CFA Level I · CFA Level I Exam · Guidance for Standard V: Investment Analysis, Recommendations, and Actions
A portfolio manager recommended a hedge fund to a client with an aggressive risk profile after analyzing its track record, its principals, its fees and its risk profile. Six months later the fund lost 60% of its value. Which statement about the manager's compliance with Standard V(A) is most accurate?
The manager most likely complied. Standard V(A) requires a reasonable and adequate basis supported by research, not a guaranteed result. The manager analyzed the track record, principals, fees and risk, so a later loss does not by itself show a violation.
- AThe manager violated the Standard because a loss of that size shows the basis was inadequate
- BThe manager complied, because a reasonable basis does not guarantee that an investment has no downside riskCorrect
- CThe manager complied only if the fund's earlier returns are guaranteed to continue
Explanation
Analysis that results in a reasonable basis does not guarantee against downside risk. Decisions rest on the facts known at the time. The manager should discuss the process with the client and remind the client that past performance does not guarantee future gains. Judging by the outcome is the error in option A.
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