» CFA 1 – 50 questions

Jason Briggs purchased a 3-month call option by paying $0.08. The exercise price of the option is $1.32 while the underlying is priced at $1.35. Is the option currently in-the-money and at what price will break-even occur?

In-the-money: Yes; Break-even price: $1.40.

In-the-money: No; Break-even price: $1.27.

In-the-money: Yes; Break-even price: $1.35.

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.

A tariff directly benefits which of the following entities:

Local producers and the government

Consumers and the government

Consumers and local producers

As the degrees of freedom increases and the t-statistic approaches towards the z-statistic, the tails of the distribution most likely become:

unchanged.

thinner.

thicker.

When marginal products (MP) are maximized, marginal costs (MC) are:

minimized.

maximized.

zero.

In a positively skewed distribution:

Mode > Median

Mean = Median

Mean > Median

Flavo Inc. is reporting under IFRS and has outstanding bonds amounting to $150 million with 5 years to maturity. The company decides to redeem the bonds at the call price of $144 million. The correct accounting treatment for the loss on redemption is:

$6 million to be recorded as a deferred expenditure in the balance sheet. This will be amortized over 5 years.

$6 million to be recorded as an expense in the income statement.

$6 million to be adjusted from opening retained earnings.

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 account size.

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

Flotation costs are those costs which are incurred by a company during the process of raising additional capital. The value of these flotation costs is typically related to the amount and type of capital being raised. Which of the following statements is least likely accurate regarding flotation costs? 2

If flotation costs are 5%, issuing $20 million in stocks will result in the company receiving an amount of cash equal to $19 million.

Flotation costs should be deducted as one of the project's initial-period cash flows.

Flotation costs cannot be applied to bonds issuance.

At initiation, the values of a swap contract and a forward contract are most likely to be:

Positive

Negative

Zero

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:

violated standard III-D ‘Performance Presentation’.

violated standard I-C ‘Misrepresentation’.

did not violate any standard.

Under U.S. GAAP at the end of year 1, EBB would recognize $0 revenue, $0 cost of construction and $0 income. The $26 million expenditure would be recorded as an increase in inventory account and decrease in cash (if EBB paid cash for all expenditures).

debt-to-equity.

Total assets.

Cash outflows from operations.

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

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

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

Put and call prices will increase.

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:

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.

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

Which of the following statements is least likely correct regarding the trustee of a bond indenture?

It is appointed by the issuer, but acts in the fiduciary capacity with the bondholders.

The trustee can bring legal action against the issuer on behalf of the bondholders.

In the event of default, the discretionary powers of the trustee decrease considerably.

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?

Yes, with respect to loyalty

Yes, with respect to preservation of confidentiality

No

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 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:

solvency

growth

liquidity

Anita Vizquel, CFA, is a sole practitioner providing investment advisory services. Based on extensive and ongoing research, Vizquel believes that Viatex Brokerage provides the best execution at a competitive price and she uses the firm for the majority of her clients' trades. In recognition of her loyalty, Viatex provides Vizquel with soft dollar commissions in the form of research reports that Vizquel finds very relevant for some, but not all, of her clients. Has Vizquel violated the CFA Standards?

Yes, by accepting research reports that do not benefit all of her clients

No

Yes, by using Viatex for the majority of her client's trades

What happens to the prices in the long run when the aggregate demand increases and the economy recovers from an inflationary gap (classical approach)?

The prices increase.

The prices remain the same as the economy comes back to equilibrium.

The prices decrease.

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

accounts receivable.

cash.

inventory.

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

dealer, if the lender of the cash defaults.

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

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

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:

diseconomies of scale.

economies of scale.

constant returns to scale.

A financial intermediary buys a stock and then resells it a few days later at a higher price. Which intermediary would this most likely describe?

A dealer

A broker

An arbitrageur

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.

Samuel Lopez wants to calculate the GDP or a specific country without taking into account the effect of inflation on prices. Which of the following is the most appropriate GDP measure Lopez should use?

Nominal GDP

Real GDP

GDP based on current prices

EBB Inc. entered into a three-year contract to construct a building with an estimated total cost of $32 million. Due to limitations, project costs are uncertain and the output of the project cannot be measured reliably. If at the end of year 1EBB spent $26 million, under U.S.GAAP EBB would most likely recognize:

$0 in any account until the project has completed.

