CFA Level I Ethics practice questions
25 exam-style questions from across Ethical and Professional Standards, which is 10–15% of the Level I exam (roughly 18–27 of the 180 questions). Pick an answer to see whether you were right, why each option is right or wrong, and the lesson to go back to.
Module 1 Ethics and Trust in the Investment Profession
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1A professional association's code of ethics is most likely to:
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The answer is B.
A. A code states expectations. Members can still break it, which is why associations also discipline violations. The trap
B. A code publicly communicates the shared principles and expected behavior of a community.
C. Laws and codes work side by side. A code does not remove legal duties.
From the lesson What ethics is, and why professions have a code of ethics
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2Which statement about legal and ethical standards is most accurate?
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The answer is B.
A. Law is a floor. Some legal conduct, such as trading on a confidential tip where no law forbids it, is still unethical. The trap
B. Legal and ethical overlap but do not coincide. Conduct can be legal and unethical, or ethical and illegal.
C. Ethical standards usually ask for more than the law, not less.
From the lesson Challenges to ethical behavior, and ethical vs legal standards
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3Listing the clients, the employer and the market as the parties affected by a decision is part of which phase of an ethical decision-making framework?
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The answer is A.
A. Identifying stakeholders and the duties owed to each is part of the first phase.
B. Consider covers situational influences, additional guidance and alternative actions. The trap
C. Reflect happens after the action, when the outcome is assessed.
From the lesson A framework for ethical decision making
Module 2 Code of Ethics and Standards of Professional Conduct
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4Which of the following is least likely to be a source of a Professional Conduct inquiry?
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The answer is C.
A. Self-disclosure on the annual statement is a standard source of inquiry. The trap
B. Proctors report suspected testing-rule violations on exam day.
C. Weak performance is a business matter, not evidence of a breach of the Code and Standards, and is not a listed source.
From the lesson How the Code and Standards are enforced: the Professional Conduct Program
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5Which of the following is a principle of the CFA Institute Code of Ethics?
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The answer is A.
A. This is the sixth principle, which asks members to keep their own skills current and help others with theirs.
B. The Code asks for reasonable care and independent judgment. It does not promise or require a return outcome.
C. Disclosure of holdings is a topic of the Standards on conflicts of interest, not a Code principle. The trap
From the lesson The six principles of the Code of Ethics
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6Under which Standard heading is Fair Dealing found?
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The answer is A.
A. Fair Dealing is Standard III(B), under Duties to Clients.
B. Duties to Employers (IV) covers loyalty, additional compensation and supervisors.
C. Conflicts of Interest (VI) covers avoiding or disclosing conflicts, priority of transactions and referral fees. The trap
From the lesson The seven Standards of Professional Conduct at a glance
Module 3 Guidance for Standard I: Professionalism
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7An analyst based in a country with no laws against trading on material nonpublic information receives a confidential tip about a takeover and buys shares in the target. Did the analyst violate the Standards?
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The answer is B.
A. Local law is silent, so the Code and Standards apply. Being legal locally does not settle it. The trap
B. The Code bans trading on material nonpublic information. It is stricter than the absent law, so it governs (II(A) is also breached).
C. Fair Dealing is about treating clients fairly when making recommendations or taking investment action. No client was disadvantaged here.
From the lesson Standard I(A): Knowledge of the Law
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8A research analyst accepts an issuer's offer of first-class flights and three nights at a resort to attend a two-hour site visit, though commercial flights are available. Did the analyst violate the Standards?
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The answer is B.
A. The visit is legitimate, but the lavish issuer-paid travel could reasonably be expected to compromise independence. The trap
B. Analysts should pay for commercial transport and hotel. Luxury hospitality from the issuer threatens objectivity.
C. Priority of Transactions concerns the order of client, employer and personal trades, not hospitality.
From the lesson Standard I(B): Independence and Objectivity
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9A wealth manager tells prospects that a balanced fund "will return at least 6% every year". Did the manager violate the Standards?
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The answer is B.
A. Past returns do not make a future return certain. A guarantee on an uncertain return is a misrepresentation. The trap
B. A balanced fund's return is uncertain, so promising a minimum misleads prospects.
C. Suitability is about matching recommendations to a client's needs and circumstances. The problem here is the false promise.
From the lesson Standard I(C): Misrepresentation
Module 4 Guidance for Standard II: Integrity of Capital Markets
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10An analyst overhears two executives on a train discussing a planned, unannounced dividend cut at their company. The analyst sells the stock for clients before the announcement. Did the analyst violate the Standards?
