CFA Level 1 · Lesson 028: Standard I + II Comprehensive Test (15 Questions)

Module: Ethics & Professional Standards (1.3 — Standard II: Integrity of Capital Markets) Progress: 28/560 lessons Date: June 10, 2026

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Knowledge Review: Standard I & II Quick Reference

Standard I — Professionalism

Sub-Standard	Core Requirement
I(A) Knowledge of the Law	Know and comply with all applicable laws, rules, regulations, and the CFA Code of Ethics; dissociate and report upon discovery of violations
I(B) Independence & Objectivity	Maintain independence and objectivity; do not offer, solicit, or accept any gift, benefit, or compensation that could compromise independence; issuer-paid research must be disclosed
I(C) Misrepresentation	Must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities
I(D) Misconduct	Must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on professional reputation

Standard II — Integrity of Capital Markets

Sub-Standard	Core Requirement
II(A) Material Nonpublic Information (MNPI)	Must not act or cause others to act on MNPI that could affect the value of any investment; mosaic theory permits analysis based on public information combined with non-material information
II(B) Market Manipulation	Must not engage in practices that distort prices or artificially inflate trading volume; prohibits information-based manipulation (spreading false rumors) and transaction-based manipulation (deceptive trades)

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Comprehensive Test (15 Questions)

Question 1 (I(A) — Knowledge of the Law)

Analyst Zhang discovers that his firm is marketing an unregistered financial product in violation of local securities laws. After reporting to the compliance department, the firm decides to continue selling the product. Under Standard I(A), what should Zhang do next?

A. Continue working at the firm but cease participation in selling this product B. File an anonymous report to the regulatory authority C. Resign from the firm, and if necessary, notify the regulatory authority D. Accept the firm's decision since he has fulfilled his reporting obligation

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Question 2 (I(B) — Independence & Objectivity)

An analyst is invited to a luxury dinner hosted by a listed company and receives a commemorative gift worth ¥2,000 at the event. The company has not requested any research report from the analyst. Under Standard I(B), the analyst should:

A. Attend the dinner but decline the gift B. Attend the dinner and accept the gift, as it is a normal business courtesy C. Decline the dinner invitation, as it could impair independence D. Attend the dinner and accept the gift, but disclose it in future research reports

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Question 3 (I(B) — Issuer-Paid Research)

Analyst Wang accepts payment from a listed company to conduct in-depth research on its stock and publish a report. Under Standard I(B), what is the most appropriate action for Wang to take?

A. Refuse the payment, as issuer-paid research is inherently a violation B. Accept the payment and issue a favorable rating in the report C. Accept the payment, but clearly disclose in the report that the issuer paid for the research D. Accept the payment and deliver the report only to the paying company without public release

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Question 4 (I(C) — Misrepresentation)

A fund manager's client presentation materials state: "The fund has achieved an average annualized return of 15% over the past 3 years." However, this figure is an internal calculated rate of return without deducting management fees and custodian fees (totaling approximately 2%). Does this violate Standard I(C)?

A. No, because the return data itself is accurate B. No, because this is standard industry practice C. Yes, because stating returns without deducting fees may mislead investors D. Yes, but it is acceptable as long as it is explained in small print

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Question 5 (I(C) — Performance Presentation)

An analyst claims that his stock selection model has "an accuracy rate of up to 90%," but the model was only back-tested on 10 stocks. Under Standard I(C), this constitutes:

A. Reasonable promotion, as the back-test data supports the claim B. Misrepresentation, because the sample size is far too small to support such a high accuracy claim, and the scope of back-testing was not disclosed C. Misrepresentation, unless the analyst states it is a back-test result D. Acceptable, as "accuracy" has no uniform definition

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Question 6 (I(D) — Misconduct)

CFA charterholder Li posts false negative information about a competitor's company on his personal social media account, causing the company's stock price to drop. He then buys the company's stock and profits. Under Standards I(D) and II(B), Li's conduct:

A. Violates only I(D) B. Violates only II(B) C. Violates both I(D) and II(B) D. Is personal conduct that does not violate any standard

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Question 7 (II(A) — Material Nonpublic Information)

Analyst Zhao overhears a listed company's CEO telling a friend at lunch: "We will announce a major acquisition tomorrow." Zhao immediately notifies the trading desk to purchase the company's stock. Under Standard II(A), Zhao's conduct:

A. Is compliant, because he overheard the information unintentionally B. Is a violation, because he traded on MNPI C. Is compliant, as long as he documents it D. Is not a violation, because the information was obtained in a public setting

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Question 8 (II(A) — Mosaic Theory)

By combining and analyzing information from five public data sources, an analyst infers that a company will release better-than-expected quarterly earnings. Based on this, he recommends that clients buy the stock. Under Standard II(A)'s mosaic theory, this conduct:

A. Is a violation, because the analyst used speculative conclusions B. Is a violation, unless the analytical conclusion proves accurate C. Is compliant, because all information sources are public and the analysis was independently performed D. Is compliant, as long as the analyst discloses the information sources

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Question 9 (II(A) — Selective Disclosure / Expert Networks)

A fund manager pays to consult a practicing physician (expert network) in the healthcare industry and learns that a pharmaceutical company's new drug clinical trial data significantly exceeds expectations. This data has not yet been made public. The fund manager buys the company's stock based on this information. Does this violate Standard II(A)?

