CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Benny Len is an analyst at a large brokerage house. Benny has recently done a study analyzing two years of historical information on the returns of stocks with high P/E ratios. Benny concludes that these high P/E stocks generate low returns and reports that these stocks should be sold from all client portfolios. According to CFA Institute's Standards of Professional Conduct, which Standard of Professional Conduct has been violated?
A. Standard III (B) Loyalty, Prudence and Care
B. Standard I (B) Independence and Objectivity
C. Standard V (A) Diligence and Reasonable Basis
Explanation: Standard V(A) Diligence and Reasonable Basis has been violated since Benny's conclusion is not supported by sufficient historical data. It should have been based on a more detailed historical review. Two years is NOT sufficient time to be able to generate such an opinion.

User Contributed Comments 8

User Comment
mbuechs2 Even if the horizon was longer and the conclusion was correct: lower return might also mean lower risk.
captaz low returns may be appropriate for some clients. Issuing a blanket 'sell' statement just because stocks generate low returns in unreasonable.
surob Agreed with captaz. Good point. Know the needs of your clients. Suitability is important.
ThePessimist To captaz's point, the example also violates III(C): Suitability.
peteypete Some people have to just read the question and answer. Don't go into extra bits, if there was suppossed to be more info there would be more info. go with what you got and don't "What if?"
manstey Suitability was for sure violated here!!
SuperKnight Does anyone know how many years he should have looked at, in order NOT to violate this standard?
Gooner7 I agree with all of you that suitability was violated! My guess is on the actual exam, if this question was asked, CFA would not have both answers included in the choices.
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