2017 Level II Mock Exam PM
The afternoon session of the 2017 Level II 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
1–6 Ethical and Professional Standards 18
7–12 Quantitative Methods 18
13–18 Economics 18
19–24 Financial Reporting and Analysis 18
25–30 Equity 18
31–36 Equity 18
37–42 Fixed Income 18
43–48 Derivatives 18
49–54 Alternative Investments 18
55–60 Portfolio Management 18
Total: 180
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currently registered CFA candidates. Candidates may view and print the exam for personal exam prepara-
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© 2017 CFA Institute. All rights reserved.
2 2017 Level II Mock Exam PM
2017 LEVEL II MOCK EXAM PM
Amanda Austin Case Scenario
Amanda Austin is the CEO and founder of Austin Research Consultants. e rm
advises investment banks on how to establish and sustain prot- making research divi-
sions. Her latest client is a newly established investment bank, Evergreen Investment
Bank (Evergreen). As part of her consultancy assignment, she has been asked to
implement policies and procedures to help Evergreen claim compliance with the CFA
Institute Research Objectivity Standards (CFA Institute ROS). Austin subsequently
drafts an Independence and Objectivity of Research Policy and Procedures Manual.
To ensure that all sta members understand Evergreen’s new research policies and
procedures, Austin holds a training session for the group to discuss the requirements
of the CFA Institute ROS. She starts o the session describing the objectives of the
standards. “e CFA Institute ROS helps rms implement and enforce policies and
procedures to eliminate analysts’ conicts of interest, thereby ensuring their indepen-
dence and objectivity. Adopting the standards also supports self- regulation by creating
specic, measurable, and demonstrable standards as well as by providing a favorable
work environment that supports, and encourages ethical behavior by the analysts.”
Austin continues and informs Evergreen’s sta that once the policy and procedures
manual is nalized, she will communicate its availability to all of the rm's clients and
prospective clients to assure them that the rm is acting in an ethical and professional
manner. In addition, a hard copy of the manual will be sent to all research analysts
and their supervisors to ensure the implementation of and ongoing compliance with
the policy and procedures.
Austin proceeds to talk about the specics of the CFA Institute ROS and discusses
Standard6.0 Relationships with Subject Companies. In her draft policy, she made the
following suggestions for implementation:
Suggestion 1 Evergreen’s analysts should not promise a subject company a
specic target price or rating.
Suggestion 2 Only factual portions of the report should be sent to the subject
company prior to publication for verication.
Suggestion 3 Material gifts or entertainment provided by the subject company
should be accepted only if allowed by the rm’s policies.
Austin continues by explaining the new personal trading policies. She states that
Evergreen requires all employees to report all of their transactions, except for those
in diversied investment companies, that are subject to trading restriction periods
of 30 days before a report issuance and 5 days after an issuance, unless signicant
news has been announced. In addition, those same employees can make trades that
are contrary to the rm’s investment recommendation only when under nancial
duress; however, evidence of the duress must be supplied and approved in advance
by the compliance ocer.
During the question and answer session, Ted Osram, one of Evergreen’s research
analysts, says to Austin, “I am often invited to appear on investment- related televi-
sion programs to discuss my recommendations. Should I fully disclose my spouse’s
shareholding in the company I am speaking about in addition to my own? I see from
your draft policy that I need to disclose only my personal investments and trading
when making public appearances.”
Christine Shera, a research analyst, states that she would like to discuss her last
research report as it relates to the CFA Institute ROS. She continues, “I recently
issued a research report on a company that was based on a report I received from a
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3
2017 Level II Mock Exam PM
sell- side analyst whom I know to be thorough and competent. I liked her ideas, so
with her permission and acknowledgement, I replicated portions of her report. e
sell- side analyst’s report was so thorough I did not have to add much to my report.
But I did add my own recommendation, risk rating, and a time frame over which I
think her target price will be met. Her report was published just two days after she
visited the company’s management, and I sent my report to our clients only one day
after I received her report, so I know the information was timely.”
1 Austin’s description of the objectives of the CFA Institute ROS is least likely
correct with regard to the impact of:
A policies and procedures.
B self- regulation.
C the rm’s work environment.
KEY = A
CFA Institute Research Objectivity Standards
Modular Level II, Vol. 1, Reading 3, Section 3
Study Session 1- 3-a
Explain the objectives of the Research Objectivity Standards.
A is correct. Conicts of interests are not eliminated through the implementation of
the CFA Institute ROS. One of the CFA Institute ROS’ objectives is to promote policies
and procedures that minimize and manage conicts of interests that may jeopardize a
Research Analyst’s independence and objectivity.
2 Does Austin's communication plan for the Independence and Objectivity of
Research Policy and Procedures Manual most likely meet the requirements of
the CFA Institute ROS?
A Yes
B No, with regard to distribution to the analysts and their supervisors
C No, with regard to the availability to clients and prospective clients
KEY = B
CFA Institute Research Objectivity Standards
Modular Level II, Vol. 1, Reading 3, Section 4 – Standard1.0 Research Objectivity Policy
Study Session 1- 3-b
Evaluate company policies and practices related to research objectivity, and distin-
guish between changes required and changes recommended for compliance with the
Research Objectivity Standards.
