» CFA 1 – 50 questions

By entering into a currency swap both parties:

make payments in different currencies and in different notional amounts.

have to borrow funds at relatively higher interest rates compared to borrowing directly from their banks.

are exposed to less counterparty risk because principal amounts are exchanged at the beginning and end of the swap.

If a firm’s long-run average cost of production increases by 15 percent as a result of an 8 percent increase in production the firm is most likely experiencing:

constant returns to scale.

diseconomies of scale.

economies of scale.

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):

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

equal basis among all clients who placed orders.

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

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.

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

NPV

There is no preference between NPV and IRR

IRR

The auditors were not provided with the supporting documents for the majority of the transactions (including material transactions) selected for the audit. Which type of audit opinion should most likely be issued in such case?

An adverse opinion

A qualified opinion

A disclaimer of opinion

An analyst is conducting a market liquidity study. After studying a stratified sample of dividend-paying stocks, the analyst concludes that the economy is sufficiently liquid and that the stock market may be undervalued. What trap has this analyst most likely fallen into?

Data mining bias

Look-ahead bias

Sample selection bias

Brodes is exploring new product opportunities. This particular line of business is about as systematically risky as Brodes's portfolio as a whole. How should Brodes best discount the present value of inflows and present value of outflows?

Discount both at the weighted average cost of capital.

Discount inflows at the weighted average cost of capital and outflows at the risk-free rate.

Discount inflows at the risk-free rate and outflows at the weighted average cost of capital.

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

Threat of lawsuits

Change in interest rates

Discovery of oil

You are provided the following information on a company, Noct, and on the economy: Noct's beta is 0.8 The expected market return is 7.0% The risk-free interest rate is 2.0%. Noct's standard deviation is 0.6 The expected return for Noct is closest to:

6%

4%

7%

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

2

3

1

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

Imports from Russia will increase.

Russian exporters will gain.

Prices of domestic products will increase.

Which of the following statements regarding market efficiency is least likely accurate?

There are three forms of market efficiency: weak, semi-strong and strong.

In an efficient market, prices of stocks will slowly adjust to new information.

An efficient capital market reflects all of the information about its securities, including risk.

If a European bank is looking to borrow money from another bank over a short term, it would be most likely to use which measure for the assigned rate?

Libor

Spot rate

Koribor

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:

Increase

Decreases

Remain constant

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:

$25,600

$27,100

$27,600

Which of the following is impacted by inflation in the case of capital-indexed bonds?

Both A and B

The interests

The principal

A lognormal distribution:

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.

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

The debt-to-assets ratio is most accurately classified as a:

solvency ratio.

liquidity ratio.

valuation ratio.

Jack purchased a bond which pays 5% per year in the first four years, 6% per year during the next five years, and 7% per year during the six years after that. What type of bond has Jack just purchased?

Deferred coupon

Step-up

Floater

The distinction between items listed as current assets on a balance sheet and those listed as non-current assets is most likely based on differences in:

growth

solvency

liquidity

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

-1

1

0

An investor is holding an inverse floating rate note. If interest rates increase, the periodic coupons paid to the investor will:

increase.

remain unchanged.

decrease.

Which of the following statements is most accurate?

Separately managed account portfolios must be included in a single composite and the sponsor's name must be disclosed.

Separately managed account portfolios may be included in a single composite and the sponsor's name must be disclosed.

Firms claiming compliance with the GIPS standards must not present performance net of wrap fees under any circumstances

Mark Johnson is an analyst for Big Riches Investment Firm. He replaced Todd Phillips, who was an analyst with Big Riches, but resigned to move overseas. Phillips passed on all of his prior analytical reports and backup data for Johnson to use in his new role. In preparation for an annual valuation of the foodservice equipment industry, Johnson pulled up a valuation model developed by Phillips and changed it to include economic indicators published by the US Bureau of Economic Analysis. Once these revisions were made, Johnson back-tested the results using the S&P 500. Which of the following is most accurate?

Johnson must give credit to Phillips for the creation of the valuation model. However, it is unnecessary to reference the S&P 500 or the Bureau of Economic Analysis as reference materials.

Johnson must give credit to Phillips for the creation of the valuation model, and add the Bureau of Economic Analysis, and S&P 500 as reference materials.

Johnson must publish the valuation model under his own name, naming the Bureau of Economic Analysis, and S&P 500 as reference materials.

