Ethical and Professional Standards Q103

103Janice McDowell, CFA, is the chief investment officer of Zenith Investment Bank and wants to improve the diversification of one of its balanced funds in order to improve its returns. The investment policy statement of the fund mentions low risk investments in large-cap equities, government bonds of AA ratings and corporate bonds of high investment-grade ratings. However, a new IPO offering of a small pharmaceutical company with high growth potential, promises high returns since the issue is being offered at a discount. He immediately allocates some portion of the issue to his fund, without exceeding the limit on the equity exposure of this fund. McDowell has least likely violated the CFA Institute Standards of Professional Conduct relating to:

Option : C
Explanation : The Standards related to III(A) Loyalty, Prudence, and Care and III(C) Suitability are violated. The IPS mentions low risk securities, and describes the asset classes. Therefore investment in the pharma stock may not be suitable for this portfolio.

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