CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Michelle tells a prospective client, "I may not have a long-term track record yet, but I'm sure that you'll be very pleased with my recommendations and service. In the three years that I've been in the business, my equity-oriented clients have averaged a total return of more than 26 percent a year." The statement is true, but Michelle only has a few clients and one of her clients took a large position in a penny stock (against Michelle's advice) and realized a huge gain. This large return caused the average of all of Michelle's clients to exceed 26 percent a year. Without this one investment, the average gain would have been 8% a year.

Has Michelle violated the Standards?
A. Yes, because she did not consider the client's investment preferences when stating her performance.
B. Yes, because her statements do not fairly and accurately reflect her track record.
C. No, because the 26% return is in fact a true record of Michelle's performance.
Explanation: Standard I (C) - Misrepresentation. Although Michelle's statement regarding the total return of her client's accounts on average may be technically true, it is misleading because the majority of the gain resulted from one client's large position, taken against Michelle's advice. She has not taken steps to present a fair, accurate, and complete presentation of performance. Even though she is not guaranteeing future results, her words are still a misrepresentation of performance. Not disclosing the risk preferences of clients does not make a statement misleading and is not a violation of the Standards in this context.

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