2019 Level Ill Mock Exam PM The afternoon session of the 2019 Level Il Chartered Financial Analyst” Mock Examination has 60 questions. To best simulate the exam day experience, candidates are advised to allocate an average of 18 minutes per item set (vignette and 6 multiple choice questions) for a total of 180 minutes (3 hours) for this session of the exam. Questions Topic ‘Minutes 16 [Ethical and Professional Standards 18 712 Behavioral Finance 18 1318 Private Wealth 18 19.04 Economies 18 25-30 Asset Allocation 18 31-36, Fixed Income 18 37-42 Fixed Income as 43-48 Equity 18 49-54 erative Investments 18 lobal investment Performance Standards 18 Total: 180 By accessing this mock exam, you agree tothe fellowing teri of use: This mock exam is provided to ‘currently registered CEA candidates. Candidates may view ané print the exam for personal exam prepara- ion only. The falling activities are sell prohibited and may result i disciplinary andor legal action sccesing or permitting accessby anyone othe than corenly-registred CEA candidates; copying, posting to-any website emaling,dstsbuting and/or reprinting the mock exam fr any purpone (© 2018 CFA Inte Alrights reserved2019 Level Il Mock Exam PM. 2019 LEVEL Ill MOCK EXAM PM Athena Investment Services Case Scenario Caitlyn Wilson, CFA, recently started her own asset management company, Athena Investment Services. The board of directors of Athena adopted both the CFA Institute Code of Ethics and Standards of Practice (Code and Standards) and the CFA Institute Asset Manager Code of Professional Conduct (Asset Manager Code) to institution- alize ethical behavior within the firm. The board also implemented half-yearly staff performance reviews, including an assessment of each manager’s ability to ensure their department's compliance with the both the Code and Standards and the Asset ‘Manager Code. Six months into the first financial year, Wilson meets with all of the managers to assess each department's compliance. Wilson asks the compliance officer, Mark Zefferman, CFA, to make an opening statement to set the right tone for the meeting. Zefferman states, ‘Ata minimum, we are responsible for implementing procedures address- ing the general principles embedded in the six components of the Asset Manager Code. As stated below, we must: Statement 1 Act with skill, competence, and diligence while exhib- iting independence and objectivity when giving invest. ment advice, Statement 2. Put our clients’ interests above the firm's when appro. priate and act in a professional and ethical manner at all times, and Statement 3. Communicate with our clients in a timely and non: isleading manner and obey al rules governing capital markets?” Zefferman adds, “With regard to the last statement, please be aware that we must imple- ‘ment the new anti-money: laundering regulations introduced by our local regulator, effective the first quarter of next year: I have analyzed the new regulations and have found that all of the local requirements are part of regulations recently introduced in Europe, where only a few of our clients reside. When we start taking on new clients based in Singapore in the second half of next year, we will also need to follow that country’s anti- ‘money-laundering regulations, The local anti-money-laundering legislation appears to be embedded in the Singapore regulations as well Wilson continues, "I would like each of you to explain how the implementation ofthe Asset Manager Code within your department is being supervised. Let us start, with Shenal Mehta, our client service manager” Mehta states, "With respect to the Asset Manager Code relating to client services, we have ensured that we enforce the following policies: All disclosures and complete, and our calculations are shown, no matter how complicated, We also ensure that the client sees some sort of communication from us when they request it and that the marketing material sent to clients is checked by the compliance department for accuracy and completeness” accurate2019 Level Il Mock Exam PM. Anders Peterson, CFA, chief investment officer, states, “In addition to what Mehta has said, I have the following comments: Comment 1 On occasion, we are able to acquire securities we expect will be particularly strong performers, such as over- subscribed initial public offerings. In order to ensure that all clients are treated fairly, each client portfolio is given the same number of shares. Comment 2 Any communication with clients is kept confidential and is only accessible by authorized personnel. Comment 3 A giftand entertainment policy is in place to help ensure ‘our managers and analysts keep their independence and objectivity” Richard Gilchrist, head of portfolio administration, then adds, “Our portfolio policies call for all assets to be valued at fair market prices using third-party pricing services, When a security price is not available from the service, a committee whose members have experience in valuing illiquid assets uses the hierarchy dictated by Global Investment Performance Standards (GIPS) to determine values: Wilson concludes the meeting by mentioning that Athena must do even more to censure its clients continue to have faith in Athena's ability to protect and grow their assets, She recommends they disclose their risk management practices, which iden- tify, measure, and manage the various risk aspects of the business to clients and the regulator, She adds, “In addition, we need to create a business continuity plan covering data backup and recovery, alternate trading systems if the primary system fails, and methods to communicate to employees, critical vendors, and suppliers in case of an ‘emergency that could disrupt normal business functions 1 Which of Zefferman’s opening statements is inconsistent