» CFA 1 – 50 questions

An analyst is developing net present value (NPV) profiles for two investment projects. The only difference between the two projects is that Project 1 is expected to receive larger cash flows early in the life of the project, while Project 2 is expected to receive larger cash flows late in the life of the project. The slope of the NPV profile for Project 1 when compared to the slope of the NPV profile for Project 2 is most likely:

equal

steeper

flatter

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?

M1

M3

M2

Mark Johnson is an analyst for Big Riches Investment Firm. He replaced Todd Phillips, who was an analyst with Big Riches, but resigned to move overseas. Phillips passed on all of his prior analytical reports and backup data for Johnson to use in his new role. In preparation for an annual valuation of the foodservice equipment industry, Johnson pulled up a valuation model developed by Phillips and changed it to include economic indicators published by the US Bureau of Economic Analysis. Once these revisions were made, Johnson back-tested the results using the S&P 500. Which of the following is most accurate?

Johnson must publish the valuation model under his own name, naming the Bureau of Economic Analysis, and S&P 500 as reference materials.

Johnson must give credit to Phillips for the creation of the valuation model. However, it is unnecessary to reference the S&P 500 or the Bureau of Economic Analysis as reference materials.

Johnson must give credit to Phillips for the creation of the valuation model, and add the Bureau of Economic Analysis, and S&P 500 as reference materials.

Which of the following is a leading economic index?

Employees on non-agricultural progress

Average weekly hours of manufacturers

Average price rate

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

interest rates have decreased.

the level of market uncertainty has decreased.

the value of the broad market has decreased.

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 both at the weighted average cost of capital.

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

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

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

Overstated

Neither understated nor overstated.

Understated

Which of the following statements regarding market efficiency is least likely accurate?

An efficient capital market reflects all of the information about its securities, including risk.

There are three forms of market efficiency: weak, semi-strong and strong.

In an efficient market, prices of stocks will slowly adjust to new information.

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:

mortgage loans.

collateralized mortgage obligations.

mortgage pass through securities.

If the yield curve rises uniformly, how would the price of a 8.5% coupon bond yielding 2.75% most likely change in a year?

It will increase.

It will not change.

It will decrease.

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

liquidity ratio.

solvency ratio.

valuation ratio.

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.

1.7113.

1.5410.

Roberto Vargas, CFA, is in charge of the compliance program at his investment firm. According to the Standards of Practice Handbook, as a supervisor, Vargas is least likely required to:

disseminate the contents of the program to all personnel.

respond promptly to all violations.

incorporate a professional conduct evaluation as part of an employee’s performance review.

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

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.

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

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

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 increase the supplier's orders and recognizes the expense before the goods are received.

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

To deal with short-run stabilization, as compared to monetary policy, fiscal policy is most likely:

more effective as it is easy to implement.

less effective as it is very time consuming.

equally effective as both policies work well in combination.

Alonzo Myers manages accounts at GRTY Securities. Jerry Reed, one of his clients, e-mailed Myers to buy 300 shares in the IPO of JJKS Corp’s stock. Few days later, despite being a hot issue, Myers succeeded prorating 500 shares of JJKS Corp. for his clients. After purchasing 500 shares for his clients and 300 shares for Reed as per request, he purchased remaining 200 shares for his wife. Myers:

did not violate the standards by purchasing 200 shares for his wife and 300 shares for Reed.

violated the standards by purchasing 200 shares for his wife but is in compliance for purchasing 300 shares for Reed as per his request.

violated the standards by purchasing 200 shares for his wife and only 300 shares for Reed.

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

Regarding the definition of the firm, the GIPS Standards require all of the following except:

a firm’s organization alters historical composite results.

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.

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

expenses

capital maintenance adjustments.

liabilities

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?

Yes, with respect to loyalty

No

Yes, with respect to preservation of confidentiality

Which of the following is considered to be best practice from shareowners’ perspective?

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.

Under change-in-control provisions, executives should not be granted severance packages to leave the company.

