» CFA 1 – 50 questions

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?

Neither under IFRS nor under US GAAP

IFRS

US GAAP

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.

Cash outflows from operations.

Total assets.

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

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 II-A ‘Material Non-public Information’.

Standard VI-B ‘Priority of Transactions’.

Standard V-A ‘Diligence and Reasonable Basis’.

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

liabilities

expenses

capital maintenance adjustments.

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.

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

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

Which of the following statements is most accurate?

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

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.

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.

$1,410,400.

$4,880,200.

The Sharpe Ratio measures'

return relative to standard deviation

return relative to beta

beta

The performance of commodity indices can be quite different from their underlying commodities because

returns of commodity indices are influenced by more than one factor.

commodity returns are more volatile than commodity index returns.

commodity indices are relatively illiquid and depict less information transparency.

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.

According to the Standards of Practice Handbook, which of the following statements is most likely correct regarding priority of transactions?

should pre-clear their participation in IPOs.

are not permitted to undertake personal transactions in accounts for which they are a beneficial owner.

should not be permitted to trade for three days before and one day after placing a client's trade.

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:

secondary market.

primary market.

money market.

Zooror, a Japanese notepad maker, has an inventory turnover of 8.7 times per year. The average number of days of inventory for notepad manufacturing is 45 days. How does Zooror compare to its competition?

Zooror has slower turnover than its average competition

Zooror is average with its competition

Zooror has quicker turnover than its average competition

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

For all investors

For institutional investors

For unique investors

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

solvency ratio.

liquidity ratio.

valuation ratio.

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.

Reginald Fuller manages institutional portfolios on behalf of BDY Advisors. Fuller also manages an account of a trust company named SOTO Trust. The trust offered Fuller a $50,000 cash gift if he succeeded in achieving a 20% return this year. The best practice for Fuller includes:

refusing the offer of SOTO trust to avoid a conflict of interest with his employer.

accepting the offer and achieving the target without compromising his objectivity towards other clients.

making an immediate written report to his employer specifying the$50,000 cash offer proposed by the trust

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

-1

1

0

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?

An arbitrageur

A broker

A dealer

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

Generating sufficient income and maintaining the real capital value of the fund are most likely the objectives of:

university endowments.

insurance companies.

investment companies.

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:

$26 million as an increase in inventory account.

$26 million as cost of construction.

$0 in any account until the project has completed.

For short selling purposes if a security is extremely hard to borrow, the short rebate rate may be:

very high.

negative or very low.

10 basis points more than the overnight rate.

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:

candlestick chart.

point and figure chart.

bar chart.

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:

Remain constant

Decreases

Increase

For venture capital investing, later stage financing is the capital provided for a company:

to prepare for an IPO.

to plan for major expansion.

to initiate commercial manufacturing and sales.

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

sector index.

Examining investor biases

Data mining

McKinney Alpha is an accredited research firm that only hires experienced and competent analysts offering them training and financial courses from time to time. The firm allows analysts to either prepare their own research or rely on secondary sources. Tyler Klein, an analyst at McKinney uses a research report prepared at Gemma Brokerage. If Klein will use that report, he will:

violate Standard IV-A ‘Loyalty to employers’ as he is not allowed to use the report prepared by Gemma Brokerage.

violate Standard I-C ‘Misrepresentation’ by relying on work not prepared by himself for his clients.

not violate any standard if he makes reasonable efforts to determine that research is sound and uses the information in good faith.

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 increase and call option prices will decrease.

Put and call prices will increase.

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

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 using Viatex for the majority of her client's trades

No

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

The efficiency of an unbiased estimator is measured by its:

sample size.

variance

mean value.

As compared to firms with high degree of financial leverage, firms with high degree of operating leverage:

are less flexible in making changes and bankruptcy protection help little to reduce operating costs.

can easily emerge as a going concern by using bankruptcy laws and protection.

do not lead to major dislocations in the rights and privileges of owners, lenders and management.

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

A European call option with nine months to expiry.

A European call option with six months to expiry.

A European call option with three months to expiry.

Which of the following is most likely a correct implication of stock dividends to the shareholders?

When stock dividends are paid shareholders’ cost per share held decreases.

Generally stock dividends are taxable.

Stock dividends positively affect the market value of shareholders’ wealth.

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.

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%

less than 8.0%

equal to 8.0%

Gary Cohn, CFA, a broker at Slater Investments, works primarily with high net worth individuals. One of his clients, Claire Stafford, has adopted a very successful investment strategy and made a number of successful trades over the past year. Having observed this pattern, Cohn replicates Stafford's trades in his personal account after carrying out the instructions in his client's orders. Has Cohn most likely violated the Standards?

No

Yes, with respect to fair dealing

Yes, with respect to priority of transactions

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.

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.

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

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.

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

Which of the following statements is/are accurate? I. Differences in laws across countries determine different behavior between CFA members and candidates. II. Within the investment industry, a CFA member or candidate will always understand ethical behavior by strictly adhering to the laws of the country in which he/she operates.

I only

I & II

II only

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.

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

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

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

individuals substitute future consumption for present consumption.

Which of the following is the most accurate description of the defensive interval ratio?

The defensive interval ratio measures the duration for which the daily cash requirements of a period can be met from the expected liquid assets at the end of the period.

The defensive interval ratio measures the duration for which the daily cash requirements of a period can be met from the existing liquid assets.

The defensive interval ratio measures the duration for which the daily cash requirements can be met from the current assets.

Which of the following orders would most likely go unexecuted?

A marketable limit order

A market order

A short sale order above the market price

Aggregate demand (AD) curve will be flatter if:

investment expenditure is highly sensitive to interest rates.

saving is highly sensitive to income.

money demand is highly sensitive to income and interest rates.

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 underlying.

Incorrect with regard to the parties.

Incorrect with regard to the low degrees of leverage.

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

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

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

Return on capital is not affected by market shares.

Which of the following statements regarding the Markowitz efficient frontier is least likely to be correct? The optimal portfolio for:

an investor is the portfolio that lies on the efficient frontier and provides her with the greatest level of utility.

an investor is found at the point of tangency between the efficient frontier and an investor’s highest utility curve.

a more risk-averse investor will lie inside the efficient frontier but will lie outside the efficient frontier for a less risk-averse investor.

CFA 1 - 50 Questions