CFA Level I · CFA Level I Exam

Guidance for Standard V: Investment Analysis, Recommendations, and Actions: formula sheet

Full chapter guide

Key formulas

Core duty (V(A)(1)): Exercise diligence, independence and thoroughness in analyzing investments, making recommendations and taking investment actions; All three words matter. A rushed or biased analysis breaches the Standard even if the outcome is good.
Reasonable basis (V(A)(2)): Have a reasonable and adequate basis, supported by appropriate research and investigation, for any recommendation or action; Depth of research scales with the complexity and risk of the investment and the client situation.
Third-party research test: Rely on others' work only after making reasonable efforts to confirm it is sound; Review assumptions, methods, data quality and the provider's independence.
Compliance idea: Firm policy should set minimum due diligence, require documentation, and ensure research is reviewed and updated; Written procedures support the reasonable basis. Quantitative models and ratings need understood limits.
Standard V(A) core duty: Diligence + Independence + Thoroughness → Reasonable and adequate basis; Applies to analysis, recommendations and investment actions. Use the Standard's wording in answers.
Test for relying on others' research: Reliance is acceptable only after reasonable efforts to confirm the research is sound; Check assumptions, rigor, thoroughness and independence of the provider.
Quantitative model due diligence: Understand inputs, assumptions, limits and stress behavior; You need not rebuild the model, but you must know its limits.
Responsibility rule: Using outside research does not transfer accountability; You remain responsible for recommendations and actions.
Standard V(A) core duty: Diligence, independence and thoroughness + reasonable and adequate basis (supported by research and investigation); Applies to analysis, recommendations and investment actions, including those made by groups.
Disagreement with a sound basis: Reasonable basis exists → member need not dissent or remove their name; The standard does not require agreement with every group conclusion.
Disagreement because basis is inadequate: No reasonable basis → dissent, and consider removing name if dissent is not reflected; Staying associated can imply endorsement and may also raise Standard I(C).
Process disclosure: Disclose: basic format + general principles of the process (analysis, security selection, portfolio construction); Applies to clients and prospective clients. Update them promptly when a change could materially affect the process.
Limitations and risks: Disclose: significant limitations and risks of the investment process; Includes limits of models and assumptions that could materially affect results.
Relevant factors: Use reasonable judgment to identify important factors and include them in communications; Do not omit a key factor or overstate a minor one.
Fact vs opinion: Distinguish fact from opinion in analysis and recommendations; Label forecasts, views and judgments as opinion. Facts are verifiable.
Standard V(C) core duty: Develop and maintain appropriate records to support investment analyses, recommendations, actions and other investment-related communications with clients and prospects; Applies to all of these, not only written research reports.
Retention period: Keep records for at least 7 years (longer if local law requires); The Handbook recommends at least seven years; if local law requires a longer period, follow the longer one.
Ownership rule: Records are generally the property of the firm; Departing employees should not take originals; copies need firm permission.
Recordkeeping responsibility: Firm usually holds the records; where there is no firm, the member must retain them; Independent practitioners and those without firm systems must retain records themselves.
Standard V(A) Diligence and Reasonable Basis (official wording): Members and Candidates must: 1. Exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions. 2. Have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.; Applies to the work done before recommending or acting.
Standard V(B) Communication with Clients (summary, not exact wording): Summary of four duties: (1) disclose to clients and prospective clients the basic format and general principles of the investment processes used; (2) promptly disclose any change that might materially affect those processes; (3) identify and include important factors in communications; (4) distinguish between fact and opinion.; This is a summary of the Standard's duties. Applies to what clients are told and how.
Standard V(C) Record Retention (summary): Members and Candidates must develop and maintain appropriate records to support their investment analysis, recommendations, actions and other investment-related communications with clients and prospective clients.; Absent regulatory requirements, retain records for at least seven years; records are the firm's property.
Quick test: Work done poorly → V(A). Client told poorly → V(B). Evidence not kept → V(C).; A single case can breach more than one part.

Quick revision

V(A): exercise diligence, independence and thoroughness, and have a reasonable basis supported by research or investigation.
V(B): disclose the basic format and general principles of your investment process, and any changes that could affect it.
V(B): tell clients and prospects about significant limitations and risks of the process and the recommendation.
V(B): use reasonable judgment on which factors to include, and separate fact from opinion.
V(C): maintain records that support your analysis, recommendations, actions and communications.
Where no regulation sets a retention period, the Guidance recommends keeping records for at least seven years. Seven years is a recommendation, not a rule. Follow a longer legal period where one applies, and keep records in a form that can be retrieved. Records belong to the firm, not the member.
Using third-party research: you must check its quality and assumptions, not just trust the name of the provider.
Group research: a member who believes the group view has a reasonable basis may stay associated with it. A member who believes it lacks a reasonable basis should ask to have their name removed from the report.
Firms should have written policies for research review, so a reasonable basis does not depend on one person.
Changing jobs: do not take records or files without the former employer's permission.
Fact versus opinion: label forecasts and views clearly as such, so the client can judge them.
Elimination tip: reject options that rely blindly on others, hide risks, or discard records.

Common mistakes

Thinking a profitable recommendation proves compliance Fix: V(A) judges the process. Ask what research supported the decision at the time it was made.
Believing a recommendation that later loses money breaches the Standard Fix: A loss alone is not a violation. If the basis was reasonable and adequate, the member complied.
Believing a reputable provider removes the duty to check. Fix: Reputation helps, but you must still make reasonable efforts to confirm soundness.
Thinking you must recreate all third-party research yourself. Fix: The Standard asks for reasonable efforts. Review assumptions, rigor and independence, not rebuild from scratch.
Thinking every member must agree with the group conclusion. Fix: Remember the guidance: consensus work can differ from one member's view, and agreement is not required if the basis is reasonable.
Saying a dissenting member must always remove their name. Fix: Name removal is for cases where the member believes the basis is inadequate and their dissent is not reflected. Mere disagreement does not trigger it.
Thinking you must reveal every detail of a proprietary model. Fix: Remember the standard asks for the basic format and general principles only, plus significant limitations.
Applying the duty only to existing clients. Fix: The standard names clients and prospective clients. Prospects are covered.
Treating seven years as a legal requirement everywhere. Fix: Say 'at least seven years recommended; follow longer local requirements'.
Thinking an analyst owns the models and notes they built. Fix: Remember that records are generally firm property. Leaving analysts need permission to take copies.

Exam tips

Look for the process words: reviewed, verified, documented, copied, relied. They signal whether the answer is compliance or violation.
Never pick an option saying a loss proves a violation or a gain proves compliance. V(A) is judged on the basis at the time.
With third-party research, models and ratings, the best option usually involves making reasonable efforts to check them, not rejecting them or accepting them blindly.
Separate V(A) from III(C) Suitability and V(B) Communication. If the question is about the quality of research, it is V(A).
Name the Standard in your head as V(A) and use the phrase reasonable and adequate basis to anchor the answer.
Look for the phrase 'without checking' or 'relied solely'. It usually signals a V(A) violation.
Correct answers use 'reasonable efforts', not 'verify every figure' or 'rebuild the model'.
Expect scenarios with a conflicted broker or vendor. Independence is the hidden clue.