ignoring quality of managment, industry outlook, current stock price, etc. The amount of gold is only one input in a diligent and reasonable recommendation.
anricus28 The problem is that he has not distinguished between fact and opinion.
superjam communication of difference between fact an opinion is V(b): Communication, not V(a): D&RB. i expect its because the question implies he did not make appropriate considerations of industry, outlook etc
jainrajeshv I am agree with Captaz, you can not give buy recommendation only on the basis of quantity of the stock, other factors as also required to analyse.
ElCarnal I picked C, thinking they meant that he made the recommandation based on his research and presented it as a fact.
sheenalim I agree with Captaz that you need other inputs to make a recommendation, and also think that he cannot call it a 'fact' because nobody will know for 100% sure whether there is 1 million ounces of gold.
danrow Could it be because he did not differentiate between fact and opinion?
rm001 it would be a fact only after the gold has been then the analyst's report would be pointless
peteypete its simple. how does the analyst know there is 1 million tonnes of gold from a sample. what if that sample contained 50% gold but the rest would of contained only 5%.
CFunder this question has been pulled from page 86 of the CFAI text, example 2 - V(B) separating opinion from fact. Based on the information in the question, none of the answers really fit the fact pattern.
bundy Its the word "fact" that tips you off. If he had said estimated he would be fine
djread I did not realize that differentiation between fact and opinon fell under dilligence and reasonable basis...I thought it fell under communication with client's so I took this to be a trick question and went with C
Shaan23 Like DJREAD just said Fact vs opinion has nothing to do with diligence and reasonable basis but has to do with communication with clients.

He does not have reasonable and adequate basis. If you went to 10 basketball games and they were all sold out would that be enough to tell your client to purchase stock in the team? NO. You could not base it on that alone. You would check other stuff that I dont know about yet because I'm only on section I of the CFA
ascruggs92 Yeah, lots of things wrong with that statement. 1M ounces of gold is an estimate, not a fact, since it is impossible for even the owners of the mine to know how much they have in reserves. Even if it were a fact, there's no mention of whether it is profitable to extract and sell those 1M ounces at current prices. Furthermore, he mentions nothing about current operations and management. It would be like making an investment in APPL because they have a net cash position of $150B, but making no other mention of the quality of the business
AyoyinkaJ Why is the answer not B? Did Saunders actually indicate the basic characteristics of the investment?
JNW1980 It seems to me the "based on the fact" bit would violate Communications with clients (difference between fact and opinion) but not reasonable basis. If he is looking at core samples then he is probably in the weeds with his research.
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