B is correct. The CFA Institute ROS requires the formal written policy on the inde-
pendence and objectivity of research to be disseminated to all employees of the rm,
not just those involved with the preparation of research reports and their supervisors.
3 Which of Austin’s suggestions regarding Standard6.0 Relationships with
Subject Companies is most likely a CFA Institute ROS requirement rather than
a recommendation?
A Suggestion 1
B Suggestion 2
C Suggestion 3
4 2017 Level II Mock Exam PM
KEY = A
CFA Institute Research Objectivity Standards
Modular Level II, Vol. 1, Reading 3, Section 4 – Standard6.0 Relationships with Subject
Companies
Study Session 1- 3-b
Evaluate company policies and practices related to research objectivity, and distin-
guish between changes required and changes recommended for compliance with the
Research Objectivity Standards.
A is correct. Standard6 Relationships with Subject Companies prohibits research
analysts from directly or indirectly promising a subject company a specic price target
or rating. This is a requirement of Standard6, not just a recommendation.
4 Which of Evergreen’s personal trading polices is most likely stricter than
required or recommended by the CFA Institute ROS Standard7.0 Personal
Investments and Trading?
A e types of transactions that need to be reported
B Trading contrary to the rm’s recommendation
C Trading restrictions for all employees
KEY = C
CFA Institute Research Objectivity Standards
Modular Level II, Vol. 1, Reading 3, Section 4 – Standard7.0 Personal Investments and
Trading Requirements and Recommendations
Study Session 1- 3-b
Evaluate company policies and practices related to research objectivity, and distin-
guish between changes required and changes recommended for compliance with the
Research Objectivity Standards.
C is correct. Evergreen’s trading restrictions for all employee transactions is stricter than
that required or recommended within Standard7.0 Personal Investments and Trading.
Evergreen requires all employees to report all transactions, whereas Standard7.0 only
requires covered employees to report their transactions. Standard7.0 does not require
or recommend that transactions in diversied investment companies be reported. The
trading restriction period is consistent with recommendations for Standard7.0
5 What is Austin’s most appropriate response to Osram’s question with regard to
the CFA Institute ROS requirements?
A “No, you are required to fully disclose any investments of the rm or what
you own personally only when a direct conict of interest is present.”
B “You should disclose your spouse’s interests. I will revise the policy to reect
this requirement.”
C “You need to make a disclosure regarding your spouse’s interests only when
you are actively marketing the company you are discussing.”
KEY = B
CFA Institute Research Objectivity Standards
Modular Level II, Vol. 1, Reading 3, Section 4 – Standards 2.0 Public Appearances, and
7.0 Personal Investments and Trading
Study Session 1- 3-b
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Evaluate company policies and practices related to research objectivity, and distin-
guish between changes required and changes recommended for compliance with the
Research Objectivity Standards.
B is correct. Standard2 Public Appearances requires the disclosure of personal and
rm conicts of interests to the host or interviewer and where possible to the audience.
Since Osram is in a position to benet personally from his spouse’s interests in the rm
he is recommending, the spouse’s investment position should be disclosed.
6 Which of the CFA Institute ROS did Shera most likely violate by issuing her last
research report?
A Standard8.0 Timeliness of Research Reports and Recommendations
B Standard11.0 Rating System
C Standard3.0 Reasonable and Adequate Basis
KEY = C
CFA Institute Research Objectivity Standards
Modular Level II, Vol. 1, Reading 3, Section 4 – Standards 3.0 Reasonable and Adequate
Basis, 8.0 Timeliness of Research Reports and Recommendations, and 11.0 Rating System
Study Session 1- 3-b
Evaluate company policies and practices related to research objectivity, and distin-
guish between changes required and changes recommended for compliance with the
Research Objectivity Standards.
C is correct. By using another analyst’s research information, Shera violated Standard3
Reasonable and Adequate Basis. Firms must be able to provide supporting information
for the investment recommendation to investing clients. Shera would not be able to
provide this as she did not do her own research, prepare her own nancial model to
determine the target price, nor did she independently verify the information in the sell
side analyst’s report.
Gareld Case Scenario
Jordan Gareld, an analyst for a rm that specializes in international equities, is investi-
gating the behavior of HighTech Inc., a technology stock. He believes its returns should
be inuenced by the return on the NASDAQ index, as many analysts suggest. Gareld
collects ve years of monthly returns from 2005 to 2009 for the NASDAQ index.
Gareld estimates a simple linear regression using the NASDAQ return to explain
the variation in HighTech’s return. e summary output from this analysis is shown
in Exhibit1.
Exhibit1 Gareld’s First Regression Model Summary Output Regression of
HighTech Returns on NASDAQ Index Returns, 2005–2009
Coecient Standard Error p-Value
Intercept 0.001795002 0.007209589 0.804260285
NASDAQ return 1.086005661 0.130620835 0.000000000
(continued)
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