Alex Brown, an analyst at Thinkglobal Securities Inc., is analyzing the bicycle industry and writing a report on Fastride Cycles Corp. He mentions in his research report that the demand for bicycles is increasing, as the urban population is becoming more environment and health conscious. His study was conducted in two cities in the United States, which substantiated the increase in demand for bicycles. Based on his analysis, he estimates that Fastride Cycles’ sales will increase by 25% and makes a buy recommendation in his report. Which of the following statements in the report will most likely violate the standards?
a. The urban population is becoming more environment and health conscious.
b. Demand for bicycles will increase.
c. Fastride Cycles’ sales will increase by 25%.
Correct answer: C Alex’s recommendation is based on his opinion about the demand for bicycles. His statement that Fastride’s sales will increase by 25% is an estimation or an opinion based on his studies and not a fact. So, he violates Standard V(B). The other two statements do not have a direct material impact that will affect an investor’s decision.
What? Since when were analysts not allowed to publish estimated sales numbers?
Another ethics question I answered also stated that analysts are apparently not allowed to execute BUY/SELL trades requested by clients if the firm’s recommendation is SELL/BUY. I’ve never heard of this in the industry. Are analysts just expected to decline the client request because the client doesn’t agree with the firm’s recommendation?
This is based on opinion and it is not a fact so this violates the standard. Saying that EPS will increase by 5% in the next 5 years is based on an analyst’s models and analysis. These model and analyses only provide an opinion as to what EPS will be in the next 5 year. EPS will most likely not increase by 5% in the next five year. This is not factual information.
You cannot refuse the trade, but you need to warn the client of the change in recommendation. If the client still wants to trade, then you can execute even if it goes against the firm’s buy/sell recommendation.
He says “will” increase by 25%, but this is not necessarily true. This number is based on his previous analysis of the bicycle industry. In the report, he could have mentioned that this is an estimated number or even say " may increase by 25% based on my analysis."
Right, the answer choice do not seem to give much of an option lol. Actually, wouldn’t mentioning that it is an estimate in the report solve the problem? Here it seems like there is not mention of it being an estimate in the report.
Exactly. Nowhere does it say that he said it will increase. I get that it never explicitly said that he put the word estimate on the report but since the question used the word estimate, I’d assume that that’s what the question implies.
I picked C based on completely different reasons to the answer. For me, I thought C because he only conducts his study in two cities in the U.S and then recommends a buy.