Ethics question I encountered on Kaplan’s study material.

The answer explanation says “King’s recommendation is not based on thorough quantitative work because the period used in her study is only one year. Hence She didn’t have a reasonable basis for her recommendation.” There’s much debate in the industry as to the appropriate sample size needed to derive a strong conclusion. If she’s using monthly data, it would probably generate a weak result due to the small sample size, but switching to daily data or intra-day tick data would significantly improve the accuracy of her quantitative estimates. As I learned from the Master’s of Financial Engineering, you need an average of 40+ years of data to generate anything statistically significant, but industry still doesn’t shy away from major quantitative strategies such as momentum, which typically only use one year of data. Some of these strategy are indeed based on only short-term data because long term data could distort the results.

The answer also provides that “King’s recommendation does not consider the client’s specific needs and circumstances.” However, the question does mention a specific stock but sounded like the analyst is merely recommending a change in strategy from value to growth but didn’t mention client’s preference to any specific class of stocks. Too many assumptions must be made here to arrive at Kaplan’s conclusion that Code of Standards are violated.

What’s your guys’ opinion?

Thanks,
Ryan Huang.