» CFA 1 – 50 questions

Two mutually exclusive projects can best be evaluated and selected considering

Ranking based on NPV

Ranking based on discounted payback period

Ranking based on IRR

Mathew Chambers manages individual accounts, including his father’s, at Harvey Securities. During a Sunday lunch at a restaurant with his friend Neil Rojas, Chambers noticed the directors of Navarro Motors sitting at the adjacent table. Rojas stated, “I believe Navarro has hired a new CEO as the firm is undertaking many positive amendments in its production process”. On Monday Chambers noticed a $1 increase in Navarro’s share price and purchased 500 shares for his father’s account. Chambers least likely violated:

Standard V-A ‘Diligence and Reasonable Basis’.

Standard II-A ‘Material Non-public Information’.

Standard VI-B ‘Priority of Transactions’.

Which of the following characteristics is unique to the fee structure of private equity funds? 2

Management fees are paid on invested capital.

The Genral Partner earns an incentive fee at the same time as investors receive their initial investment back.

The clawback provision ensures the safe return of an investor's initial investment as well as his/her right to receive profit.

To deal with short-run stabilization, as compared to monetary policy, fiscal policy is most likely:

more effective as it is easy to implement.

equally effective as both policies work well in combination.

less effective as it is very time consuming.

Convexity plays a stronger role in interest rate risk for:

all interest rate changes equally.

small changes in interest rates.

large changes in interest rates.

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.

Pension expense for employees directly related to production is reflected by an increase in:

salaries and other administrative expenses.

the net pension liability account in the balance sheet.

the inventory account and is expensed through cost of sales.

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

financing activity.

operating activity.

investing activity.

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

solvency ratio.

liquidity ratio.

valuation ratio.

When a company finances share repurchases with cash:

assets and shareholders’ equity decrease and leverage increases.

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

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

Gloria Inc. ships 5 machines to a customer at $5,550 per machine. The total cost for Gloria Inc. is $26,250 and payment is due in 60 days. No cash changes hands at delivery. The accounting treatment related to this transaction at the time of shipment most likely includes:

revenue increased by $5,550, cost of goods sold decreased by $26,250 and cash remains unchanged.

accounts receivable and revenue increased by $27,750 and inventory decreased by $26,250.

accounts receivable and revenue increased by $27,750 and inventory and cost of goods sold decreased by $26,250.

Which of the following statements is/are accurate regarding the common-size analysis of financial statements? I. A vertical common-size balance sheet presents all the line items as a percentage of total assets. II. A vertical common-size income statement presents all the line items as a percentage of net income. III. A horizontal common-size income statement calculates all line items as a percentage of the base year's income statement.

Statement II only

Statements I & III only

Statements II & III only

Which of the following is not a suitable risk return measure for alternative investments?

Sortino ratio

Sharpe ratio

Safety-first risk

In the case of a collusion, firms agree to:

share profits/losses.

share technologies.

share the quantity of output.

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 preservation of confidentiality

No

Yes, with respect to loyalty

When the price of the underlying is above the exercise price, a call option is:

In-the-money

At-the-money

Out-of-the-money

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

Which of the following schools of economists applies the utility theory and argues that the government should not counteract business cycles?

Social economics school

Austrian school

Neoclassical school

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

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.

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

For a normal random variable approximately 68% of all outcomes fall within:

three standard deviation of the mean.

one standard deviation of the mean.

two standard deviations of the mean.

Which of the following are most likely to be an exchange-traded transaction?

Futures

Swaps

Forwards

Which of the following is the highest ranked unsecured debt?

First lien loan.

Senior subordinated.

Senior unsecured.

Market equilibrium is most likely described as the price at which:

Both the buyers and the sellers are happy

Quantity supplied is equal to quantity demanded

Excess demand is maximized

A company has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7 percent dividend. The issue matures in 5 years. Which of the following statements is least likely correct? The company’s:

preferred shareholders will rank below debt holders should the company file for bankruptcy.

interest coverage ratio will deteriorate.

Debt/Total capital ratio will improve.

Which of the following statements is most accurate?

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

Separately managed account portfolios must 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

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

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

Which of the following statements is least likely accurate?

Management actions do not influence book value or market value.

Management actions have an indirect impact on market value.

Management actions can directly influence book value.

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.

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

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

lf a firm is unwilling to permit dissemination of adverse opinions about a corporate client, members or candidates should least likely:

encourage the firm to remove the controversial company from the research universe.

put it on a restricted list so that firm disseminates only factual information about the company.

encourage the firm to disseminate the adverse opinions in a press release or in oral presentation.

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

Overstated

Understated

Neither understated nor overstated.

Which of the following two measures are based on the total risk and provide similar rankings?

Treynor ratio and Jensen’s alpha.

Sharpe and Treynor ratios.

M2 and Sharpe ratio.

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

Is easier to calculate than the nominal rate

Considers changes in purchasing power

Is measured in the local currency

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

thinner.

unchanged.

thicker.

When a reliable current market price for a firm’s debt is not available, the cost of debt can be estimated using the:

interest expense of the firm’s income statement.

coupon rate of the same bonds.

matrix pricing model.

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:

money market.

primary market.

secondary market.

Inturnal Systems, Inc. sells calculators. IS's calculators sell for an average of $15 apiece, and it costs IS an average of $5 to make each calculator. With $500,000 of fixed expenses and $250,000 of debt service due, IS's breakeven point considering all financial costs is closest to how many calculators?

75,000

25,000

50,000

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

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

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

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

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

intangibles

current assets.

fixed assets.

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 I-C ‘Misrepresentation’.

violated standard III-D ‘Performance Presentation’.

The elements directly related to measurement of financial performance least likely include:

expenses

liabilities

capital maintenance adjustments.

Which of the following statements is most accurate? Unlike depreciation, amortization is only used to reduce the carrying amount of: intangible assets.

intangible assets.

assets with indefinite useful lives.

assets with no residual value.

What would be a recommended action for a firm that has disclosed material non-public information in an analyst meeting?

The firm should not act on the information for at least 5 working days.

The firm should promptly issue a notification to the analysts for not taking any action until the information is disseminated.

The firm should promptly issue a press release.

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 broker

An arbitrageur

A dealer

A company’s $100 par perpetual preferred stock has a dividend rate of 7 percent and a required rate of return of 11 percent. The company’s earnings are expected to grow at a constant rate of 3 percent per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being:

undervalued by $36.36.

overvalued by $11.36.

undervalued by $15.13.

Under IFRS the definitional criteria for identifiable intangible assets most likely includes:

it is probable that the expected future economic benefits of the asset will flow to the company.

the cost of the asset can be reliably measured.

the asset must be identifiable, under the control of company and expected to generate future economic benefits.

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

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.

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.

Which of the following statements is most likely correct regarding Global Investment Performance Standards' compliance requirements?

Firms must comply with all applicable laws/regulations regarding the calculations and presentations of performance.

Changes in firm's organization must lead to the alteration of historical composite performance.

The GIPS must be applied on a composite-wide basis.

If you were offered to invest your money at interest rate of 4% and can choose how it is compounded, which compounding frequency would yield the highest effective return?

Annual compounding

Continuous compounding

Quarterly compounding

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.

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

An ordinal scale.

An interval scale.

A nominal scale.

CFA 1 - 50 Questions