Questions 1-6 relate to Jose Verde.
Jose Verde is an international equity analyst for New World Capital Management (NWCM).
Verde has been studying the potential impact of proposed joint ventures involving U.S. firms and
firms partially owned by the government in a recently democratized country. There is much
excitement in the investment community about the potential of these joint ventures, which
concerns Verde somewhat as he has had great difficulty finding and acquiring reliable
information about the quality and accessibility of inputs and labor in local markets. Furthermore,
there is still considerable uncertainty about which U.S. firms will be offered partnerships, what the
conditions of those partnerships will be, and the accounting rules that will govern the new
ventures. However, Verde is confident that there will be demand for the output in local and
international markets.
Verde contacts a friend domiciled in the foreign country in an effort to gather more information on
the joint ventures. His friend claims to have reliable contacts in the government. He informs
Verde that it appears that only one U.S. firm, GlobalCo, will be offered a partnership. The
remaining partnerships will go to firms based in other countries.
Seeking to verify this information, Verde speaks with the CFO of one of the other U.S. firms
positioning itself for a joint venture partnership, International Merchants, Inc. (IMI). In the
conversation Verde learns that IMI has decided to withdraw its bid to be a joint venture partner,
but that the formal announcement of the withdrawal will not occur for another week. The CFO
says IMI has decided that the risk of expropriation is too high given their expectations of a
change in the balance of power in the upcoming elections in the new democracy and a likely
reversion to a more socialistic government.
Not wanting to miss an opportunity, Verde completes his industry analysis and concludes with a
buy recommendation for GlobalCo and a sell recommendation for IMI. While Verde bases his
written recommendations on the information received in the phone calls, the information is not
disclosed in his analysis. Before releasing the recommendations to his clients, Verde asks some
of his colleagues in the research department to review his analysis and conclusions. Normal
policy is to discuss the report with his boss but she is out of the office and Verde feels speed is
important and goes to his coworkers instead. Two days later Verde releases his revised
recommendations to his clients.
...
Verde based his conclusions on discussions with a foreign national and the CFO of a firm
involved in bidding for the joint ventures. Augmenting his own research in this way means that
Verde:
A) conformed to the standard of diligence and thoroughness by seeking additional facts and
information from new sources.
B) did not conform to the standard of diligence and thoroughness because he obtained material
nonpublic information during his due diligence.
C) did not conform to the standard of diligence and thoroughness because he lacked enough
information and facts about the input markets, accounting processes, and new government to
make a reasonably informed recommendation and acted on material nonpublic information.
Question #2 of 60
Information sourced from Verde's friend is:
A) material nonpublic information because of the personal relationship between Verde and his
friend and may not be used in Verde's report.
B) not material nonpublic information because it originated from a source that is not known to be
privy to nonpublic information and may be used in Verde's report.
C) material nonpublic information because the foreign source claimed to have access to
unpublished government information and may not be used in Verde's report.
Question #3 of 60
Information sourced from the CFO at IMI:
A) is not material nonpublic information thus Verde can use it in his report.
B) is similar enough to other information Verde gathered and falls under the mosaic theory thus
Verde can use it in his report.
C) may not be used in Verde's report unless he was able to gather the same information from public
and nonmaterial nonpublic sources.
Question #4 of 60
Verde shared his research with his colleagues at New World prior to releasing the report to New
World clients. Concerning this action Verde:
A) is being thorough by seeking the opinion of others before releasing his report and is thereby
complying with standards rather than violating them.
B) breached the standards by partially disseminating his findings and recommendations inside the
firm prior to releasing the information to clients outside of the firm.
C) is fulfilling his duty to his firm by giving his colleagues time to incorporate the information into
clients' accounts (money under management) before the report is released.
Question #5 of 60
Verde attempted to maintain the confidence of his sources by not revealing them in his report. By
doing so, Verde:
A) is exercising discretion in order to maintain a competitive edge.
B) is neither helping nor harming the consumers of his report, as long as he reaches logical
conclusions from the information the sources provide.
C) may have violated the standards related to known limitations of his analysis and material
misrepresentation by omitting the source of his information and other facts that led to his
conclusions.
Question #6 of 60
Verde's superior is concerned with potential problems related to his recent analysis on the firms
seeking joint ventures. The best recommendation the superior can give to Verde is to:
A) omit the recommendation for IMI and disseminate the rest of the report.
B) omit the recommendation for GlobalCo and disseminate the rest of the report.
C) delay disseminating the report until the conflict of nonpublic information related to IMI's decision
can be resolved and the other issues related to thoroughness, accuracy, limitations, and
misrepresentations can be properly overcome.
Question #7 of 60
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