» CFA 1 – 25 questions

Which of the following is least likely a macroeconomic influence that affects an industry’s growth? Changes in:

interest rates.

inflation.

technologies.

Michael recently purchased a new sedan. He then acquired insurance to protect against loss due to accident, nature, failure, or theft. Because the vehicle was insured, Michael didn't bother locking the doors, and the car was soon stolen. This is an example of what insurance problem?

Moral hazard

Adverse selection

Fraud

A tariff directly benefits which of the following entities:

Consumers and local producers

Consumers and the government

Local producers and the government

Todd Whitley, CFA, has purchased shares in an oversubscribed initial public offering using a block trade. The number of shares Whitley acquired is insufficient to fill all of his clients' buy orders. In order to adhere to the Standards, Whitley should most likely allocate these shares on a(n):

equal basis among all clients who placed orders.

pro rata basis according to each client's order size.

pro rata basis according to each client's account size.

An analyst makes the following comment regarding derivative contracts: “All derivative contracts must have an underlying, two parties – a buyer and a seller, and low degrees of leverage” The comment is most likely to be:

Incorrect with regard to the underlying.

Incorrect with regard to the low degrees of leverage.

Incorrect with regard to the parties.

A hypothetical futures contract has a current market price of $19 and initial margin requirement of $9. The maintenance margin requirement is $4. For 15 short contracts, the price at which a margin call will trigger is:

$10.

$14.

$24.

Russell Bellamy, CFA, a manager with a regional bank, sends out a regular newsletter to clients on a monthly basis. Independent of his position, Bellamy has been appointed to the Board of a local nonprofit organization that provides grants to local artists. In his latest newsletter to clients, Bellamy mentions his appointment as well as the fact that the organization recently announced the start of a fundraising campaign. Has Bellamy most likely violated the Standards?

No

Yes, with respect to preservation of confidentiality

Yes, with respect to loyalty

An equity analyst working for a growth oriented mutual fund has a tendency to misvalue the stocks of popular companies that she has previously recommended and the fund already owns. Her behavior is most likely consistent with which of the following biases?

Prospecttheory

Escalationbias

Confirmationbias

Which of the following is least likely a characteristic of open-ended mutual funds?

An open-end structure makes it easy to grow in size but creates pressure on the portfolio manager to manage the cash inflows and outflows.

In open-end funds, new shares are created and sold at a premium or a discount to net assets values depending on the demand for the shares.

Open-end funds accept new investment money and issue additional shares to existing or new investors. Therefore, the number of outstanding shares changes after every new investment.

When a monopolist charges each customer the highest price he/she is willing to pay, this is most accurately described as:

Third-degree price discrimination

Second-degree price discrimination

First-degree price discrimination

A lognormal distribution:

is bounded below by 1 and has a long right tail.

may well describe a stock price whose continuously compounded returns do not follow a normal distribution.

is not completely described by two parameters i.e. the mean and the variance.

The correlation of a risk-free asset to a risky portfolio is closest to

-1

0

1

The Cournot model of oligopoly form of market structure assumes that the number of firms in an oligopoly is:

3

2

1

A dealer has entered into an equity swap as the fixed-rate payer. The swap is based on the returns of the S&P500 index. On the last settlement date, the index fell by 2% due to a significant drop in the value of a few of its component stocks. On the last settlement date, the dealer would have to pay:

a fixed-rate payment and an equity payment.

the entire fixed payment it owes.

a netted amount of fixed payment.

Gilbert Love worked as financial analyst at Milton Securities. During his employment at Milton, Love covered Indigo Corp and developed detailed financial models, assumptions and supporting reports. When Milton switched his job, his new employer assigned him to analyze Indigo Corp. Milton developed a new model with improved assumptions and specifications and re-created the supporting records by gathering data from the covered company. Has Milton violated any CFA Institute Code and Standards?

Yes, he violated ‘Misrepresentation’ and ‘Record Retention’ by developing the model and re-creating the supporting records for Indigo Corp.

Yes, he has violated Standard V-C ‘Record Retention’ by re-creating the supporting records.

No, he is in compliance with the Code and Standards.

Nelly devotes her budget each week to both beans and beef. Beans are an inferior good costing $1 per can. A pound of beef, a normal good, costs $5. As Nelly's income increases from $50 to $75 per week, her consumption of beans will most likely:

Decreases

Remain constant

Increase

Which of the following is most accurately considered a systematic risk?

Discovery of oil

Change in interest rates

Threat of lawsuits

Identify the most appropriate explanation of ''channel stuffing''.

Channel stuffing is an aggressive revenue recognition strategy in which the firm oversupplies goods to the distribution channel.

Channel stuffing is a conservative revenue recognition strategy in which the firm hold goods and delays the supply of goods to the distribution channel.

Channel stuffing is an aggressive revenue recognition strategy in which the firm increase the supplier's orders and recognizes the expense before the goods are received.

For short selling purposes if a security is extremely hard to borrow, the short rebate rate may be:

negative or very low.

10 basis points more than the overnight rate.

very high.

Blanco Shell Investments (BSI) is a small family owned investment bank and its shares are relatively illiquid. In a casual meeting Brett Palmer, managing director at BSI, told his friend, Leon Fox, that BSI is going to earn substantial profits in its commodities business. In the next few days Fox purchases BSI shares while Palmer disposes his position in BSI and switches his job. Two months later BSI announces huge losses in its commodities business and the share price decreases by $2. Palmer has violated the CFA Institute Standards of Professional Conduct concerning

‘Material Nonpublic Information’ only

‘Market Manipulation’ and ‘Material Nonpublic Information’.

‘Market Manipulation’ only.

Earth, Sun, Moon, and Star firms have market shares of 28%, 22%, 15%, and 10% respectively. The 4-firm Herfindahl-Hirschman Index is closest to:

0.1609.

0.1871.

0.1593.

Which statement most accurately describes risk transfer and risk shifting?

Risk transfer is handled through an insurance policy, while risk shifting involves derivatives to modify a firm’s risk levels.

Risk transfer occurs when the insurer sells many policies with risks that have high correlations, while risk shifting involves derivatives so that the firm may adjust its probability distribution of returns.

Risk shifting and risk transfer are the same – both involve insurance, and can cover all of the insured risk.

When choosing one of two mutually exclusive projects, which is the preferred method?

There is no preference between NPV and IRR

NPV

IRR

Which of the following is defined as the latest sovereign bond issue for a given maturity?

Off-the-run issue

Lead issue

On-the-run issue

Survivorship and backfill biases most likely cause hedge fund indices to be:

Overstated

Understated

Neither understated nor overstated.

CFA 1 - 25 Questions