» CFA 1 – 50 questions

A U.S. based firm has a position in a European bond for a par value of €50 million. For a 1 basis point increase in yield the market value of the investment changes to €49.85 million and for a 1 basis point decrease in yield investment value changes to €51.23 million. The price value of basis point for the investment is closest to:

0.690.

0.027.

0.013.

A consumer with a steeper indifference curve most likely indicates that his marginal rate of substitution (MRSXY) is:

greater and he can give up more of good Y to get an additional unit of good X.

greater and he cannot gain from voluntary exchange with the consumer whose MRSXY is lower.

lower and he can give up more of good X to get an additional unit of good Y.

You are the favorite to win a tennis tournament. In fact, oddsmakers give you a 90% chance to win each match, regardless of who you are playing. Each match is considered an independent event. The probability of you winning all 10 matches to claim the trophy is closest to:

50%

35%

90%

In conversation with a prospective client, a portfolio manager stated “I cannot guarantee that you will earn 18% on equities this year but I can provide you a range within which your return will lie. My range is quite popular among my clients and has a history of ten years. Each year, I develop the range by using financial models, economic forecasts and accredited reports. Based on the CFA Institute Standards, the portfolio manager:

did not violate any standard.

violated standard III-D ‘Performance Presentation’.

violated standard I-C ‘Misrepresentation’.

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 parties.

Incorrect with regard to the low degrees of leverage.

A real exchange rate is different from a nominal exchange rate in that the real exchange rate:

Considers changes in purchasing power

Is easier to calculate than the nominal rate

Is measured in the local currency

Which of the following is considered as the major difference between a bond mutual fund and a money market fund?

The maturity of the underlying assets

The taxability of these two funds

The nature of the assets they invest in

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

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

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

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

Lead issue

Off-the-run issue

On-the-run issue

The short in a currency forward most likely:

hedges the risk of rise in value of foreign currency.

gains when foreign currency appreciates.

hedges the risk of change in value of foreign currency.

Which of the following statements are accurate regarding corporate governance? I. A board should have a committee of independent members who set executive compensation. II. A board should have the authority to hire third-party consultants. III. Elections should be staggered to let the board members execute long-term plans.

I, II & III

III only

I & II only

Turkey is the strongest importer of Russian oil products. Which of the following will be the outcome if Turkey places tariffs on imported products?

Prices of domestic products will increase.

Russian exporters will gain.

Imports from Russia will increase.

Which of the following most likely represents valid criticisms concerning the neoclassical and Austrian schools?

Economic forecasts are imperfect as fiscal policies are implemented with a time lag.

It is difficult to achieve market equilibrium through reduction in generalized price and wage.

Neoclassical and Austrian policies are focused on the short term only.

An investment management firm has been in existence for eight years. To enhance the quality of reported performance, the firm's senior compliance officer decides to make the firm's presented performance compliant with the GIPS standards. To comply with the GIPS standards, the firm is required to initially present a GIPS-compliant performance track record of: 2

eight years.

five years.

one year.

Which of the following is most accurate regarding a futures contract but not a forward contract?

A futures contract is not marked to market.

A futures contract is standardized and sold on an exchange

A futures contract is subject to more default risk

Under which measurement scale is data categorized, but not ranked?

An interval scale.

An ordinal scale.

A nominal scale.

Which of the following would most appropriately describe an investor's liquidity constraint?

No less than a 1% loss in capital

Fund should return 5% per year

10% of assets must be available immediately, 50% available within 2 days

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?

Confirmationbias

Escalationbias

Prospecttheory

Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is responsible for managing the High Beta Mutual Fund (HBMF). Curtis Fowler, aged 56 and dependent on his portfolio returns, is W&WS’s client. His portfolio will now be managed by Chavez, who has been asked to invest 20% of his portfolio funds in HBMF. Chavez fills the request forms and immediately purchases shares of HBMF for Fowler. Is Chavez in compliance with codes and standards, and if not, what should be the recommended course of action for Chavez?

No, she should make reasonable inquiry about Fowler’s risk and return objectives and financial constraints prior to taking investment action requested by Fowler.

Yes, she is in compliance with codes and standards.

