» CFA 1 – 50 questions

Dan Fisher is an investment manager at Rotterdam Securities and often uses Topaz brokerage services for his clients. Corey Foster, Fisher’s client, has directed him to use the services of Luna Brokerage House for him. Fisher believes that Topaz offers best price and better research reports compared to Luna. The best course of action for Fisher is to use the services of:

Luna for Foster and should disclose to him that he may not be getting best execution.

Topaz for all of his clients as he is obligated to seek best price and best execution.

Topaz for all his clients as brokerage commission is the asset of the Rotterdam and will be used to maximize the value of client’s portfolio.

Which of the following properties of correlation and covariance is most likely correct?

As the number of securities in a portfolio increases the importance of covariance decreases all else equal.

Correlation only deals with linear relationships.

When correlation between two variables is > 0 the variables have a perfectly positive linear relationship.

Aggregate demand (AD) curve will be flatter if:

money demand is highly sensitive to income and interest rates.

investment expenditure is highly sensitive to interest rates.

saving is highly sensitive to income.

Which of the following statements is most likely correct regarding parametric and non-parametric tests?

In a parametric test observations are converted into ranks according to their magnitude.

Nonparametric tests are considered distribution-free methods because they do not rely on any underlying distribution assumption.

Parametric tests are relatively unaffected by violations of assumptions.

For rating agencies, the primary factor in assigning their ratings is:

potential loss severity.

priority of payment in the event of a default.

likelihood of default.

Which of the following statements is least likely accurate?

Management actions have an indirect impact on market value.

Management actions do not influence book value or market value.

Management actions can directly influence book value.

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:

organizational structure is unstable or complex.

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

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

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, 2 and 3 only.

categories 1 and 2 only.

all four categories.

Which of the following is least accurately considered a firm's factor of production?

Customers

Materials

Land

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

decrease.

remain unchanged.

increase.

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:

liquidity

growth

solvency

Under which of the following cases is the capitalization of development cost most likely prohibited?

In the case of software development by a company following US GAAP.

In the case of the development of a lifesaving drug by a company following US GAAP.

In the case of a company following IFRS.

As of September 5, 2014, the current price of corn is $3.60 per bushel. Farmers have stopped asking if they will profit this year - the question now is how much will they lose for their year's work. Under which of the following 6-month futures corn prices would backwardation most likely be present?

$3.60 per bushel

$4.00 per bushel

$3.20 per bushel

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

American-style options can be exercised before expiration.

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

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

The intercept of security characteristic line (SCL) is:

Jensen’s alpha.

Beta.

RM–RF.

How does the oil the industry most likely maintain a premium pricing strategy?

Significant barriers of entry

The threat of substitutes

The bargaining power of the buyers

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 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.

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

A type of credit derivative in which credit protection buyer makes a series of regularly scheduled payments to credit protection seller while the seller makes no payment until a credit event occurs is categorized as a:

credit default swap.

credit linked note.

total return swap.

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

Little work required to hold properties long-term

Markets are homogeneous across types and geography

Properties can be an inflation hedge

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.

Sullivan Investments, an asset management firm, complied with the GIPS standards on 1 January 2006. Can Sullivan link its non-GIPS compliance performance for periods beginning on or after 1 January 2000 with its GIPS compliance performance?

No

Only if it discloses periods of non-compliance.

Yes

Regarding the definition of the firm, the GIPS Standards require all of the following except:

total firm assets must be the aggregate of the market value of all discretionary and nondiscretionary assets under management.

a firm’s organization alters historical composite results.

firms must be defined as an investment firm.

A high-tech industry only has 3 large firms operating in it. This is most likely a:

low-cost industry.

fragmented industry.

concentrated industry.

The probability that the Eurozone economy will grow this year is 18%, and the probability that the European Central Bank (ECB) will loosen its monetary policy is 52%. Assuming that the joint probability that the Eurozone economy will grow and the ECB will loosen its monetary policy is 45%, then the probability that either the Eurozone economy will grow or the ECB will loosen its the monetary policy is closest to:

25%.

11%.

42.12%.

The Sharpe Ratio measures'

return relative to beta

return relative to standard deviation

beta

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 adjusted from opening retained earnings.

$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.

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 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.

Discount both at the weighted average cost of capital.

Investor N agrees to pay Investor R $18,000 in 3 months for 5000 bushels of corn. Investor N and Investor R most likely entered into a(n):

Forward contract

Swaps contract

Options contract

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

2

3

1

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

$7

$3

When an increase in interest rate leads to a decline in savings, it implies that:

individuals substitute future consumption for present consumption.

income effect of a higher interest rate is greater than substitution effect.

savings and interest rate patterns cannot be determined in terms of the income and substitution effect.

Regarding business segments, companies are not required to provide:

factors used to identify reportable segments.

disclose segment information under both IFRS and U.S, GAAP.

full financial statements for segments.

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

Discovery of oil

Change in interest rates

Threat of lawsuits

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?

Adverse selection

Moral hazard

Fraud

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

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

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.

GIPS standards least likely resolve misleading practices related to:

survivorship bias.

analyst financial statement adjustments.

varying time periods.

Which of the following statements is most accurate?

The Hecksher-Ohlin model attributes differences in comparative advantage to differences in labor productivity.

The Ricardian model would attribute differences in comparative advantage to differences in labor productivity.

The Ricardian model would attribute differences in comparative advantage to differences in factor endowments.

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

The taxability of these two funds

The nature of the assets they invest in

The maturity of the underlying assets

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

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.

Management fees are paid on invested capital.

In the event of bankruptcy, which of the following is most accurate?

Senior subordinated loans are subordinate to junior subordinated loans.

Senior secured loans are subordinate to subordinated loans.

Junior subordinated loans are subordinate to senior subordinated loans.

DLF Ltd is an Indian company in the business of constructing residential houses. The proceeds derived from the residential houses by the company will most likely be recorded as:

a reduction in current liabilities.

a reduction in fixed assets.

revenue.

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 II & III only

Statements I & III only

The expected P/E ratio of a stock is 10, and the actual P/E ratio is 10.8. What can we say about the stock?

The stock is overvalued.

We can not say anything about the stock.

The stock is undervalued.

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

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

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

If the yield curve rises uniformly, how would the price of a 8.5% coupon bond yielding 2.75% most likely change in a year?

It will increase.

It will not change.

It will decrease.

A publishing firm contributed $250,000 to support some philanthropic projects. The firm immediately expensed that amount in its income statement for the current fiscal year. According to applicable tax legislation such contributions are not tax-deductible.

The treatment of $250,000 for accounting and tax purposes represents a permanent difference.

A deferred tax asset arises, as taxable income is greater than accounting profit.

A temporary difference of $250,000 gives rise to a deferred tax liability.

Which of the following transactions do not offset each other?

'Accumulated depreciation' and 'property, plant and equipment'

'Provision for doubtful debts' and 'trade receivables'

'Dividends paid to shareholders' and 'dividends received from an investment in equity'

Generating higher returns from security selection most likely depends upon:

lower informational efficiency and higher skills of investment managers.

higher informational efficiency and lower index turnover.

lower index turnover and passive management.

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

Examining investor biases

Data mining

sector index.

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

For unique investors

For all investors

For institutional investors

CFA 1 - 50 Questions