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09/17/2012

Three Must-Know Tips to Nailing Ethics


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CFA Exam Prep

If you're new to the CFA exams, hopefully by now you're aware of how important mastering ethics is to your CFA studies. In an effort to help, here are three steps to ensure you are on the right path to nailing the ethics section in the exam.

DECIDE ON YOUR [MATERIAL] APPROACH.

For Ethics, nothing beats the CFA curriculum. If you only have the attention span (and concentration) to read only one chapter in the CFA curriculum, read the Ethics section. There are various practice questions found at the end of these readings as well—these make for good practice.

Study notes are pretty good as well—the main study material providers, such as Schweser, cover ethics adequately. There is some value to the conciseness and summary style offered by third-party providers; it makes it easier to digest (although from a conceptual standpoint, you should try working from CFA Institute material).

BE THOROUGH. KNOW YOUR CASE STUDIES.

Ethics case-studies are chapters in the CFA Institute and other study providers' material, where an extensive fictional scenario is explored and dissected from an ethics perspective. In these case studies, a scenario set in a professional/industry-related setting is often depicted, and one or several protagonists' thoughts, decisions, and actions are explained.

Work through the case-study chapters in detail and observe how the various standards are explored through the situations. Actual exam questions in Level I are small and highly simplified versions of these case studies, but in Levels II and III don't be surprised if you are hit by three pages of ethics case-study material before you're given your first question.

PRACTICE BEING ETHICAL.

Answering ethics questions requires a certain degree of familiarity with the question format as well as the source material—a combination of knowing what keywords to watch out for, anticipating common traps, and weeding out irrelevant information.

Concepts will not be tested individually, instead, as the CFA levels progress, more and more concepts will be blended into the questions (which will be longer and longer with the item-set format in Levels II and III). Practicing loads of questions beforehand will reduce any surprises in the actual exam. For tips on where to find extra ethics practice questions, see the Online Resources Review.


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For example—here's a question taken from the CFA Institute books—this is a format typical of a CFA Level I exam:

Smith, a research analyst with a brokerage firm, decides to change his recommendation for the common stock of Green Company, Inc., from a “buy” to a “sell.” He mails this change in investment advice to all the firm’s clients on Wednesday. The day after the mailing, a client calls with a buy order for 500 shares of Green Company.

In this circumstance, Smith should:
A. accept the order.
B. advise the customer of the change in recommendation before accepting the order.
C. not accept the order because it is contrary to the firm’s recommendation.

In this question—probably as a result of doing literally thousands of questions—I immediately fixated on B, which is the right answer in this case. Two concepts jumped out at me—the conflicting recommendations (Smith recommends a sell, customer wants a buy), and the timing of the recommendation vs. the purchase order (just 24 hours). If you've done your practice questions, chances are you did too. With more practice, you will learn to quickly draw out these aspects of the questions in less and less time, saving you time per question.

This however is a fairly straightforward question—expect all kinds of literary tricks and convoluted test of standards as you progress through the levels.

–300 Hours

This article was reposted with permission from 300 Hours, a site dedicated to CFA candidates and charterholders.


As an impartial, nonprofit forum for the finance and banking industries NYSSA encourages discussion and debate among its member and other professionals. Commentaries, however, should be taken as the sole opinion of the author(s) and not of NYSSA. If you would like to submit a commentary to the Finance Professional's Post, send your article to the editor.

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