CFAI Practice: M05 — Ethics Application

Total: 5 questions

Source: CFA Institute Practice Questions — Ethical and Professional Standards (2026)


Question 1

Maria, a CFA charterholder, works in Country X where local law allows investment managers to trade on information received from corporate insiders. Maria receives a tip from a company’s CFO about an upcoming earnings surprise. Maria should most appropriately:

  • A. trade on the information because local law permits it
  • B. refrain from trading because CFA Institute Standards prohibit using material nonpublic information
  • C. trade only for her personal account but not for clients

Question 2

James, a research analyst, overhears a conversation at a restaurant between two executives of a publicly listed company discussing a major acquisition that has not been announced. James should most appropriately:

  • A. immediately buy shares of the target company for his clients
  • B. document the information and refrain from trading or sharing until it becomes public
  • C. share the information only with his firm’s compliance department and trade for clients

Question 3

Sarah manages accounts for both institutional and retail clients. She receives an allocation of a highly sought-after IPO. Sarah should most appropriately:

  • A. allocate all IPO shares to her largest institutional clients first
  • B. distribute IPO shares fairly among all eligible clients on a pro-rata basis
  • C. allocate shares to retail clients only since they have fewer investment opportunities

Question 4

David, a portfolio manager, selects a 12-month period during which his fund outperformed the benchmark to present in marketing materials, while omitting periods of underperformance. This practice most likely violates:

  • A. Standard III(D) — Performance Presentation
  • B. Standard V(B) — Communication with Clients and Prospective Clients
  • C. Standard I(C) — Misrepresentation

Question 5

Lisa, a senior analyst at Firm A, has accepted an offer to join Firm B. Before her departure, she contacts several of Firm A’s clients to inform them she is moving and solicits them to transfer their accounts to Firm B. This action most likely violates:

  • A. Standard III(E) — Preservation of Confidentiality
  • B. Standard IV(A) — Loyalty
  • C. Standard VI(A) — Disclosure of Conflicts