CFA Practice Question

CFA Practice Question

Geoffrey Myers manages several individual client portfolios. One of his less risky accounts has several municipal bonds. Geoffrey feels that the stock market is in a bubble formation near the top and decides to write index calls for the portfolio. He explains his decision to the client stating that this strategy will produce income with little or no risk.
A. Geoffrey has violated Standard III (C) - Suitability.
B. Geoffrey has violated Standard III (A) - Loyalty, Prudence, and Care.
C. Geoffrey has not violated any standard as he has explained the rationale and risks of the strategy to the client.
Explanation: While writing calls can bring in income, it also imposes a huge risk on the writer. The stock market can continue to rise for a while with no upper limit, imposing steep losses on the client. The fact that the client is invested in municipal bonds indicates that (s)he is in a high tax bracket and probably does not need current income. The fact that the account is low risk indicates that the client has low risk tolerance, perhaps because of age. The short-call strategy is not appropriate for the client, resulting in a violation of the standard on appropriateness and suitability. Geoffrey has not explained all the risks of this strategy to the client either.

User Contributed Comments 5

User Comment
armanaziz Why not B?
iambroke i guess in his head he feels hes being prudent....
dipu617 How can I look inside his head..!!! ;-)
santibanez What if he was right and the asset loses 30%?
santibanez He would secure the premium for the client at least
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