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The answer is B.
A. How the information was obtained does not matter. It was material and nonpublic, and the analyst acted on it. The trap
B. A planned dividend cut would move the price and had not been announced, so trading on it breaches II(A).
C. Fair dealing concerns equitable treatment of clients when making recommendations or taking action, not trading on inside information.
From the lesson Standard II(A): Material Nonpublic Information
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11An analyst combines public satellite images of parking lots, public filings and conversations with suppliers about general industry demand, concludes that a retailer will miss earnings, and downgrades it. Did the analyst violate the Standards?
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The answer is A.
A. A conclusion built from public and nonmaterial nonpublic pieces is allowed, even if the conclusion would be material had the company announced it.
B. The test applies to the information used, not to how significant the finished conclusion is. The trap
C. Nothing suggests that outside pressure compromised the analyst's independence.
From the lesson Standard II(A): Material Nonpublic Information
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12A trader repeatedly buys and sells the same small-cap stock between two accounts the firm controls so that the stock appears actively traded before a client offering. Did the trader violate the Standards?
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The answer is C.
A. Market manipulation does not require a specific loss. The false picture of activity harms market integrity. The trap
B. No inside information is involved. The problem is the misleading trades.
C. Trades that give a false impression of activity, with intent to mislead, are transaction-based manipulation.
From the lesson Standard II(B): Market Manipulation
Module 5 Guidance for Standard III: Duties to Clients
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13The chief executive of a company asks the manager of the company's pension plan to build a large position in the company's own shares, saying it would "show the market that employees back us". The manager thinks the shares are overvalued but buys them for the plan to keep the relationship. Did the manager violate the Standards?
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The answer is B.
A. Being hired by the sponsor does not make the sponsor the client. The plan's beneficiaries are. The trap
B. The manager buys shares the manager judges overvalued, to please the sponsor. That puts the sponsor ahead of the beneficiaries, the real clients.
C. The purchases are genuine trades at market prices, not trades designed to create a false price or volume. The breach is the duty owed to the beneficiaries.
From the lesson Standard III(A): Loyalty, Prudence, and Care
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14A firm receives 9,000 shares of an oversubscribed issue. Three eligible clients ordered 8,000, 5,000 and 2,000 shares. Under a pro rata allocation, the client who ordered 8,000 shares should receive:
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The answer is B.
A. Splits the shares equally: 9,000 ÷ 3. Pro rata follows order size. The trap
B. Total orders are 15,000, so the fill ratio is 9,000 ÷ 15,000 = 60%. 60% × 8,000 = 4,800.
C. Fills the first order in full and ignores the other clients.
On your calculator- 9000÷15000×8000= 4800
- 9000ENTER15000÷8000× 4800
ENTER enter (on the HP, puts the number on the stack)
From the lesson Standard III(B): Fair Dealing
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15A fund is marketed as holding investment-grade corporate bonds only. To lift returns, its manager buys high-yield bonds. Did the manager violate the Standards?
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The answer is B.
A. A better return does not excuse acting outside the stated mandate. The trap
B. A manager who runs a fund to a mandate must act within its stated objectives and constraints.
C. Nothing has been misstated in a performance presentation. The breach is in the portfolio itself.
From the lesson Standard III(C): Suitability
Module 6 Guidance for Standard IV: Duties to Employers
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16While still employed, a portfolio manager tells several of her firm's clients that she is leaving and invites them to move their accounts to her new firm. Did the manager violate the Standards?
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The answer is B.
A. Clients are free to choose, but the manager may not solicit them while she is still employed.
B. Soliciting the employer's clients before leaving takes business from the firm she is paid to serve.
C. Fair dealing concerns how clients are treated relative to each other. The duty breached here is to the employer. The trap
From the lesson Standard IV(A): Loyalty (to employers)
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17A client offers a portfolio manager a weekend at a resort if the client's account beats its benchmark this year. The manager mentions it to her supervisor in a hallway conversation, and the supervisor says it is fine. Did the manager violate the Standards if she accepts?
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The answer is B.
