Question #23
Reading: Reading 42.5 Standards of Professional Conduct Guidance for Standards V
PDF File: Reading 42.5 Standards of Professional Conduct Guidance for Standards V.pdf
Page: 13
Status: Incorrect
Correct Answer: B
Your Answer: C
Question
Using as his universe all companies in the steel industry, Reynold Anderson analyses the performance of stock prices for the industry. He succeeds in developing a regression model with excellent statistical control measures. The extrapolation from the model shows low risk variance of the securities in this industry. Without the inclusion of non-steel stocks in the portfolio, Anderson concludes that, based on these results, every portfolio can use the steel industry securities to diversify and lower its risk. He persuades his clients to change their current portfolios. Anderson states that, as the model's results show, some particular industries, such as car manufacturers, have underpriced stocks, and investors should take advantage of it. Anderson has violated the Standards because he:
Answer Choices:
A. is not clear enough about the model results
B. does not distinguish the opinion, based on his model, from the fact
C. does not consider the suitability of the investment
Explanation
While any of the answers can be shown to violate CFA Institute Standards, this cannot be
determined conclusively from the information given. However, the scenario clearly
indicates that Anderson does not distinguish between opinion and fact in communicating
to his clients. Therefore, he violates the Standards on this basis.