with the Asset ‘Manager Code of Professional Conduct? A Statement 1 B- Statement 3 © Statement 2 or inne Cis correct. Zefferman states that the firm Is responsible for putting clients’ interests ‘above the firm's when appropriate. The Genera Principles of Conduct embedded in the six components of the Asset Manager Code state that managers have the responsibility ‘of acting for the benefit of clients. The code does not stipulate that ths responsibilty is applicable only when appropriate. ‘Ais incorrect because the principles reflected in the statement are correct. Bis incorrect because the principles reflected inthe statement are correct, ‘Asset Manager Code of Professional Conduct Los ‘General Principles of Conduct 2 Which of the following anti-money-laundering laws must Athena currently comply with to be consistent with the CFA Institute Standards of Professional onduct? A Local B Singaporean2019 Level Il Mock Exam PM. © European ATi Cis correct. Zefferman, as 2 CFA charterholde, will be responsible for ensuring that ‘Athena complies withthe stricter anti-money-laundering laws of Europe, where some of Its clients reside, as per Standard I(A)-Knowledge of the Law. Europe's new laws, which ‘encompass and exceed the local anti-money-laundering regulations, are already in place; therefore, these are the regulations that must be currently followed, Aisincorrect because Zefferman will be responsible for implementing the more strict laws of Europe that are currently in place, Bis incorrect because Zefferman will be responsible for implementing the more stict laws of Europe that are currently in place. Guidance for Stand Losb Standard HA)-Knowledge ofthe Law Which of Mehta's client service policies is consistent with the Asset Manager Code of Professional Conduct? A ‘Types of disclosures B_ Communication timing © Marketing material reviews A Cis correct Section D, Risk Management, Compliance, and Support, of the Asset Manager Code states that portfolio information provided to clients should be reviewed by an Independent third party, The compliance department would be considered an inde- pendent thied party because compliance is not involved with compiling or presenting the information to clients. According to Section F, Disclosures, disclosures should be truthful accurate, complete, and understandable. Its unlikely that clients would easily understand complicated calculations. Section F Disclosures, aso call for communications ith clients to be on an ongoing and timely bass. Communication with clients only when ‘they ask for it would not be consistent with the Asset Manager Code. Its recommended. that communication be at least on a quarterly basis. Ais incorrect because according to Section F, Disclosures, disclosures should be truthful accurate, complete, and understandable. Its unlikely that cents would easily understand complicated calculations Bis incorrect because Section F Disclosures, calls for communications with clients tobe fon an ongoing and timely basis. Annual communication would not be considered timely. [Asset Manager Code of Professional Conduct Lose Section A, Loyalty to Clients: Section Disk Management, Compliance, and Suppert Section F, Disclosures Which of Peterson's comments is inconsistent with the Asset Manager Code of. Professional Conduct? A Comment I B_ Comment 3 © Comment 22019 Level Il Mock Exam PM. orn Als correct. Section 86}, Investment Process and Actions, requires clients to be treated ‘equitably, not equally, Clients have different investment objectives and risk tolerances, so treating clients equally would be inconsistent with the Asset Manager Code. Bis incorcect because the policy is consistent with the Asset Manager Code. Cis incorrect because the policy is consistent with the Asset Manager Code. ‘asset Manager Code of Professional Conduct Lose Section A Loyalty to Clients: Section B Investment Process and Actions 5 Are Gilchrist’s comments regarding portfolio valuation consistent with the Asset Manager Code of Professional Conduct? A Yes. B_ No, with regard to third-party pricing services. © No, with regard to the process used to price illiquid securities pr inne Als correct. Section E, Performance and Valuation, of the Asset Manager Code calls for the use of fair market values sourced by thied parties when available, and when such third-party prices are not available, the code calls for the use of “good fath” methods to determine fair value. Athena’s policy appears consistent with this requirement. In terms of client reporting, monthly valuation reports would be consistent with the cal for timely reporting Bis incorrect because Gilchrst’s valuation methodology using far value and thied- party valuers is consistent withthe Asset Manager Code, Cisincorrect because Gilchrist’ monthly valuation reports to clients would be con- sidered consistent with the Asset Manager Code. ‘asset Manager Code of Professional Conduct Lose Section E Performance and Valuation; Section F, Disclosures 6 Are Wilson's closing remarks consistent with recommended practices and procedures designed to prevent violations of the Asset Manager Code of Professional Conduct? A No, with regard to the business continuity plan, B_ No, with regard to disclosure of the firm’s risk management process. © Yes. BP itiney Ais correct. Ata minimum, Section D, isk Management, Compliance, ané Support, of the Asset Manager Code recommends that a business continuity plan include plans for contacting and communicating with clients during a period of extended disruption, Wilson's continuity plan includes no such strategy. Wilson’ recommendation for disclos- ing the firms risk management process to both clients and regulators goes beyond the ‘code recommendation, which Isto disclose the risk management process only to clients.