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CFA Level I Exam · Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Standard V(A): Diligence and Reasonable Basis Explained

Updated 7 October 2026 · Fact-checked

Standard V(A) requires you to exercise diligence, independence and thoroughness when analysing investments, making recommendations and taking investment actions. You must also have a reasonable and adequate basis, supported by appropriate research and investigation, for each recommendation or action. To answer exam questions, check what research was done and whether it fits the situation.

Understand Standard V(A): Diligence and Reasonable Basis

Standard V(A) is about the quality of the work behind an investment view. Before you tell a client to buy, sell or hold, you need evidence. That evidence must be proportionate to the decision and the risk involved.

The official wording says members and candidates must: exercise diligence, independence, and thoroughness in analyzing investments, making investment recommendations, and taking investment actions; and have a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action.

There is no fixed checklist. What counts as a reasonable basis depends on the situation. A recommendation to buy a thinly traded private company needs deeper work than a recommendation to buy a large, well-covered index fund. The more complex or risky the product, the more investigation you need.

The Standard also covers secondary and third-party research. You may rely on it, but you must make reasonable efforts to confirm it is sound. Check the assumptions, the rigour of the method, the timeliness of the data and the independence of the provider. Relying on a quantitative model or a rating is allowed only if you understand its limits. For group research, a member of the group who disagrees with the conclusion is not required to dissociate from the report, as long as the report has a reasonable and adequate basis. If the member believes the report lacks a reasonable and adequate basis, they should decline to be identified with it (dissociate). A member who believes the group report has a reasonable basis and relies on it is not in violation merely because others contributed or the report later proves flawed.

Standard V(A) also covers the selection of external advisers or subadvisers. You must use a reasonable process to select and monitor them.

Key formulas to remember

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.

How to solve Standard V(A): Diligence and Reasonable Basis questions

Use the same short sequence on any V(A) question. It keeps you from being drawn to a plausible but wrong option.

  1. 1Identify the action: a recommendation, a trade, use of someone else's research, a model, or selecting a manager.
  2. 2Ask what research or investigation was done before the action.
  3. 3Judge whether that work was reasonable and adequate for the product's complexity, risk and the client's needs.
  4. 4Check independence. Did the member simply copy a source, a rating or a colleague's view without checking it?
  5. 5Check whether the work was timely. Old data, or events that changed the facts, can undermine a basis.
  6. 6Decide if the Standard was violated or complied with. Remember that a good result does not prove diligence, and a loss does not prove a breach.
  7. 7Pick the option that shows reasonable verification, documentation or independent review, and reject extreme answers.

Quickest way: Three-question V(A) filter

When to use it: Use it on standalone three-option items where you have about 90 seconds.

  1. Was there independent checking? If the member only copied or relied blindly, lean to violation.
  2. Was the effort proportionate to the risk? Simple, liquid products need less work than complex ones.
  3. Was the work current and documented? If not, lean to violation.
  4. Eliminate options that say research is never needed or that perfection is required. The answer sits between those two extremes.

Common mistakes in Standard V(A): Diligence and Reasonable Basis

  • Thinking a profitable recommendation proves compliance

    Candidates focus on outcome rather than process.

    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

    Candidates confuse bad outcomes with bad analysis.

    Fix: A loss alone is not a violation. If the basis was reasonable and adequate, the member complied.

  • Assuming third-party or vendor research can be used without any checking

    Candidates assume well-known providers are always reliable.

    Fix: You may use it, but you must make reasonable efforts to confirm it is sound. Check assumptions, method and independence.

  • Applying one fixed level of research to every situation

    Candidates look for a single checklist.

    Fix: The required depth varies with the complexity and risk of the investment and the client. Match effort to the case.

  • Thinking a group member must always remove their name from a report they disagree with

    Candidates assume any disagreement with the group view forces the member to withdraw.

    Fix: A member is not required to dissociate from the report simply because they disagree with the group view, as long as the report has a reasonable and adequate basis. The member should decline to be identified with it only if they believe it lacks a reasonable and adequate basis.

  • Treating a rating or quantitative model as a complete basis

    Numbers feel objective.

    Fix: Understand the model's inputs and limits. A rating alone, without understanding, is not a reasonable basis.

Worked examples

Example 1

An analyst at an asset manager in London reads a broker's report recommending a mid-cap European retailer. The analyst changes the cover page to the firm's template, adopts the target price and issues a buy recommendation to clients without reviewing the report's assumptions or data. Which Standard V(A) point best describes the analyst's conduct? A) Compliant, because broker research is always reliable. B) A violation, because no reasonable effort was made to confirm the research was sound. C) Compliant, because the broker is a recognised firm.

Show the solution
  1. Identify the action: relying on third-party research to make a client recommendation.
  2. Standard V(A) allows reliance on such research only after reasonable efforts to confirm it is sound.
  3. The analyst did no review of assumptions, method or data, so there was no independent verification.
  4. Option A is wrong because no research is always reliable. Option C is wrong because a firm's reputation is not a substitute for checking.

Answer: B. The analyst violated Standard V(A) by not making reasonable efforts to confirm the third-party research was sound.

Example 2

A portfolio manager recommends a large position in a thinly traded emerging-market bond to a sophisticated institutional client. The client's mandate permits such bonds and it has a high risk tolerance and a long horizon. The manager reviewed the issuer's audited financials, the bond's covenants and liquidity conditions, and documented the analysis. The bond later falls in price after an unexpected political event. Considering only Standard V(A), which statement is most accurate? A) The manager violated V(A) because the price fell. B) The manager violated V(A) because the bond was thinly traded. C) The manager did not violate V(A) on the basis of the research described.

Show the solution
  1. V(A) tests whether the basis was reasonable and adequate at the time of the decision.
  2. The manager reviewed financials, covenants and liquidity, and documented the work. That is proportionate to a risky, illiquid product.
  3. A later loss from an unexpected event does not show a lack of diligence, so option A fails.
  4. Thin trading raises the research needed but does not itself breach V(A), so option B fails.
  5. The client's mandate and risk profile fit the investment, so suitability is not in question. The item tests only the quality of the research under V(A).

Answer: C. On the research described, the manager did not violate Standard V(A). A later price fall alone does not show a breach.

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.

Practice questions from Guidance for Standard V: Investment Analysis, Recommendations, and Actions

Standard V(A): Diligence and Reasonable Basis in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Standard V(A): Diligence and Reasonable Basis: frequently asked questions

What is a reasonable basis under Standard V(A)?

It is the research and investigation that supports a recommendation or action, and it must be reasonable and adequate for the situation. The more complex or risky the investment, the more work you need. It should also be independent and thorough.

Can I rely on third-party research under Standard V(A)?

Yes, but only after making reasonable efforts to confirm it is sound. Review its assumptions, methods, data and the provider's independence. Copying it blindly would breach the Standard.

What compliance procedures support Standard V(A)?

Firms should set minimum due diligence requirements, document the analysis, review and update research, and check outside managers and models. Written procedures help show that a reasonable basis existed.

Does a loss on a recommendation mean I violated Standard V(A)?

No. A loss alone does not show a violation. The test is whether you had a reasonable and adequate basis, supported by appropriate research, when you made the recommendation or took the action.