Clayton Hamner, CFA, an independent equity analyst, produces research reports and recommendations for his 25 high net worth clients, all of whom have been informed of the different levels of services available to them. Recently, Hamner distributed his latest report on Acton Pharmaceuticals (APH) in an email that was sent simultaneously to the 18 clients who either currently hold APH shares or for whom this investment is suitable. After sending that email, Hamner followed up with seven of those clients, all of whom pay for premium service, to discuss his report in greater detail. Of those calls, Hamner's first is to his sister, whose account generates a significant share of his income. Has Hamner most likely violated the Standards?

Yes, by not disseminating his report to all clients

Yes, by calling his sister before calling other clients

No

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 diligence and reasonable basis

No

Yes, with respect to misrepresentation.

As of September 5, 2014, the current price of corn is $3.60 per bushel. Farmers have stopped asking if they will profit this year - the question now is how much will they lose for their year's work. Under which of the following 6-month futures corn prices would backwardation most likely be present?

$3.20 per bushel

$4.00 per bushel

$3.60 per bushel

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

-1

0

1

A portfolio manager's small cap portfolio has a beta of 1.2 and standard deviation of 40%. Over the past year, the portfolio returned 10%, the market returned 7%, and the risk-free rate was 2%. The Sharpe ratio is closest to:

0.3

0.4

0.2

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

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.

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 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.

Which statement most accurately describes risk transfer and risk shifting?

Risk transfer is handled through an insurance policy, while risk shifting involves derivatives to modify a firm’s risk levels.

Risk transfer occurs when the insurer sells many policies with risks that have high correlations, while risk shifting involves derivatives so that the firm may adjust its probability distribution of returns.

Risk shifting and risk transfer are the same – both involve insurance, and can cover all of the insured risk.

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.

Capital is not a variable factor of production.

Labor is a variable factor of production.

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

university endowments.

investment companies.

insurance companies.

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.

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

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

By complying with GIPS standards firms cannot:

participate in competitive bids against other compliant firms throughout the world.

assure prospective clients that the reported historical track record is complete and fairly presented.

eliminate the need for in-depth due diligence on the part of the investor.

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

Average cost

FIFO

LIFO

During the morning section of the CFA Level 1 exam, when the proctor made the final 5 minutes announcement, Enrique, a candidate next to Rachael noticed and told Rachael that she was not filling her answers on the sheet provided. Rachael immediately started transferring answers on to the answer sheet. When the proctor made the final announcement Rachael succeeded filling 100 circles and by the time proctor reached at her table, she had only 5 circles left to fill. Rachael instantly handed her sheet to the proctor. Is Rachael or Enrique in violation of the standard relating to conduct as members and candidates in the CFA Program?

Only Enrique is in violation.

Both Rachael and Enrique are in violation.

Only Rachael is in violation.

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

I and IV

II and III

II and IV

Lauren Sims, marketing director of Karma Advisors, planned a brief performance presentation in five different U.S states where majority of the firm’s clients are located, in celebration of Karma’s five years of success. In his presentation, Sims clearly includes references to the information presented and also prepared a detailed information report to support his brief presentation. At the conclusion, Sims provided the report only to the clients who requested it. By failing to provide the report to all the clients who attended the session, Sims:

did not violate any CFA Institute codes and standards.

violated Standard III-B ‘Fair Dealing’

violated Standard III-D ‘Performance Presentation’.

Which of the following is not a suitable risk return measure for alternative investments?

Sharpe ratio

Sortino ratio

Safety-first risk

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:

direct capitalization approach.

income-based approach.

asset-based approach.

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

For institutional investors

For all investors

For unique investors

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

Imports from Russia will increase.

Prices of domestic products will increase.

Russian exporters will gain.

The optimal capital budget occurs at the intersection of:

the investment opportunity schedule and the corporate tax rate

the investment opportunity schedule and the marginal cost of capital

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

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

0.47

2.13

0.62

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.

In which of the following circumstances can a producer of agricultural products value the product at the net realizable value (NRV)?

The cost is higher than NRV

The cost is less than NRV

In all cases

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.

organizational structure is unstable or complex.

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

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?

Libor

Spot rate

Koribor

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 can be met from the current assets.

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.

CFA 1 - 50 Questions