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

A portfolio manager uses a quantitative screening model built by an outside vendor to select stocks for client portfolios. He has not examined the model's assumptions or limitations. Under Standard V(A), his actions are most likely:

His actions are inconsistent with Standard V(A). Members must exercise diligence, independence and thoroughness, and must consider the output and potential limitations of quantitative models. Using a vendor model without examining its assumptions does not provide a reasonable and adequate basis for investment actions.

  1. Aacceptable, because third-party models remove the need for independent analysis
  2. Bacceptable, provided the model output was profitable in the prior year
  3. Cinconsistent with the Standard, because the output and potential limitations of quantitative models should be consideredCorrect

Explanation

The guidance lists the output and potential limitations of quantitative models as an attribute to consider when forming a reasonable basis. Relying on a model without understanding its limits fails the diligence and independence requirement. Past profit does not substitute for this.

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