» CFA 1 – 50 questions

Leading economic indicators (LEI) are variables that:

change before nominal GDP of economy changes.

are useful for predicting economy’s near-term future state.

provide information regarding economy’s past condition.

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 parties.

Incorrect with regard to the low degrees of leverage.

Incorrect with regard to the underlying.

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 would most accurately be considered a primary source of liquidity?

Money market account

Restructuring debt obligations

Selling equipment

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:

equal to 8.0%

less than 8.0%

greater than 8.0%

In repurchase agreements, repo margin provides a margin of safety to the:

cash lender, if the collateral’s market value declines.

security lender, if the collateral’s market value declines.

dealer, if the lender of the cash defaults.

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 both call and put options.

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.

According to European Central Bank (ECB), debt securities with a maturity of up to two years are part of which of the following aggregate categories of money?

M2

M3

M1

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

ROE increases while book value of equity remains constant

Increasing ROE is always a positive signal

ROE increases as a result of a leverage increase

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.

Acquiring entity is required to deal directly with management and board.

Board and management should be able to use cash or available credit lines to pay hostile bidders to forgo takeover.

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

No claim

Residual claim

First claim

An investor purchases a 2-year zero-coupon bond with par value of $1,000 at $960. The implied interest earned on the bond is closest to:

$40.

$0.

$21.

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

In the case of a company following IFRS.

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.

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 statements is most likely correct regarding parametric and non-parametric tests?

Parametric tests are relatively unaffected by violations of assumptions.

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

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

The intercept of security characteristic line (SCL) is:

Jensen’s alpha.

RM–RF.

Beta.

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.

Statements II & III only

Statement II only

Statements I & III only

A recently issued sovereign bond for a given maturity is also referred to as:

of the run issue.

benchmark issue.

floating issue.

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%.

42.12%.

11%.

An investor placed a market buy order for thinly traded shares of G.Z.T Inc. The main drawback for the investor would be that:

the trade would be very expensive to execute.

it would be very difficult to execute the order.

the order may be filled at a low price.

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 risk-free rate and outflows at the weighted average cost of capital.

Discount both at the weighted average cost of capital.

Discount inflows at the weighted average cost of capital and outflows at the risk-free rate.

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 III-D ‘Performance Presentation’.

violated standard I-C ‘Misrepresentation’.

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?

Interest rates

Financial strength

Market demand

Private equity investments tend to be:

As liquid as public stocks

Less liquid than public stocks

More liquid than public stocks

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

There are homogenous products and homogenous inputs.

Labor is a variable factor of production.

Capital is not a variable factor of production.

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

Exchange-traded securities are most likely referred to as credit risk-free because:

An intermediary guarantees counterparty payment

The counterparty never defaults

There is no counterparty to default

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:

90%

50%

35%

Due to the upcoming elections in the U.S., the CAD/USD currency exchange rates has risen from 1.17 to 1.31. Calculate the percentage change in the value of the USD in terms of CAD.

11.96%

-10.68%

10.68%

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

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

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

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

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

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

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

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

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

Given callable common shares:

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

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.

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:

$1,410,400.

$3,882,000.

$4,880,200.

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.

Management fees are paid on invested capital.

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

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.

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 short in a currency forward most likely:

gains when foreign currency appreciates.

hedges the risk of rise in value of foreign currency.

hedges the risk of change in value of foreign currency.

Howard Walton, CFA, is a member of a team working on a heating oil price forecast. There are some specific portions of the forecast with which Walton does not agree, but he is generally confident of the group’s decision-making processes. Which of the following statements is most accurate? Walton:

must have his name be removed as one of the forecast's authors and submit his own independent research.

should dissociate from the group.

may allow his name to be included in the forecast.

ccording to Standard II-A ‘Material Non-Public Information’, if a member or candidate determines that information is material he should make reasonable efforts to:

achieve public dissemination of the information.

alter current investment recommendations for clients.

protect information from those who can possibly act on that information.

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

1

-1

0

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.

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.

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?

He failed to deduct all fees and expenses before calculating the fund’s track record.

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.

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

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

Correlation only deals with linear relationships.

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

A "war chest" typically describes a company having a large amount of:

inventory.

cash.

accounts receivable.

Anne Berry purchased an electric vaporizer to reduce the contamination in fruit juices in her plant. She paid $550,000 to the vendor and $4,000 to another company for the installation of the machine. She recorded the vaporizer in her books at $554,000. Which valuation method was adopted in this case?

Fair value

Historical cost

Settlement value

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

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

What happens to the prices in the long run when the aggregate demand increases and the economy recovers from an inflationary gap (classical approach)?

The prices remain the same as the economy comes back to equilibrium.

The prices decrease.

The prices increase.

Which of the following is most likely an example of a non-amortizing loan?

Automobile loans

Credit card receivables

Traditional residential mortgage loans

CFA 1 - 50 Questions