CFA Level 1 - Ethical Standards & Quantitative Methods Flashcards

Question 1

Standard I: Professionalism

Accepted Answer

Covers four subsections:
1. **Knowledge of the Law**: Must comply with the stricter of applicable law, rule, or regulation.
2. **Independence and Objectivity**: Must not offer, solicit, or accept gifts that compromise independence.
3. **Misrepresentation**: Must not make false or misleading statements.
4. **Misconduct**: Must not engage in dishonesty, fraud, or deceit.

Question 2

Standard II: Integrity of Capital Markets

Accepted Answer

Covers two subsections:
1. **Material Nonpublic Information**: Members with material nonpublic information must not act or cause others to act on it.
2. **Market Manipulation**: Members must not engage in practices that distort prices or artificially inflate volume to mislead market participants.

Question 3

Standard III: Duties to Clients

Accepted Answer

Covers five subsections:
1. **Loyalty, Prudence, and Care**: Place client interests above employer or personal interests.
2. **Fair Dealing**: Deal fairly and objectively with all clients.
3. **Suitability**: Determine investment suitability based on client's IPS before taking action.
4. **Performance Presentation**: Ensure information is fair, accurate, and complete.
5. **Preservation of Confidentiality**: Keep client information confidential unless illegal, required by law, or authorized.

Question 4

Standard IV: Duties to Employers

Accepted Answer

Covers three subsections:
1. **Loyalty**: Do not deprive employer of skills, divulge confidential information, or cause harm.
2. **Additional Compensation Arrangements**: Do not accept gifts/benefits competing with employer unless written consent is obtained from all parties.
3. **Responsibilities of Supervisors**: Make reasonable efforts to ensure supervisees comply with laws and standards.

Question 5

Standard V: Investment Analysis, Recommendations, and Actions

Accepted Answer

Covers three subsections:
1. **Diligence and Reasonable Basis**: Exercise independence and thoroughness in investment analysis.
2. **Communication with Clients and Prospective Clients**: Disclose investment processes, risks, and limitations; distinguish fact from opinion.
3. **Record Retention**: Maintain records supporting investment decisions (default recommendation: 7 years).

Question 6

Standard VI: Conflicts of Interest

Accepted Answer

Covers three subsections:
1. **Disclosure of Conflicts**: Disclose all matters that could reasonably impair objectivity to clients and employers.
2. **Priority of Transactions**: Client and employer transactions take priority over personal transactions.
3. **Referral Fees**: Disclose any compensation received for or paid to others for product/service referrals.

Question 7

Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate

Accepted Answer

Covers two subsections:
1. **Conduct as Participants in CFA Institute Programs**: Do not compromise the integrity, security, or fairness of the CFA exams or program.
2. **Reference to CFA Institute, the CFA Designation, and the CFA Program**: Do not misrepresent or exaggerate the meaning of holding the designation.

Question 8

Mosaic Theory

Accepted Answer

An exception to Standard II(A). Financial analysts may reach investment conclusions using a combination of **public information** and **nonmaterial nonpublic information** without violating insider trading rules.

Question 9

Present Value (PV) Formula

Accepted Answer

The value today of a future payment discounted at the interest rate $r$:
$$PV = \frac{FV}{(1+r)^n}$$
Where $FV$ is future value, $r$ is the interest rate per period, and $n$ is the number of periods.

Question 10

Annuity Due vs. Ordinary Annuity

Accepted Answer

- **Ordinary Annuity**: Cash flows occur at the **end** of each period.
- **Annuity Due**: Cash flows occur at the **beginning** of each period.

*Relationship*: $PV_{Due} = PV_{Ordinary} 	imes (1 + r)$

Question 11

Effective Annual Rate (EAR)

Accepted Answer

The actual annual rate of interest earned or paid taking into account compounding during the year:
$$EAR = \left(1 + \frac{r_{stated}}{m}\right)^m - 1$$
Where $r_{stated}$ is the annual nominal rate and $m$ is compounding periods per year.

Question 12

Bayes' Formula

Accepted Answer

Used to update conditional probabilities given new information:
$$P(A|B) = \frac{P(B|A) 	imes P(A)}{P(B)}$$
Where $P(A|B)$ is the updated (posterior) probability of event $A$ given event $B$ has occurred.

Question 13

Positively Skewed Distribution Characteristics

Accepted Answer

A right-skewed distribution has a long right tail containing extreme positive values.

*Relationship of Central Tendency*:
$$	ext{Mode} < 	ext{Median} < 	ext{Mean}$$

Question 14

Sample Variance ($s^2$)

Accepted Answer

A measure of dispersion around the mean for a sample of size $n$:
$$s^2 = \frac{\sum_{i=1}^{n} (x_i - \bar{x})^2}{n - 1}$$
Uses $n - 1$ degrees of freedom in the denominator to provide an unbiased estimate of population variance.

Question 15

Sharpe Ratio

Accepted Answer

Measures excess return per unit of total risk (standard deviation):
$$	ext{Sharpe Ratio} = \frac{R_p - R_f}{\sigma_p}$$
Where $R_p$ is portfolio return, $R_f$ is risk-free rate, and $\sigma_p$ is portfolio standard deviation.

Question 16

Central Limit Theorem (CLT)

Accepted Answer

States that for a population with mean $\mu$ and variance $\sigma^2$, the sampling distribution of the sample mean $\bar{x}$ approaches a normal distribution with mean $\mu$ and variance $\frac{\sigma^2}{n}$ as sample size $n$ becomes large ($n \ge 30$).

*Standard Error of Mean*: $\sigma_{\bar{x}} = \frac{\sigma}{\sqrt{n}}$

Question 17

Type I vs. Type II Errors

Accepted Answer

- **Type I Error ($\alpha$)**: Rejecting the null hypothesis ($H_0$) when it is actually true (False Positive).
- **Type II Error ($\beta$)**: Failing to reject the null hypothesis ($H_0$) when it is actually false (False Negative).

*Power of a Test* $= 1 - \beta$

Question 18

Test Statistic: $z$-score vs. $t$-statistic

Accepted Answer

Used for hypothesis testing of a population mean:
- Use **$z$-score** when population variance $\sigma^2$ is **known**: $z = \frac{\bar{x} - \mu_0}{\sigma / \sqrt{n}}$
- Use **$t$-statistic** when population variance $\sigma^2$ is **unknown**: $t = \frac{\bar{x} - \mu_0}{s / \sqrt{n}}$ with $n - 1$ degrees of freedom.

Question 19

p-value in Hypothesis Testing

Accepted Answer

The smallest level of significance ($\alpha$) at which the null hypothesis ($H_0$) can be rejected. 
- If $p	ext{-value} \le \alpha$, **reject $H_0$**.
- If $p	ext{-value} > \alpha$, **fail to reject $H_0$**.

Question 20

Lognormal vs. Normal Distribution in Finance

Accepted Answer

- **Normal Distribution**: Symmetrical; can take negative values; commonly used for modeling **asset returns**.
- **Lognormal Distribution**: Positively skewed; bounded below by $0$; commonly used for modeling **asset prices** ($S_t$).

CFA Level 1 - Ethical Standards & Quantitative Methods

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