Question #51
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: 26
Status: Correct
Correct Answer: B
Question
Janet Coleman, CFA, is preparing a research report on Union Utilities. During the past year, three of the five utility companies in her region have cut their dividends by 50%, on average, to provide more internal funds for capital investment. Coleman reasons that the management of Union will be under pressure to cut its dividends within the next year to remain competitive. Coleman issues a research report in which she states: "Union will decrease its dividend from $2 to $1 a share by the second quarter to finance its investment opportunities. If investors buy the stock now at around $50 a share, their total return could exceed 20%." With regard to the Standard on communication with clients and prospective clients, Coleman:
Answer Choices:
A. did not violate the Standard
B. violated the Standard because she promised a specific return on an investment
C. violated the Standard because she failed to distinguish opinion from fact
Explanation
Coleman's statement that Union "will" decrease its dividend fails to distinguish between
fact and opinion, as required by Standard V(B) Communication with Clients and
Prospective Clients, because a prediction is not a fact. Her statement that total return
"could" exceed 20% is appropriately phrased as an opinion.
(Module 42.8, LOS 42: V(B))