A. No, because expert networks are legitimate information channels B. Yes, because the clinical trial data constitutes MNPI C. No, as long as the fund manager confirms the expert has not breached any confidentiality agreement D. No, because the information comes from a third party rather than company insiders

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Question 10 (II(B) — Information-Based Manipulation)

Trader Chen anonymously posts a false message on an investment forum claiming "a listed company is about to be fined $5 billion by the government," while simultaneously shorting the stock heavily. After the rumor is debunked, Chen has already closed his position at a profit. Chen's conduct:

A. Violates only II(B) (Market Manipulation) B. Violates only I(D) (Misconduct) C. Violates both I(D) and II(B) D. Is not a violation, because forum posts should not be taken seriously

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Question 11 (II(B) — Transaction-Based Manipulation)

A trader pushes up the price of a small-cap stock by 5% near market close through a series of small buy orders, in order to improve the month-end book value of his holdings. Under Standard II(B), this conduct:

A. Is not a violation, because there was no intent to deceive B. Is a violation, because he deliberately created trading activity that distorted the market price C. Is not a violation, because all buy orders were genuine D. Is a violation, but only if there is evidence proving intent to manipulate

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Question 12 (Cross-Standard — I(A) + II(A))

Analyst Liu discovers that a colleague is trading on inside information. After Liu reports to the compliance department, compliance replies that "the matter has been handled." However, Liu observes that the colleague continues similar behavior. Liu should:

A. Take no further action since compliance has responded B. Report the colleague directly to the regulatory authority C. Report again to the compliance department / supervisor; if still ineffective, consider resigning and retain the right to report to the regulatory authority D. Anonymously warn the colleague to stop

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Question 13 (Cross-Standard — I(B) + II(B))

A research department head instructs analysts to "issue positive ratings whenever possible," because the department derives most of its revenue from investment banking services to the companies it covers. Analysts who do not comply will have their bonuses reduced. The department head's conduct violates which standard(s)?

A. Only I(B) (Independence & Objectivity) B. Only II(B) (Market Manipulation) C. Only IV(A) (Loyalty to Employer) D. Primarily I(B); if analysts comply and issue misleading reports, the analysts also commit violations

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Question 14 (Cross-Standard — I(C) + I(D))

Charterholder Manager Wang writes on his resume: "Former Investment Director at XX Fund, managing assets of ¥50 billion." In reality, he was the "Deputy Investment Director" of the fund, and the fund's actual AUM was ¥30 billion. This violates:

A. Only I(C) (Misrepresentation) B. Only I(D) (Misconduct) C. Both I(C) and I(D) D. Neither, as the differences are minor

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Question 15 (Comprehensive — Scenario Analysis)

A fund manager at XYZ Asset Management receives the following three pieces of information: - Message A: The CEO of a portfolio company reveals at an industry conference that "next quarter's earnings guidance will be significantly raised" (the conference is public) - Message B: A supplier of the company privately informs that "order volume has doubled" - Message C: Through analysis of public financial statements and industry data, the manager concludes that "the company's profitability is sustainably improving"

Which of the following actions is most compliant?

A. Immediately increase the position based on Message A (public conference = public information) B. Immediately increase the position based on Message B (supplier information = verifiable through public channels) C. Immediately increase the position based on Messages A + B + C combined D. Recommend increasing the position based on Message C; for Message A, verify whether it has been widely disseminated in the market before acting; disregard Message B entirely

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Answer Key & Explanations

Question 1: C

Explanation: I(A) requires members to first report violations to internal compliance. If the firm does not take corrective action, the member must dissociate — if necessary, by resigning and consulting legal counsel about potentially notifying regulatory authorities. A is insufficient; B should be preceded by resignation and dissociation; D improperly absolves personal responsibility.

Question 2: C

Explanation: I(B) requires maintaining independence and objectivity. Even if no report is requested, luxury treatment may subconsciously influence future judgment. The most prudent course is to decline. If attending, the analyst should decline gifts and pay their own expenses to avoid any conflict of interest. A ¥2,000 gift exceeds the reasonable threshold for "ordinary business courtesy."

