CFA Practice Question

CFA Practice Question

Tomonaga Olawando is a research analyst currently doing research on Cleebok Shoes, a footwear manufacturer infamous for its exorbitantly priced shoes. Tomonaga has been interviewing Pollyanna Givens, a senior vice president with the public relations division. Pollyanna has told him that the investment community has underestimated the payoffs from Cleebok's plan to outsource shoe production to Mexico, thus cutting production costs significantly. She told him her estimate puts the cost savings close to $600 million, rather than the figure of $370 million quoted by a few active analysts. In his report, Tomonaga states that the extra savings of $230 million a year will raise the stock price by 26% over the next year and hence, Cleebok represents a great buy.

Tomonaga has ______

I. not violated any code of ethics.
II. violated Standard V (A) - Diligence and Reasonable Basis.
III. violated Standard V (B) - Communication with Clients and Prospective Clients.
IV. violated Standard III (C) - Suitability.
A. III only
B. II and III only
C. II, III and IV only
Explanation: By representing an opinion as a fact in his research report, Tomonaga has violated Standards V (A) - Diligence and Reasonable Basis and V (B) - Communication with Clients and Prospective Clients.

User Contributed Comments 16

User Comment
KD101 It is management's opinion and not the fact
eddeb Communication with clients has been violated?
armanaziz distinction between fact and opinion is a part of proper "Communication with Clients"
dimanyc this is just retarted. if analysts could not rely on the opinions that come from the management of the company, but solely rely on the facts (due to materiality of which they btw can't trade on), there won't be such thing is research reports. most of the reports are based on somebody's opinion and estimates...
solnce Relying on a senior VP's opinion is not diligent? Really? If you cannot rely on such opinions, there is no need to talk to corporate people at all.
gerry solnce: it's not a diligent process that the analyst just used what the VP said as her conclusion. She needed at least to analyze if what the VP said could be reasoable and other impact as well.
bikegeek ya'll seem to be overlooking a key part of that VP when you say we should listen to her. Namely she is a VP of PUBLIC RELATIONS! If you take what she says as fact, you might as well just take any of the marketing brochures as fact and put a buy on the company.
Had the person been in Finance, accounting or anything along those lines, their opinion would be more credible, but still follow what gerry said and do further analysis since an employee of a company will have a biased view point.
steved333 Well done, bikegeek. I overlooked this point, as well. Though I got the answer right, it is a very important distinction that could save my ass in a future exam question. Thanks!
Xocrevilo Note that answers II and III are from the same Standard, so we should watch out for them appearing together again. I disagree with Bikegeek's point about the fact that is a VP of PR being a key point. Even if the question had stated her as being a VP of Accounting or whatever, then I still think the answer would have been the same.
vikram59 I agree with Xocrevilo. The fact that she is the VP of PR has nothing to do with it. It has to do with the fact that she never said that the chip was great etc. She just implied certain things and that cannot be used to make recommendations!
jackwez sometimes I wonder if you are ever allowed to tell anyone to buy a stock...
shiva5555 Come on people. Management has a HUGE incentive to lie to analysts.
MaresaJaden Isn't she the VP of public relations at Cleebok? Definitely not a reliable source...
Insipidity Good point there bikegeek!
jjhigdon I agree with MaresaJaden. It might be ok to rely on such an opinion coming from a VP in Finance or product development, but this states its a public relations VP, presumably lacking the expertise to make such a percise prediction about the economic benefit of the new product and also likely with a more bias or inclination to overstate said benefits.
harrybay Did Jeffrey Skilling, Michael Pearson, Bernie Madoff and Bernard Ebbers always tell the truth?
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