» CFA 1 – 50 questions

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

10 basis points more than the overnight rate.

negative or very low.

very high.

The auditors were not provided with the supporting documents for the majority of the transactions (including material transactions) selected for the audit. Which type of audit opinion should most likely be issued in such case?

A disclaimer of opinion

A qualified opinion

An adverse opinion

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.

Determine the impact on domestic exports of a country through its transmission mechanism if its interest rates decrease?

Exports will remain unaffected.

Exports will increase.

Exports will decrease.

A tariff directly benefits which of the following entities:

Consumers and local producers

Consumers and the government

Local producers and the government

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

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.

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

Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is responsible for managing the High Beta Mutual Fund (HBMF). Curtis Fowler, aged 56 and dependent on his portfolio returns, is W&WS’s client. His portfolio will now be managed by Chavez, who has been asked to invest 20% of his portfolio funds in HBMF. Chavez fills the request forms and immediately purchases shares of HBMF for Fowler. Is Chavez in compliance with codes and standards, and if not, what should be the recommended course of action for Chavez?

No, she should make reasonable inquiry about Fowler’s risk and return objectives and financial constraints prior to taking investment action requested by Fowler.

No, she should consult Fowler’s existing investment policy statement (IPS) and should judge the suitability of his investments in the context of his total portfolio.

Yes, she is in compliance with codes and standards.

The four broad categories of hedge fund strategies identified by HFRI are:

Event-driven, Equity driven, Relative value and Market neutral strategies.

Equity-driven, Market neutral, Arbitrage and Hedge strategies.

Event-driven, Relative value, Equity hedge and Macro strategies.

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

George Mendes is considering an employment offer made by DR Associates, an investment bank. Should Mendes accept the offer, he will be responsible for supervising twenty portfolio managers. Mendes' only concern is that employees' personal trades are not being adequately monitored and many of these transactions involve front-running clients' trades. To comply with the CFA Institute Standards of Professional Conduct, Mendes should most likely:

accept the offer and dismiss employees involved in front-running.

decline the offer in writing until the firm adopts reasonable procedures to allow exercise of his supervisory responsibilities.

accept the offer and implement adequate compliance procedures.

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%

An investor purchases a 1-month out-of-the-money American call option on a stock. A week later, the stock price is less than the call option strike price. The time value of the option is most likely:

A negative amount.

A positive amount.

Zero.

Two mutually exclusive projects can best be evaluated and selected considering

Ranking based on IRR

Ranking based on discounted payback period

Ranking based on NPV

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.

When choosing one of two mutually exclusive projects, which is the preferred method?

NPV

There is no preference between NPV and IRR

IRR

Samantha Bjork, CFA, has been offered an equity analyst position at a firm that has not adopted a formal code of ethics. Which of the following statements is most likely correct? Bjork:

may accept the position and should encourage the firm to adopt a code of ethics if she does.

must refuse to accept a position with any firm that has not adopted a code of ethics.

must refuse to accept a position with any firm that has not adopted the CFA Institute's Code of Ethics.

In the case of a collusion, firms agree to:

share technologies.

share profits/losses.

share the quantity of output.

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 decrease.

It will not change.

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

floating issue.

benchmark issue.

of the run issue.

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

liquidity ratio.

valuation ratio.

solvency ratio.

Dan Fisher is an investment manager at Rotterdam Securities and often uses Topaz brokerage services for his clients. Corey Foster, Fisher’s client, has directed him to use the services of Luna Brokerage House for him. Fisher believes that Topaz offers best price and better research reports compared to Luna. The best course of action for Fisher is to use the services of:

Luna for Foster and should disclose to him that he may not be getting best execution.

Topaz for all of his clients as he is obligated to seek best price and best execution.

Topaz for all his clients as brokerage commission is the asset of the Rotterdam and will be used to maximize the value of client’s portfolio.

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’.

did not violate any standard.

violated standard III-D ‘Performance Presentation’.

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.

-10.68%

10.68%

11.96%

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

The threat of substitutes

Significant barriers of entry

The bargaining power of the buyers

The expected P/E ratio of a stock is 10, and the actual P/E ratio is 10.8. What can we say about the stock?

We can not say anything about the stock.

The stock is overvalued.

The stock is undervalued.

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 III

I and IV

II and IV

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 account size.

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

equal basis among all clients who placed orders.

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 preservation of confidentiality

Yes, with respect to loyalty

No

An investor uses simple stock screen criteria based on a P/E ratio of less than 5 and financial leverage ratio of less than 0.5. The investor will least likely exclude stocks of companies:

with excessive financial risk.

that are expensive for good reason.

with poor profitability.

Which of the following orders would most likely go unexecuted?

A short sale order above the market price

A market order

A marketable limit order

Which of the following statements is least likely accurate?

Management actions have an indirect impact on market value.

Management actions do not influence book value or market value.

Management actions can directly influence book value.

The Sharpe Ratio measures'

beta

return relative to standard deviation

return relative to beta

The short in a currency forward most likely:

hedges the risk of rise in value of foreign currency.

hedges the risk of change in value of foreign currency.

gains when foreign currency appreciates.

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:

undervalued by $36.36.

overvalued by $11.36.

undervalued by $15.13.

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

capital maintenance adjustments.

expenses

liabilities

When inventories start to accumulate, the inventories-to-sales ratio reaches its above-normal level. Which phase of the business cycle is associated with an increased inventories-to-sales ratio?

Expansion

Trough

Peak

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.

Russian exporters will gain.

Prices of domestic products will increase.

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.

$1,150,000.

$560,000.

Which of the following is impacted by inflation in the case of capital-indexed bonds?

The interests

Both A and B

The principal

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

Out-of-the-money

At-the-money

In-the-money

Under IFRS the definitional criteria for identifiable intangible assets most likely includes:

the asset must be identifiable, under the control of company and expected to generate future economic benefits.

the cost of the asset can be reliably measured.

it is probable that the expected future economic benefits of the asset will flow to the company.

When a reliable current market price for a firm’s debt is not available, the cost of debt can be estimated using the:

interest expense of the firm’s income statement.

matrix pricing model.

coupon rate of the same bonds.

An investment management firm has been in existence for eight years. To enhance the quality of reported performance, the firm's senior compliance officer decides to make the firm's presented performance compliant with the GIPS standards. To comply with the GIPS standards, the firm is required to initially present a GIPS-compliant performance track record of: 2

five years.

one year.

eight years.

Which of the following statements is least likely correct regarding the trustee of a bond indenture?

It is appointed by the issuer, but acts in the fiduciary capacity with the bondholders.

In the event of default, the discretionary powers of the trustee decrease considerably.

The trustee can bring legal action against the issuer on behalf of the bondholders.

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?

No

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

If a firm’s long-run average cost of production increases by 15 percent as a result of an 8 percent increase in production the firm is most likely experiencing:

economies of scale.

diseconomies of scale.

constant returns to scale.

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

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.

categories 1, 2 and 3 only.

all four categories.

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 nature of the assets they invest in

The taxability of these two funds

CFA 1 - 50 Questions