» CFA 1 – 50 questions

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

Out-of-the-money

In-the-money

At-the-money

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 as a result of a leverage increase

ROE increases while book value of equity remains constant

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):

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

equal basis among all clients who placed orders.

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

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:

Debt/Total capital ratio will improve.

interest coverage ratio will deteriorate.

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

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.

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

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

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 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 three months to expiry.

A European call option with six months to expiry.

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

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

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

should pre-clear their participation in IPOs.

A tariff directly benefits which of the following entities:

Consumers and the government

Consumers and local producers

Local producers and the government

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:

Decreases

Remain constant

Increase

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 I-C ‘Misrepresentation’.

violated standard III-D ‘Performance Presentation’.

did not violate any standard.

Which of the following statements is least likely accurate?

Management actions have an indirect impact on market value.

Management actions can directly influence book value.

Management actions do not influence book value or market value.

Which of the following orders would most likely go unexecuted?

A market order

A marketable limit order

A short sale order above the market price

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.

all four categories.

categories 1, 2 and 3 only.

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

commodity returns are more volatile than commodity index returns.

commodity indices are relatively illiquid and depict less information transparency.

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

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.

In a positively skewed distribution:

Mode > Median

Mean > Median

Mean = Median

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

maximized.

zero.

minimized.

Which of the following statement is least accurate regarding Standard V(C) - Record Retention?

An employee's notes supporting a recommendation belong to his or her firm.

If the review of a security does not lead to a change in position, there is no record retention requirement.

A press release issued by the covered company is an example of supporting documentation.

You are the favorite to win a tennis tournament. In fact, oddsmakers give you a 90% chance to win each match, regardless of who you are playing. Each match is considered an independent event. The probability of you winning all 10 matches to claim the trophy is closest to:

50%

90%

35%

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

the inventory account and is expensed through cost of sales.

salaries and other administrative expenses.

the net pension liability account in the balance sheet.

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

increase.

decrease.

remain unchanged.

You are given: Price of corn today: $7.00 per bushel 1-year corn future: $8.00 per bushel Which of the following terms most accurately describes this environment?

Backwardation

Inverted

Contango

Which of the following are not part of other comprehensive income? I. Exchange differences on translating foreign operations II. Issuance of equity shares III. Actuarial gains/losses IV. Loss from sale of machinery

II and IV

I and IV

II and III

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

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

No

Which of the following best describes the reason for choosing the NPV rule over the IRR rule when dealing with mutually exclusive projects?

NPV rankings are affected by external interest rates or discount rates.

The reinvestment rates used by NPV are more conservative and therefore are economically more relevant.

IRR ranking assumes reinvestment at opportunity cost of capital that is less realistic and economically less relevant.

Which type of financing is required for a leveraged buyout?

Equity financing

Internal financing

Debt financing

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

Discovery of oil

Threat of lawsuits

Change in interest rates

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

The threat of substitutes

The bargaining power of the buyers

Significant barriers of entry

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.

1.5410.

1.7113.

Given callable common shares:

the company has the right to buy back the shares at a pre-established price.

the shareholder has the right to buy more shares at a pre-established price.

the shareholder has the right to sell back the shares at a pre-established price.

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.

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

Excess demand is maximized

Quantity supplied is equal to quantity demanded

Both the buyers and the sellers are happy

Which of the following inventory valuation methods will produce the largest total balance sheet assets when prices are increasing (and quantities remain level)?

LIFO

Average cost

FIFO

When a monopolist charges each customer the highest price he/she is willing to pay, this is most accurately described as:

Second-degree price discrimination

First-degree price discrimination

Third-degree price discrimination

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

Considers changes in purchasing power

Is measured in the local currency

Is easier to calculate than the nominal rate

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

The efficiency of an unbiased estimator is measured by its:

sample size.

variance

mean value.

Determine the conversion value of a convertible bond if the conversion ratio is 7:3 and the market price of the bond is $30.

$13

$70

$30

The Sharpe Ratio measures'

beta

return relative to beta

return relative to standard deviation

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

No claim

Residual claim

First claim

Which of the following is most likely common among the assumptions of the Ricardian model and Heckscher-Ohlin model?

Capital is not a variable factor of production.

There are homogenous products and homogenous inputs.

Labor is a variable factor of production.

You have been given the following probabilities: P(A) = 35% P(B) = 65% P(B | A) = 65% What is the probability that Event A and Event B occur?

65%

35%

22.75%

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%.

Nisha Mazhar is a risk analyst, and she has been given the task to identify the factor that helps measure her organization's risk tolerance. Which of the following factors will help Mazhar complete her task?

Market demand

Interest rates

Financial strength

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.

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

assets with no residual value.

assets with indefinite useful lives.

intangible assets.

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:

growth

liquidity

solvency

The value, at 6% interest, of a bond paying 8% annual coupon payments, redeemable at par in 5 years, with a $25,000 face amount is closest to:

$27,100

$27,600

$25,600

Regarding business segments, companies are not required to provide:

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

full financial statements for segments.

factors used to identify reportable segments.

CFA 1 - 50 Questions