A. Approval must be written. A spoken okay leaves no record. The trap
B. A benefit tied to the account's performance could create a conflict, so written consent is required before accepting.
C. Fair dealing is about treating clients equitably. The issue here is the unapproved outside benefit.
From the lesson Standard IV(B): Additional Compensation Arrangements
Module 7 Guidance for Standard V: Investment Analysis, Recommendations, and Actions
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18An analyst on a five-person research committee disagrees with the committee's "buy" rating, which was reached after a thorough, independent review. The analyst most appropriately:
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The answer is B.
A. She need not dissociate when the consensus has a reasonable basis and is independent and objective. The trap
B. The group report is a consensus. She can stay on it and record her disagreement.
C. Nothing in V(A) requires a competing public note.
From the lesson Standard V(A): Diligence and Reasonable Basis
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19A fund manager who has always chosen stocks through fundamental analysis begins using a third-party quantitative screening model for all selections but does not tell clients. Did the manager violate the Standards?
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The answer is B.
A. A change to how securities are selected is a material change to the process, whatever the goal. The trap
B. Material changes to the investment process must be disclosed promptly.
C. Record retention is not the issue here.
From the lesson Standard V(B): Communication with Clients and Prospective Clients
Module 8 Guidance for Standard VI: Conflicts of Interest
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20An analyst holds a large personal position in a company she covers and cannot reasonably sell it. To comply with Standard VI(A), she most appropriately:
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The answer is B.
A. Small print is not prominent, so the disclosure would not be effective. The trap
B. Avoiding the conflict is not reasonable, so full disclosure that is prominent and in plain language is required.
C. When she bought the shares does not matter. Her holding could still bias her views.
From the lesson Standard VI(A): Avoid or Disclose Conflicts
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21A portfolio manager buys shares for his own account minutes before placing a large client order in the same thinly traded stock. Did he violate the Standards?
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The answer is B.
A. The price outcome does not matter. His own trade jumped ahead of the client's.
B. Trading personally before a client order, using knowledge of it, is front running.
C. Fair dealing is about treating clients equitably against each other. This is client versus manager. The trap
From the lesson Standard VI(B): Priority of Transactions
Module 9 Guidance for Standard VII: Responsibilities as a CFA Institute Member or CFA Candidate
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22After the exam, a candidate posts online: "Ethics questions were mostly about Standard III, and there was nothing on Standard V." Did the candidate violate the Standards?
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The answer is B.
A. Broad topical areas tested or not tested are confidential, as well as specific questions. The trap
B. Revealing what was and was not tested discloses confidential exam information.
C. The post is not a false statement. It is a disclosure of confidential content.
From the lesson Standard VII(A): Conduct as Participants in CFA Institute Programs
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23A candidate who passed Level II and is registered for Level III prints "Lee Park, CFA Level II" on her business card. Did she violate the Standards?
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The answer is B.
A. Truth is not enough. Candidates must not state or imply a partial designation from passing levels. The trap
B. "CFA Level II" suggests a partial designation, which VII(B) prohibits. She may say she is a Level III candidate for the CFA designation.
C. The problem is the manner of reference to the program, which is covered specifically by VII(B).
From the lesson Standard VII(B): Reference to CFA Institute, the CFA Designation, and the CFA Program
Module 10 Ethics Application
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24A portfolio manager's employer lets staff accept client gifts under USD 100 without approval. A client offers the manager USD 2,000 if the client's account beats its benchmark this year. The manager's most appropriate action is to:
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The answer is B.
A. A client gift is lower risk for independence, but a bonus tied to performance can make the manager favor this client over others, so the employer must agree. The trap
B. The decisive fact is the link to future performance. Standard IV(B) requires written consent from the employer before accepting.
C. Giving the money away does not cure the conflict. The problem is accepting it without consent.
From the lesson How to answer Ethics vignettes: a five-step method
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25An analyst discovers that his firm's marketing says a fund has "never had a down year", which is false. He reports it to his supervisor, who says it will be fixed "at the next print run in six months". To comply with the Standards, the analyst should most appropriately:
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The answer is B.
A. Six more months of a false claim in circulation is a continuing misrepresentation, and the analyst would be taking part by using it. The trap
B. Standards I(A) and I(C) require him not to take part in or assist a known misstatement. Escalating and refusing to use the material is the compliant, complete response.
C. Changing the firm's public material on his own is unauthorized and not required. The compliant route runs through compliance.
From the lesson Professionalism cases: law, independence, misrepresentation, misconduct, competence
Keep going
Study the topic module by module in the Ethical and Professional Standards lessons, look up a word in the Level I glossary, or run a timed practice set that tracks your score by topic.