Question #36
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: 19
Status: Correct
Correct Answer: A
Question
An analyst finds a stock with historical returns that are not correlated with interest rate changes. The analyst writes a report for his clients that have large allocations in fixed- income instruments and emphasizes the observed lack of correlation. He feels the stock would be of little value to investors whose portfolios are composed primarily of equities. The clients with allocations of fixed income instruments are the only clients to see the report. According to Standard V(B), Communication with Clients and Prospective Clients, the analyst has:
Answer Choices:
A. violated the Standard concerning fair dealings with all clients
B. not violated the Standard
C. violated the article in the Standard concerning facts and opinions
Explanation
Recommending a stock whose return is uncorrelated with interest rate changes is
appropriate for the clients described in the problem. Emphasizing the lack of correlation is
appropriate as long as the analyst makes no guarantees concerning the relationship in the
future. Reporting historical correlation is a presentation of fact, and is not in violation. The
analyst is free to show the report only to investors for whom the investment is
appropriate.
(Module 42.8, LOS 42: V(B))