Question 3: C

Explanation: I(B) permits issuer-paid research but requires full disclosure. Key conditions: ① the fact that the issuer paid for the research must be disclosed; ② the report must be based on reasonable basis and independent judgment; ③ ratings must truthfully reflect the analyst's genuine opinion. A is too absolute; B violates independence; D ignores the disclosure obligation.

Question 4: C

Explanation: I(C) prohibits misrepresentation. Claiming "15% annualized return" when investors actually receive only ~13% (net of management and custodian fees) is misleading. The firm should disclose whether returns are net of fees or prominently explain the difference between gross and net returns.

Question 5: B

Explanation: I(C) requires that statements not be misleading. Claiming "90% accuracy" based on back-testing only 10 stocks suffers from severe sample size insufficiency — 9 out of 10 correct could be luck. Additionally, the scope, sample size, and time period of back-testing were not disclosed, constituting misrepresentation.

Question 6: C

Explanation: I(D) prohibits fraud and dishonesty (spreading false information), while II(B) prohibits market manipulation (manipulating stock prices through false information for profit). Li's conduct violates both standards simultaneously. It may also violate I(A) (if securities laws were breached) and II(A).

Question 7: B

Explanation: Whether information constitutes MNPI depends on the nature of the information, not the method of acquisition. Whether intentionally obtained or accidentally overheard, if the information is material and nonpublic, trading on it violates II(A). Zhao should immediately report the information to compliance and halt trading in the relevant security.

Question 8: C

Explanation: Mosaic theory permits analysts to reach investment conclusions by gathering public information and combining it with independent analysis, even if the conclusion differs from market consensus. Key conditions: ① all information sources are public; ② the analysis is based on independent research work; ③ no MNPI is involved.

Question 9: B

Explanation: Expert networks are legitimate channels, but they cannot be used to obtain MNPI. "New drug clinical trial data significantly exceeds expectations" clearly constitutes MNPI — it comes from a nonpublic channel and is material enough to affect stock prices. Trading on this information violates II(A). Compliant approach: ① engage expert networks under agreements prohibiting MNPI sharing; ② if MNPI is inadvertently obtained, cease analysis and report to compliance.

Question 10: C

Explanation: Spreading false rumors violates I(D) (fraudulent conduct), while simultaneously using false information to manipulate stock prices and profit constitutes II(B) information-based manipulation. Both standards are violated concurrently.

Question 11: B

Explanation: II(B) prohibits any practice designed to distort market prices or create a false impression of trading activity. Pushing up the closing price to improve month-end book value (marking the close / portfolio pumping) is a classic form of transaction-based manipulation. Whether the orders are "genuine" or whether there is "intent to deceive" — the key point is that the conduct itself distorts the market pricing mechanism.

Question 12: C

Explanation: This is a cross-section scenario involving I(A) and II(A). I(A) requires: report internally → if no action, dissociate. II(A) involves MNPI requiring special handling. Option C fully covers I(A)'s escalation steps: internal report → escalate → resign and dissociate → consider external reporting.

Question 13: D

Explanation: The department head uses bonus threats to pressure analysts into issuing non-objective ratings, violating I(B) (Independence & Objectivity). If analysts comply and issue misleading reports not based on reasonable basis, the analysts themselves also violate I(B) and I(C). "Following the boss's instructions" does not constitute a compliance defense. Option D most accurately describes the scenario.

Question 14: C

Explanation: Exaggerating past job titles (Deputy Director → Director) and AUM (¥30B → ¥50B) constitutes I(C) Misrepresentation. Simultaneously, this conduct involves dishonesty and also triggers I(D) Misconduct. A resume is an important vehicle of professional reputation; making false statements on it violates both standards.

Question 15: D

Explanation: - Message A: The CEO revealed guidance raises at an "industry conference" — determine whether the conference was public (media coverage, open livestream, press releases). If public, information can be used after release; however, "just spoken" ≠ "widely absorbed by the market." Prudence requires verifying dissemination. - Message B: Privately obtained supplier information about "doubled orders" — internal operational information, clearly MNPI, must not be used. - Message C: Independent analysis based on public financial statements and industry data — fully compliant, within mosaic theory scope. - Option D provides the most prudent and compliant approach.

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Score Assessment

• 13-15 correct: ⭐⭐⭐ — Solid command of Standards I & II
• 10-12 correct: ⭐⭐ — Good, needs targeted review of weak areas
• 7-9 correct: ⭐ — Requires focused review; recommend redoing relevant sub-standard lessons
• 0-6 correct: Needs systematic relearning of Standards I & II

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CFA L028 · Standard I + II Comprehensive Test · June 10, 2026