$26 million as an increase in inventory account.

$26 million as cost of construction.

A firm values its assets using fair values. Its asset base comprises of the following asset categories: Category 1: Fee-paying discretionary portfolios Category 2: Non-fee paying discretionary portfolios Category 3: Fee-paying non-discretionary portfolios Category 4: Non-fee paying non-discretionary portfolios Based on the requirements of the Global Investment Performance Standards (GIPS), for periods beginning on or after January 1, 2011, the firm's total assets are the aggregate of:

categories 1 and 2 only.

categories 1, 2 and 3 only.

all four categories.

The intercept of security characteristic line (SCL) is:

Beta.

RM–RF.

Jensen’s alpha.

The type of chart drawn on a grid, which consists of column X’s alternating with column O’s and does not represent time or volume is most likely the:

bar chart.

candlestick chart.

point and figure chart.

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

interest rates.

inflation.

technologies.

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.

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.

Which of the following statements is most likely correct regarding the audit of financial statements?

Disclaimer of opinion occurs when an auditor issues an opinion despite scope limitations.

Auditors can provide absolute assurance about the accuracy and precision of financial statements if the opinion is unqualified.

When an auditor has concerns regarding some unreported pending contingent liabilities he might issue a qualified opinion.

Venture capital most commonly refers to:

Privatizing public firms

Financing for start-ups

Minority investing in mature capital

A portfolio manager's small cap portfolio has a beta of 1.2 and standard deviation of 40%. Over the past year, the portfolio returned 10%, the market returned 7%, and the risk-free rate was 2%. The Sharpe ratio is closest to:

0.2

0.3

0.4

A company recorded a depreciation expense of $5,000,000 for tax purposes and $3,500,000 for accounting purposes. Which of the following is the correct accounting treatment if the tax rate is 30%?

The firm should create a deferred tax liability of $450,000.

The firm reverse of a deferred tax liability of $450,000.

The firm should a deferred tax asset of $450,000.

Of the following, which response best describes for whom an investment policy statement (IPS) should be developed?

For unique investors

For institutional investors

For all investors

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

liquidity ratio.

solvency ratio.

valuation ratio.

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 subject to more default risk

A futures contract is standardized and sold on an exchange

Which of the following statements is most likely correct regarding the major sections of GIPS standards?

According to Section 4 ‘Disclosures’, firms are required to make negative assurance disclosures.

According to section 5 ‘Presentation and Reporting’, firms cannot include in GIPS-compliant presentations information not addressed by the GIPS standards.

According to Section 3’Composite Construction’, a composite return is the asset weighted average of the performance of all portfolios in the composite.

If you earned 4% over the course of 5 months, your annualized return is closest to:

10%

2%

8%

A trader is analyzing the impact of a recent increase in the volatility of a particular stock on the value of European call and put options on that underlying. Increase in the volatility will most likely lead to:

An increase in the value of both call and put options.

An increase in the value of the put option and a decrease in the value of the call option.

An increase in the value of the call option and a decrease in the value of the put option.

Under which of the following accounting standards would a deferred tax be recognised on temporary differences arising from undistributed profits of associates (investments) when the investor controls the sharing of profit?

IFRS

US GAAP

Neither under IFRS nor under US GAAP

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.

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

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

The production process of a calculator involves several steps. Suppose the pieces of the chain add the following value to the process: Raw materials supplier: $4 Factory: $3 Retailer: $2 The price that the retailer buys the calculator from the factory will be closest to:

$2

$3

$7

Two hypothetical currencies – ABC and XYZ – are trading at a spot rate of 1.60 ABC/XYZ . If the interest rate in ABC and XYZ's countries are 7% and 5%, respectively, the arbitrage-free forward rate ABC/YXZ is closest to:

1.6304.

1.7113.

1.5410.

Asset based valuation models work well for companies that do not have a high proportion of:

fixed assets.

current assets.

intangibles

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:

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

accept the offer and implement adequate compliance procedures.

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

Which of the following is a leading economic index?

Average price rate

Employees on non-agricultural progress

Average weekly hours of manufacturers

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?

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

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

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

CFA 1 - 50 Questions