» CFA 1 – 50 questions

All things being equal, inflation in a country leads to:

depreciation in its own currency.

appreciation in its own currency.

no effect on real exchange rates.

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?

Koribor

Spot rate

Libor

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

Comel Systems, Inc. is exploring entering a new product line. This particular line is significantly riskier (both generally and systematically) than the other lines. If Comel's weighted average cost of capital is 8.0%, the rate it should use in assessing the new product line is most likely:

greater than 8.0%

equal to 8.0%

less than 8.0%

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

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

In a positively skewed distribution:

Mean > Median

Mode > Median

Mean = Median

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

Which of the following situations least likely constitutes a violation of CFA Institute Code and Standards?

Mark Greer recently passed the CFA Level ll exam of the CFA Program and does not intend to appear for the CFA Level lll examination for at least three years. Greer identifies himself as an active candidate of the CFA Program.

A portfolio manager allocates oversubscribed IPO shares to suitable non-family client accounts prior to family client accounts to avoid the appearance of a conflict of interest.

A senior research analyst obtained information concerning a potential merger deal pertaining to an issuer company he covers, which is yet to be publically released. The researcher disclosed this information to his supervisor and compliance department.

Under which of the following situations would an increased return on equity (ROE) more likely be perceived negatively by shareholders?

Increasing ROE is always a positive signal

ROE increases while book value of equity remains constant

ROE increases as a result of a leverage increase

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

fixed assets.

intangibles

current assets.

What is most likely the definition of a Special Purpose Vehicle (SPV)?

A subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.

A type of asset-backed security that is secured by a mortgage or collection of mortgages.

A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors.

A lognormal 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.

may well describe a stock price whose continuously compounded returns do not follow a normal distribution.

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:

4%

7%

6%

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?

25,000

75,000

50,000

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

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

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

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

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.

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

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

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:

collateralized mortgage obligations.

mortgage loans.

mortgage pass through securities.

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:

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

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

organizational structure is unstable or complex.

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.

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

On-the-run issue

Off-the-run issue

Lead issue

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

Austrian school

Social economics school

Neoclassical school

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.

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 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.

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

Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

less liquidity and less emphasis on capital appreciation.

more liquidity and less emphasis on capital appreciation.

less liquidity and greater emphasis on capital appreciation.

Which of the following would most accurately be considered a primary source of liquidity?

Selling equipment

Money market account

Restructuring debt obligations

Under which of the following situations would a nonparametric test be more appropriate than a parametric test?

When the sample size is small and significantly not normally distributed

When studying population variance

When comparing population means

Earth, Sun, Moon, and Star firms have market shares of 28%, 22%, 15%, and 10% respectively. The 4-firm Herfindahl-Hirschman Index is closest to:

0.1871.

0.1593.

0.1609.

Which fo the following best describes a stockholder's claim to a company's assets under bankruptcy?

Residual claim

First claim

No claim

Venture capital most commonly refers to:

Financing for start-ups

Privatizing public firms

Minority investing in mature capital

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

investing activity.

financing activity.

operating activity.

Which of the following statements is most likely correct? Enterprise value:

is applicable to the comparisons of companies with significantly different capital structures.

is incapable of reflecting the real economic value of a company.

is prone to the negative earnings problem because of the use of EBITDA.

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

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.

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

Generating higher returns from security selection most likely depends upon:

lower informational efficiency and higher skills of investment managers.

lower index turnover and passive management.

higher informational efficiency and lower index turnover.

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.

firms must be defined as an investment firm.

a firm’s organization alters historical composite results.

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?

Floater

Deferred coupon

Step-up

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

Return on capital will most likely be higher in which of the following cases?

Return on capital is not affected by market shares.

If the firm has 10% market share and all other firms have less than 5% of the market share.

If the firm has 50% of the market share and another firm has the other 50%.

The implied volatility on S&P 500 options has decreased over the past month. An analyst would most likely conclude that:

the value of the broad market has decreased.

interest rates have decreased.

the level of market uncertainty has decreased.

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

A European call option with six months to expiry.

A European call option with nine months to expiry.

A European call option with three months to expiry.

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

Russian exporters will gain.

Imports from Russia will increase.

Prices of domestic products will increase.

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

Is measured in the local currency

Considers changes in purchasing power

Is easier to calculate than the nominal rate

Which of the following transactions do not offset each other?

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

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

'Provision for doubtful debts' and 'trade receivables'

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 only

I, II & III

III only

Which of the following statements is most likely correct regarding verification?

Verification tests the soundness of a firm's policies and procedures to calculate performance in accordance with the GIPS standards.

In order to claim compliance with the GIPS standards, firms must seek verification.

Verification ensures the accuracy of a composite presentation.

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

Little work required to hold properties long-term

Properties can be an inflation hedge

Markets are homogeneous across types and geography

Demand is most accurately described as:

Producer's ability to provide a product

Consumer's ability to use the product

Consumer's willingness to purchase a product

Which of the following statements is most accurate?

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

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 factor endowments.

Blanco Shell Investments (BSI) is a small family owned investment bank and its shares are relatively illiquid. In a casual meeting Brett Palmer, managing director at BSI, told his friend, Leon Fox, that BSI is going to earn substantial profits in its commodities business. In the next few days Fox purchases BSI shares while Palmer disposes his position in BSI and switches his job. Two months later BSI announces huge losses in its commodities business and the share price decreases by $2. Palmer has violated the CFA Institute Standards of Professional Conduct concerning

‘Market Manipulation’ only.

‘Market Manipulation’ and ‘Material Nonpublic Information’.

‘Material Nonpublic Information’ only

CFA 1 - 50 Questions