No, she should consult Fowler’s existing investment policy statement (IPS) and should judge the suitability of his investments in the context of his total portfolio.

You are presented with 2 investment opportunities and must choose the one with the greater present value: A lump-sum of $2 million or an annuity with 25 payments of $250,000 a year with the first payment starting today. The interest rate is 9% per year compounded annually. Which one will you choose?

The annuity

There's no difference between the two options

The lump-sum

Generating sufficient income and maintaining the real capital value of the fund are most likely the objectives of:

university endowments.

insurance companies.

investment companies.

A stock index representing U.S. manufacturing would most accurately be described as a:

sector index.

Data mining

Examining investor biases

Galactic Hyper is a chain of hypermarkets who sells most of its products for cash, which is why its days sales outstanding are as low as 22 days. Assuming that the firm's average receivables are $234,000, and the cost of goods sold (COGS) for the 1-year period is $1,245,000, the annual sales of Galactic are closest to:

$3,882,000.

$4,880,200.

$1,410,400.

Alonzo Myers manages accounts at GRTY Securities. Jerry Reed, one of his clients, e-mailed Myers to buy 300 shares in the IPO of JJKS Corp’s stock. Few days later, despite being a hot issue, Myers succeeded prorating 500 shares of JJKS Corp. for his clients. After purchasing 500 shares for his clients and 300 shares for Reed as per request, he purchased remaining 200 shares for his wife. Myers:

violated the standards by purchasing 200 shares for his wife but is in compliance for purchasing 300 shares for Reed as per his request.

did not violate the standards by purchasing 200 shares for his wife and 300 shares for Reed.

violated the standards by purchasing 200 shares for his wife and only 300 shares for Reed.

Determine the impact on domestic exports of a country through its transmission mechanism if its interest rates decrease?

Exports will increase.

Exports will remain unaffected.

Exports will decrease.

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

Which of the following are not part of other comprehensive income? I. Exchange differences on translating foreign operations II. Issuance of equity shares III. Actuarial gains/losses IV. Loss from sale of machinery

II and III

I and IV

II and IV

In repurchase agreements, repo margin provides a margin of safety to the:

security lender, if the collateral’s market value declines.

dealer, if the lender of the cash defaults.

cash lender, if the collateral’s market value declines.

Sammy Sneadle, CFA, is the founder and portfolio manager of the Everglades Fund. In its first year the fund generated a return of 30 percent. Building on the fund’s performance, Sneadle created new marketing materials that showed the fund’s gross 1- year return as well as the 3 and 5-year returns which he calculated by using back-tested performance information. As the marketing material is used only for presentations to institutional clients, Sneadle does not mention the inclusion of back-tested data. According to the Standards of Practice Handbook, how did Sneadle violate CFA Institute Standards of Professional Conduct?

The marketing materials only include the Everglades Fund’s performance and are not a weighted composite of similar portfolios.

He did not disclose the use of back-tested data.

He failed to deduct all fees and expenses before calculating the fund’s track record.

An investor wanting to purchase 100 shares of a publicly traded stock would most likely seek out:

An investment bank

A standard broker

A block broker

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

NPV

There is no preference between NPV and IRR

IRR

Assuming the correlation between an asset and market is 0.67 and the asset and market have standard deviations of 0.34 and 0.19 respectively, the market beta would be closest to:

1.20.

1.00.

0.09.

Which of the following statements is most likely correct regarding the depreciation of property, plant and equipment under IFRS and U.S. GAAP?

Unlike U.S. GAAP, under IFRS each component of an asset must be depreciated separately.

Unlike IFRS, U.S. GAAP requires an annual review of residual value and useful life.

Both IFRS and U.S. GAAP require an annual review of residual value and useful life.

Which of the following is least likely an (International Organization of Securities Commissions) (IOSCO) principle for issuers? Issuers should:

prepare their financial statements using internationally acceptable accounting standards.

make consistent choices with respect to accounting standards and their financial statements should be comparable.

timely, fully and accurately disclose financial results, risks and other material information to investors.

