2003 Sample Level II Questions

These sample questions were developed in 2003 to give candidates an indication of the question
formats that would be experienced on the actual examination.

These questions were not intended to represent the actual exam with respect to topic coverage, level of
difficulty, or time requirement. These questions were not intended to provide any indication of
candidates performance on the actual exam. Candidates should also note that these questions were
based on old curriculum and/or learning outcome statements that may no longer be assigned. Also,
format and writing style conventions used for questions have changed over time in keeping with best
practices.

Item Set #1 (Ethics):
Superior Asset Management has offices and provides investment advisory services to clients living in
various countries. Each country has different securities laws and regulations and no prohibition exist
against using material nonpublic information:
Home Country (HC) has no securities laws or regulations.
Less Strict Country (LSC) has securities laws and regulations that are less strict than the
requirements of the AIMR Code and Standards and also states that the law of the locality where
business is conducted governs.
More Strict Country (MSC) has securities laws and regulations that are morestrict than the
requirements of the AIMR Code and Standards and states that the law of the locality where
clients reside governs.
Superior wants to ensure that its portfolio managers comply with the applicable laws, rules, and
regulations of the various countries where Superior does business. Specifically, Superior is concerned
about the activities of the following four portfolio managers:

Diane Grant, an AIMR member, resides in LSC but does business in HC and LSC.
Brenda Klein, a candidate in the CFA Program, resides in LSC and manages accounts for clients
who reside in either LSC or MSC. LSC law applies
Chris Thompson, CFA, resides in MSC and does business in LSC with clients who are citizens of
LSC. MSC law applies.
J ohn Wilson, an AIMR member, resides in HC and does business in HC, LSC, and MSC. LSC and
MSC laws apply.

1. Which of the following best describes Grants responsibility under the AIMR Standards of
Professional Conduct? Grant may:
A. not use material nonpublic information for her HC clients, her LSC clients, or herself.
B. use material nonpublic information for her HC clients, LSC clients, and for herself.
C. use material nonpublic information for her HC clients but not for her LSC clients or herself.
D. use material nonpublic information for her HC clients and LSC clients but not for herself.

2. According to AIMR Standards Klein must adhere to:
A. AIMR Code and Standards for her LSC and MSC clients.
B. MSC laws and regulations for both LSC and MSC clients.
C. AIMR Code and Standards for her LSC clients and MSC laws and regulations for her MSC
clients.
D. LSC laws and regulations for her LSC clients and MSC laws and regulations for her MSC
clients.

3. Thompson also manages accounts for clients who reside in MSC. According to AIMR Standards
Thompson must adhere to:
A. MSC laws and regulations for her LSC and MSC clients.
B. AIMR Code and Standards for her LSC and MSC clients.
C. AIMR Code and Standards for her LSC clients and MSC laws and regulations for her MSC
clients.
D. LSC laws and regulations for her LSC clients and MSC laws and regulations for her MSC
clients.

4. According to AIMR Standards Wilson must adhere to:
A. AIMR Code and Standards for his HC, LSC, and MSC clients.
B. The laws and regulations of MSC for his HC, LSC, and MSC clients.
C. AIMR Code and Standards for his HC and LSC clients and the laws and regulations of MSC
for his MSC clients.
D. The laws and regulations of HC for his HC clients, the laws and regulations of LSC for his
LSC clients, and the laws and regulations for MSC for his MSC clients.

Item Set #1 Guideline Answers:
1. A is correct. Because applicable law is less strict than the AIMR Code and Standards, the member
must adhere to the Code and Standards, which say that material nonpublic information may not be
used under any circumstances.
2. C is correct. When AIMR Code and Standards impose a higher degree of responsibility than
applicable laws, the AIMR Code and Standards must be applied. This is the case for Kleins
clients in LSC. If applicable law is more strict than the requirements of the Code and Standards,
however, members, CFA charterholders, and candidates in the CFA program must adhere to
applicable law. This is the case for Kleins clients in MSC.
3. A is correct. An analyst or portfolio manager working in an international environment is required
to have knowledge of the laws of the country where he or she is working. When involved with
securities of a country with laws and regulations that are more strict than the AIMR Code and
Standards, the stricter laws and regulations of the analysts home country (in this case MSC)
prevail.
4. C is correct. If applicable law is more strict than the requirements of the AIMR Code and
Standards, members, CFA charterholders, and candidates in the CFA program must adhere to
applicable law. Thus, the Code and Standards apply to Wilsons HC and LSC clients and the laws
and regulations of MSC apply to his MSC clients.

Item Set #2 (Quantitative Analysis)
Peggy Parsons, CFA, wants to forecast sales of BoneMax, a prescription drug for treating
osteoporosis. Parsons has developed the sales regression model shown in Exhibit 1 and supporting
data found in Exhibits 2 and 3 to assist in her sales forecast of BoneMax.

Exhibit 1
BoneMax Sales Regression Model
SALES =8.530 +6.078 (POP) +5.330 (INC) +7.380 (ADV)
t-values: (2.48) (2.23) (2.10) (2.75)

Unadjusted R
2
=0.804
Number of observations =20 annual observations
Notes:
SALES =sales of BoneMax (US$ millions)
POP =population (millions) of U.S. women over age 60
INC =average income (US$ thousands) of U.S. women over
age 60
ADV =advertising dollars spent on BoneMax (US$ millions)

Exhibit 2
Variable Estimates for 2002
POP 34.7
INC 27.4
ADV 8.2

Exhibit 3
Critical Values for Students t Distribution
Area in Upper Tail Degrees of
Freedom 10% 5% 2.5%
16 1.3368 1.7459 2.1199
17 1.3334 1.7459 2.1098
18 1.3304 1.7341 2.1009
19 1.3277 1.7291 2.0930
20 1.3253 1.7247 2.0860

1. Using the regression model developed, the sales forecast in millions of U.S. dollars for 2002 is
closest to:
A. 215.
B. 280.
C. 417.
D. 426.

2. The unadjusted R
2
indicates that the intercept and the independent variables together explain:
A. 80.4% of total BoneMax annual sales.
B. 80.4% of the variability of BoneMax annual sales.
C. 89.7% of the variability of BoneMax annual sales.
D. less than 20% of the variability of BoneMax annual sales.

3. At the 5 percent level of significance, is the regression coefficient of the average income of U.S.
women over the age of 60 (INC) significantly different from zero?
A. No, because 2.10 <2.1199
B. Yes, because 2.10 >1.7247
C. Yes, because 2.10 >1.7459
D. Yes, because 2.10 >2.0860

4. In testing the statistical significance of the regression coefficient of advertising dollars spent on
BoneMax, Parsons must know which of the following inputs?









5. The standard error of the estimated coefficient for advertising dollars spent on BoneMax (ADV)
is closest to:
A. 0.373.
B. 2.211.
C. 2.684.
D. 5.934.

Item Set #2, Guideline Answers
1. D is correct. 8.530 +(6.078 34.7) +(5.330 $27.4) +(7.380 $8.2) =$426.0 million.
2. B is correct.
3. A is correct because with df =20 (3+1) =16 and a 2-tailed test =2.5% area, the critical t-value
=2.1199.
4. D is correct because both inputs are necessary to determine the statistical significance of an
individual regression coefficient.
5. C is correct. The standard error is equal to 7.380/2.75.

Degrees of
freedom
One-tailed or
two-tailed test
A.
No No
B. No Yes
C. Yes No
D. Yes Yes