George Mendes is considering an employment offer made by DR Associates, an investment bank. Should Mendes accept the offer, he will be responsible for supervising twenty portfolio managers. Mendes' only concern is that employees' personal trades are not being adequately monitored and many of these transactions involve front-running clients' trades. To comply with the CFA Institute Standards of Professional Conduct, Mendes should most likely:

accept the offer and implement adequate compliance procedures.

decline the offer in writing until the firm adopts reasonable procedures to allow exercise of his supervisory responsibilities.

accept the offer and dismiss employees involved in front-running.

A real estate appraiser is estimating the value of a real estate investment trust (REIT) which is composed of a portfolio of real estate properties. The appraiser begins the process by adjusting net income for depreciation charges and gains and losses from sales of real estate property. The resulting amount is capitalized into a value using a cap rate. The approach being used by the appraiser is most likely classified as a/an:

income-based approach.

direct capitalization approach.

asset-based approach.

Due to the upcoming elections in the U.S., the CAD/USD currency exchange rates has risen from 1.17 to 1.31. Calculate the percentage change in the value of the USD in terms of CAD.

10.68%

-10.68%

11.96%

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.

Which of the following is the highest ranked unsecured debt?

First lien loan.

Senior unsecured.

Senior subordinated.

Of the following, which represent the most significant advantage of real estate?

Markets are homogeneous across types and geography

Properties can be an inflation hedge

Little work required to hold properties long-term

A portfolio manager is evaluating investments in mortgage securities as part of a portfolio to fund long term liabilities. If she wants to minimize prepayment risk in her portfolio she is most likely to invest in:

mortgage pass through securities.

mortgage loans.

collateralized mortgage obligations.

In a positively skewed distribution:

Mean > Median

Mode > Median

Mean = Median

Which of the following statements least likely represents the correct treatment of impairment loss?

It reduces the net income and carrying amount of assets.

It is considered a non-cash item and thus does not affect the cash flow statement.

It reduces investing cash flow in the year loss is reported.

Which of the following is a leading economic index?

Average price rate

Average weekly hours of manufacturers

Employees on non-agricultural progress

The current ratio and quick ratio are most appropriately used to assess what characteristic of a company?

Liquidity

Solvency

Growth potential

In which of the following circumstances can a producer of agricultural products value the product at the net realizable value (NRV)?

The cost is less than NRV

The cost is higher than NRV

In all cases

Which of the following options on the same underlying is most likely to have the highest value?

A European call option with three months to expiry.

A European call option with nine months to expiry.

A European call option with six months to expiry.

Which of the following best describes the reason for choosing the NPV rule over the IRR rule when dealing with mutually exclusive projects?

NPV rankings are affected by external interest rates or discount rates.

The reinvestment rates used by NPV are more conservative and therefore are economically more relevant.

IRR ranking assumes reinvestment at opportunity cost of capital that is less realistic and economically less relevant.

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

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?

No, he is in compliance with the 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.

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 low degrees of leverage.

Incorrect with regard to the parties.

Incorrect with regard to the underlying.

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.

Aggregate demand (AD) curve will be flatter if:

money demand is highly sensitive to income and interest rates.

saving is highly sensitive to income.

investment expenditure is highly sensitive to interest rates.

To determine the impact of changes in exchange rates on trade balance, the ‘absorption approach’ most likely exhibits the:

effect of exchange rates on aggregate expenditure or saving decisions.

microeconomic view of the relationship between exchange rates and trade balance.

effect of changing the relative price of domestic and foreign goods.

Howard Walton, CFA, is a member of a team working on a heating oil price forecast. There are some specific portions of the forecast with which Walton does not agree, but he is generally confident of the group’s decision-making processes. Which of the following statements is most accurate? Walton:

may allow his name to be included in the forecast.

should dissociate from the group.

must have his name be removed as one of the forecast's authors and submit his own independent research.

On 1 January 2014, Neway Construction entered into a contract to lay pipes for a factory. The project will take an estimated two years to complete. As stated in the contract, total revenue for the project is an estimated $2,500,000. Total cost is expected to be 70% of revenue. Neway incurred $800,000 of costs in 2014. Assuming Neway estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the percentage-of-completion method, the revenue that will be reported in 2014 is closest to:

$1,250,000.

$1,150,000.

$560,000.

According to the Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, a risk factor related to opportunity exists when:

firm’s communication channels are ineffective for reporting inappropriate behavior.

management’s personal financial situation is threatened by the firm’s financial performance.

organizational structure is unstable or complex.

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.

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.

Yes, she is in compliance with codes and standards.

Which of the following is considered to be best practice from shareowners’ perspective?

Under change-in-control provisions, executives should not be granted severance packages to leave the company.

Board and management should be able to use cash or available credit lines to pay hostile bidders to forgo takeover.

Acquiring entity is required to deal directly with management and board.

CFA 1 - 50 Questions