Free CFA Level I Ethical and Professional Standards Practice Questions
Ethical and professional standards is the highest-weighted single topic on the CFA Level I exam at 15-20% (CFA Institute). Questions test the Code of Ethics, Standards of Professional Conduct, and the Global Investment Performance Standards (GIPS).
Sample Questions
Question 1
Easy
Under GIPS, a 'carve-out' is best defined as:
Solution
B is correct.
A carve-out under GIPS is a segment of a larger multi-asset portfolio that is separated and presented as a single-asset strategy composite. For example, the equity portion of a balanced fund could be carved out and presented as part of an equity composite. GIPS requires that carve-outs have their own cash allocation and be separately managed with dedicated cash to be included in composites.
A carve-out under GIPS is a segment of a larger multi-asset portfolio that is separated and presented as a single-asset strategy composite. For example, the equity portion of a balanced fund could be carved out and presented as part of an equity composite. GIPS requires that carve-outs have their own cash allocation and be separately managed with dedicated cash to be included in composites.
Question 2
Medium
A fundamental reason why trust is essential in the investment management profession is that:
Solution
B is correct.
Trust is essential because clients typically cannot evaluate the quality of investment advice they receive due to information asymmetry — they lack the expertise and information the professional possesses. This creates a fiduciary relationship where the professional must act in the client's best interest.
Trust is essential because clients typically cannot evaluate the quality of investment advice they receive due to information asymmetry — they lack the expertise and information the professional possesses. This creates a fiduciary relationship where the professional must act in the client's best interest.
Question 3
Hard
Which of the following best characterizes the relationship between the CFA Institute Code of Ethics and the Standards of Professional Conduct?
Solution
The Code of Ethics articulates high-level ethical principles that members and candidates must embrace, such as acting with integrity, placing client interests first, and maintaining competence. The Standards of Professional Conduct then operationalize those principles by specifying the minimum behaviors required across seven topical areas. The two documents are complementary: the Code states the values, and the Standards prescribe the conduct that gives those values practical effect.