Exchange-traded securities are most likely referred to as credit risk-free because:

There is no counterparty to default

The counterparty never defaults

An intermediary guarantees counterparty payment

Which of the following statements regarding the Markowitz efficient frontier is least likely to be correct? The optimal portfolio for:

an investor is found at the point of tangency between the efficient frontier and an investor’s highest utility curve.

an investor is the portfolio that lies on the efficient frontier and provides her with the greatest level of utility.

a more risk-averse investor will lie inside the efficient frontier but will lie outside the efficient frontier for a less risk-averse investor.

What is the most likely result of a decrease in the risk-free rate of return on put and call option prices?

Put and call prices will increase.

Put option prices will decrease and call option prices will increase.

Put option prices will increase and call option prices will decrease.

An investor purchases a 2-year zero-coupon bond with par value of $1,000 at $960. The implied interest earned on the bond is closest to:

$21.

$0.

$40.

Under IFRS cash receipt of interest cannot be classified as a (n):

financing activity.

operating activity.

investing activity.

Reginald Fuller manages institutional portfolios on behalf of BDY Advisors. Fuller also manages an account of a trust company named SOTO Trust. The trust offered Fuller a $50,000 cash gift if he succeeded in achieving a 20% return this year. The best practice for Fuller includes:

accepting the offer and achieving the target without compromising his objectivity towards other clients.

refusing the offer of SOTO trust to avoid a conflict of interest with his employer.

making an immediate written report to his employer specifying the$50,000 cash offer proposed by the trust

The performance of commodity indices can be quite different from their underlying commodities because

returns of commodity indices are influenced by more than one factor.

commodity returns are more volatile than commodity index returns.

commodity indices are relatively illiquid and depict less information transparency.

The New York Stock Exchange (NYSE) is the world's largest stock exchange. Companies whose shares are listed on the NYSE have a combined market capitalization of over $10 trillion. This exchange, where investors go to buy and sell stocks, is best classified as a:

primary market.

secondary market.

money market.

The value, at 6% interest, of a bond paying 8% annual coupon payments, redeemable at par in 5 years, with a $25,000 face amount is closest to:

$27,100

$27,600

$25,600

A "war chest" typically describes a company having a large amount of:

cash.

accounts receivable.

inventory.

Which statement most accurately describes risk transfer and risk shifting?

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.

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

Clayton Hamner, CFA, an independent equity analyst, produces research reports and recommendations for his 25 high net worth clients, all of whom have been informed of the different levels of services available to them. Recently, Hamner distributed his latest report on Acton Pharmaceuticals (APH) in an email that was sent simultaneously to the 18 clients who either currently hold APH shares or for whom this investment is suitable. After sending that email, Hamner followed up with seven of those clients, all of whom pay for premium service, to discuss his report in greater detail. Of those calls, Hamner's first is to his sister, whose account generates a significant share of his income. Has Hamner most likely violated the Standards?

Yes, by not disseminating his report to all clients

Yes, by calling his sister before calling other clients

No

Which of the following is most likely to be correct with respect to American-style options?

There is no option premium associated with American-style options.

American-style options are associated with an obligation to buy the underlying.

American-style options can be exercised before expiration.

During the morning section of the CFA Level 1 exam, when the proctor made the final 5 minutes announcement, Enrique, a candidate next to Rachael noticed and told Rachael that she was not filling her answers on the sheet provided. Rachael immediately started transferring answers on to the answer sheet. When the proctor made the final announcement Rachael succeeded filling 100 circles and by the time proctor reached at her table, she had only 5 circles left to fill. Rachael instantly handed her sheet to the proctor. Is Rachael or Enrique in violation of the standard relating to conduct as members and candidates in the CFA Program?

Only Rachael is in violation.

Only Enrique is in violation.

Both Rachael and Enrique are in violation.

Investors have the tendency to be:

less risk averse when faced with potential losses.

less risk averse when faced with potential gains.

more risk averse when faced with potential gains.

When a company finances share repurchases with cash:

leverage increases, shareholders’ equity decreases and assets remain unchanged.

assets and shareholders’ equity decrease and leverage increases.

assets and shareholders’ equity decrease and leverage remains - unchanged.

CFA 1 - 50 Questions