Ethics – Diligence and Reasonable Basis (CFA Video)

Question:

John is a very responsible analyst. Whenever he makes a recommendation, he makes sure he has done thorough studies on the underlying stock. Last week, he was busy in analyzing two stocks A and B, both depends heavily on international trades. Out of his expectation, he could only finish Stock A before the deadline for issuing recommendations.

He only has one day left to analyze stock B so he tried his best and worked until 4am on the last day. However, he was not able to include the impact of world economy in the analysis. But so far, his recommendation (buy) is aligned with his expectation and also other star analysts’. If he were to invest his own money, he definitely will buy stock B also. Does he violate Standard V(A) Diligence and Reasonable Basis?

Answer:

Decomposition:

John is a very responsible analyst. Whenever he makes a recommendation, he makes sure he has done thorough studies on the underlying stock.

His past performance is irrelevant! Even he was good, doesn’t mean he is right now

He tried his best and worked until 4am on the last day

Working Hard means nothing. Working right is what we want! (I work very hard for my CFA exam also! But I don’t get passed automatically)

Last week, he was busy in analyzing two stocks A and B, both depends heavily on international trades.

However, he was not able to include the impact of world economy in the analysis.

Means his analysis is incomplete

But so far, his recommendation (buy) is aligned with his expectation and also other star analysts’. If he were to invest his own money, he definitely will buy stock B

It doesn’t matter what other experts say. And even if he is confident, an analyst still need to go through basic relevant analysis before any recommendation. An analyst should always question his gut feeling!

He violated Standard V(A) Diligence and Reasonable Basis