» CFA 1 – 50 questions

The financial leverage ratio of a firm, whose total debt ratio is 54% and debt-to- equity is 1.15, is closest to:

2.13

0.62

0.47

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.

According to Standard I-A ‘Knowledge of Law’, members and candidates are required to:

maintain readily accessible current reference copies of applicable statutes, rules and regulations.

report potential violations of the Code and Standards committed by fellow members and candidates to regulatory organizations.

dissociate from the activity if they have reasonable grounds to believe that employer’s or client’s activities is unethical.

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:

0.09.

1.00.

1.20.

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.

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

insurance companies.

investment companies.

university endowments.

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

The bargaining power of the buyers

Significant barriers of entry

The threat of substitutes

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.

II only

I only

I & II

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.

$4,880,200.

$3,882,000.

Which of the following statements is most accurate?

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

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

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

Bill Hardwick, CFA, is a bond specialist and a fixed-income portfolio manager for a large pension fund. Hardwick is considering inclusion of highly structured mortgage securities in the pension fund. However, his team has analyzed these products and has come to the conclusion that it is difficult to distinguish between good and bad investment options due to the complexity and layers of the securities. Rather than sort it all out, Hardwick opts to just simply avoid this sector entirely and invest instead in simpler securities that can be more easily analyzed and understood. Has Hardwick most likely violated the Standards?

Yes, with respect to misrepresentation.

Yes, with respect to diligence and reasonable basis

No

Craig Adams, CFA, is in charge of managing the portfolio of ABC’s pension plan. Currently, the funds in the pension plan’s trust are invested traditionally: 80% in stocks and 20% in fixed income. The committee in charge of ABC’s pension fund wants to diversify its asset mix to include investments in hedge funds specializing in real estate. Which of the following is least likely to be a precaution of investing in hedge funds?

Hedge funds cannot diversify the pension trust as intended because analysts measure their performance relative to equity indices.

Hedge funds often adopt strategies that magnify possible losses to their investors, including the use of leverage and choice of illiquid positions.

Hedge fund performance fees are typically higher than those of traditional investments.

To determine the impact of changes in exchange rates on trade balance, the ‘absorption approach’ most likely exhibits the:

effect of changing the relative price of domestic and foreign goods.

microeconomic view of the relationship between exchange rates and trade balance.

effect of exchange rates on aggregate expenditure or saving decisions.

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.

Net present value method assumes that cash flows are reinvested at the:

opportunity cost of capital.

internal rate of return.

accounting rate of return.

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

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

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.

The production process of a calculator could look something like the following: Cost of factory buying raw materials: $2.00 Cost of retailer buying from factory: $5.00 Cost of customer buying from retailer: $9.00

$5

$4

$3

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

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:

42.12%.

11%.

25%.

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:

primary market.

secondary market.

money market.

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?

Fraud

Moral hazard

Adverse selection

An equity analyst working for a growth oriented mutual fund has a tendency to misvalue the stocks of popular companies that she has previously recommended and the fund already owns. Her behavior is most likely consistent with which of the following biases?

Confirmationbias

Escalationbias

Prospecttheory

Which type of financing is required for a leveraged buyout?

Equity financing

Internal financing

Debt financing

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):

equal basis among all clients who placed orders.

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

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

Survivorship and backfill biases most likely cause hedge fund indices to be:

Understated

Neither understated nor overstated.

Overstated

Which of the following statements is most likely correct regarding the major sections of GIPS standards?

According to Section 4 ‘Disclosures’, firms are required to make negative assurance disclosures.

According to Section 3’Composite Construction’, a composite return is the asset weighted average of the performance of all portfolios in the composite.

According to section 5 ‘Presentation and Reporting’, firms cannot include in GIPS-compliant presentations information not addressed by the GIPS standards.

Identify the most appropriate explanation of ''channel stuffing''.

Channel stuffing is a conservative revenue recognition strategy in which the firm hold goods and delays the supply of goods to the distribution channel.

Channel stuffing is an aggressive revenue recognition strategy in which the firm oversupplies goods to the distribution channel.

Channel stuffing is an aggressive revenue recognition strategy in which the firm increase the supplier's orders and recognizes the expense before the goods are received.

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

III only

I, II & III

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%

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.

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

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

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.

A company’s $100 par perpetual preferred stock has a dividend rate of 7 percent and a required rate of return of 11 percent. The company’s earnings are expected to grow at a constant rate of 3 percent per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being:

overvalued by $11.36.

undervalued by $15.13.

undervalued by $36.36.

Russell Bellamy, CFA, a manager with a regional bank, sends out a regular newsletter to clients on a monthly basis. Independent of his position, Bellamy has been appointed to the Board of a local nonprofit organization that provides grants to local artists. In his latest newsletter to clients, Bellamy mentions his appointment as well as the fact that the organization recently announced the start of a fundraising campaign. Has Bellamy most likely violated the Standards?

No

Yes, with respect to loyalty

Yes, with respect to preservation of confidentiality

Investor A has a lower risk aversion than Investor B, and Investor C has a lower risk tolerance than Investor B. Which investor's optimal portfolio will most likely have the highest expected return on the capital allocation line?

Investor A's optimal portfolio

Investor B's optimal portfolio

Investor C's optimal portfolio

The optimal capital budget occurs at the intersection of:

the investment opportunity schedule and the marginal cost of capital

the old marginal cost of capital and the new marginal cost of capital

the investment opportunity schedule and the corporate tax rate

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

remain unchanged.

decrease.

increase.

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

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

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

American-style options can be exercised before expiration.

Regarding business segments, companies are not required to provide:

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

factors used to identify reportable segments.

full financial statements for segments.

A lognormal distribution:

is not completely described by two parameters i.e. the mean and the variance.

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

is bounded below by 1 and has a long right tail.

When a company finances share repurchases with cash:

assets and shareholders’ equity decrease and leverage increases.

leverage increases, shareholders’ equity decreases and assets remain unchanged.

assets and shareholders’ equity decrease and leverage remains - unchanged.

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

A primary motivation for investment in commodities is most likely the:

positive volatility of commodities relative to stock and bond investments.

positive correlation of commodities with stock and bond investments.

positive correlation of commodities with unexpected inflation.

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

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

The maturity of the underlying assets

The taxability of these two funds

The nature of the assets they invest in

Which of the following types of indices is most likely to rely on appraisal data?

Equity indices

Fixed income indices

Real estate indices

An investor wanting to purchase 100 shares of a publicly traded stock would most likely seek out:

A standard broker

A block broker

An investment bank

Given callable common shares:

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

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

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

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

Correlation only deals with linear relationships.

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

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

On 1 January 2014, Neway Construction entered into a contract to lay pipes for a factory. The project will take an estimated two years to complete. As stated in the contract, total revenue for the project is an estimated $2,500,000. Total cost is expected to be 70% of revenue. Neway incurred $800,000 of costs in 2014. Assuming Neway estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the percentage-of-completion method, the revenue that will be reported in 2014 is closest to:

$1,250,000.

$560,000.

$1,150,000.

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

solvency ratio.

valuation ratio.

liquidity ratio.

CFA 1 - 50 Questions