» CFA 1 – 50 questions

Which of the following two measures are based on the total risk and provide similar rankings?

M2 and Sharpe ratio.

Treynor ratio and Jensen’s alpha.

Sharpe and Treynor ratios.

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.

Zero.

A positive amount.

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

Two mutually exclusive projects can best be evaluated and selected considering

Ranking based on discounted payback period

Ranking based on NPV

Ranking based on IRR

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.

For venture capital investing, later stage financing is the capital provided for a company:

to plan for major expansion.

to initiate commercial manufacturing and sales.

to prepare for an IPO.

When a company finances share repurchases with cash:

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

assets and shareholders’ equity decrease and leverage increases.

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

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:

0.2

0.4

0.3

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:

Remain constant

Decreases

Increase

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

matrix pricing model.

interest expense of the firm’s income statement.

coupon rate of the same bonds.

You are presented with 2 investment opportunities and must choose the one with the greater present value: A lump-sum of $2 million or an annuity with 25 payments of $250,000 a year with the first payment starting today. The interest rate is 9% per year compounded annually. Which one will you choose?

The lump-sum

There's no difference between the two options

The annuity

Which of the following statements is most likely correct regarding the audit of financial statements?

When an auditor has concerns regarding some unreported pending contingent liabilities he might issue a qualified opinion.

Disclaimer of opinion occurs when an auditor issues an opinion despite scope limitations.

Auditors can provide absolute assurance about the accuracy and precision of financial statements if the opinion is unqualified.

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

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

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

effect of exchange rates on aggregate expenditure or saving decisions.

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

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

Which of the following is least likely a macroeconomic influence that affects an industry’s growth? Changes in:

inflation.

technologies.

interest rates.

DLF Ltd is an Indian company in the business of constructing residential houses. The proceeds derived from the residential houses by the company will most likely be recorded as:

a reduction in fixed assets.

a reduction in current liabilities.

revenue.

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

Both the buyers and the sellers are happy

Excess demand is maximized

Quantity supplied is equal to quantity demanded

A high-tech industry only has 3 large firms operating in it. This is most likely a:

concentrated industry.

low-cost industry.

fragmented industry.

In the case of a collusion, firms agree to:

share the quantity of output.

share technologies.

share profits/losses.

Which of the following statements is most accurate?

The Ricardian model would attribute differences in comparative advantage to differences in factor endowments.

The Hecksher-Ohlin model attributes differences in comparative advantage to differences in labor productivity.

The Ricardian model would attribute differences in comparative advantage to differences in labor productivity.

Venture capital most commonly refers to:

Minority investing in mature capital

Privatizing public firms

Financing for start-ups

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

Exports will decrease.

Exports will increase.

Exports will remain unaffected.

Flavo Inc. is reporting under IFRS and has outstanding bonds amounting to $150 million with 5 years to maturity. The company decides to redeem the bonds at the call price of $144 million. The correct accounting treatment for the loss on redemption is:

$6 million to be recorded as a deferred expenditure in the balance sheet. This will be amortized over 5 years.

$6 million to be adjusted from opening retained earnings.

$6 million to be recorded as an expense in the income statement.

Under which of the following accounting standards would a deferred tax be recognised on temporary differences arising from undistributed profits of associates (investments) when the investor controls the sharing of profit?

Neither under IFRS nor under US GAAP

IFRS

US GAAP

What is the most likely result of a decrease in the risk-free rate of return on put and call option prices?

Put option prices will increase and call option prices will decrease.

Put and call prices will increase.

Put option prices will decrease and call option prices will increase.

A dealer has entered into an equity swap as the fixed-rate payer. The swap is based on the returns of the S&P500 index. On the last settlement date, the index fell by 2% due to a significant drop in the value of a few of its component stocks. On the last settlement date, the dealer would have to pay:

a fixed-rate payment and an equity payment.

the entire fixed payment it owes.

a netted amount of fixed payment.

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

commodity indices are relatively illiquid and depict less information transparency.

commodity returns are more volatile than commodity index returns.

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

Private equity investments tend to be:

More liquid than public stocks

As liquid as public stocks

Less liquid than public stocks

A financial intermediary buys a stock and then resells it a few days later at a higher price. Which intermediary would this most likely describe?

A dealer

An arbitrageur

A broker

Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

more liquidity and less emphasis on capital appreciation.

less liquidity and greater emphasis on capital appreciation.

less liquidity and less emphasis on capital appreciation.

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

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.

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 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.

Which of the following transactions do not offset each other?

'Accumulated depreciation' and 'property, plant and equipment'

'Provision for doubtful debts' and 'trade receivables'

'Dividends paid to shareholders' and 'dividends received from an investment in equity'

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.

0.09.

1.00.

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 of the following would most appropriately describe an investor's liquidity constraint?

Fund should return 5% per year

No less than a 1% loss in capital

10% of assets must be available immediately, 50% available within 2 days

Flotation costs are those costs which are incurred by a company during the process of raising additional capital. The value of these flotation costs is typically related to the amount and type of capital being raised. Which of the following statements is least likely accurate regarding flotation costs? 2

Flotation costs should be deducted as one of the project's initial-period cash flows.

If flotation costs are 5%, issuing $20 million in stocks will result in the company receiving an amount of cash equal to $19 million.

Flotation costs cannot be applied to bonds issuance.

By entering into a currency swap both parties:

have to borrow funds at relatively higher interest rates compared to borrowing directly from their banks.

are exposed to less counterparty risk because principal amounts are exchanged at the beginning and end of the swap.

make payments in different currencies and in different notional amounts.

Asset based valuation models work well for companies that do not have a high proportion of:

current assets.

fixed assets.

intangibles

Which of the following elements of a financial statement is least likely to be directly related to the measurement of financial position?

Equity

Assets

Income

Earth, Sun, Moon, and Star firms have market shares of 28%, 22%, 15%, and 10% respectively. The 4-firm Herfindahl-Hirschman Index is closest to:

0.1593.

0.1609.

0.1871.

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

Traditional residential mortgage loans

Credit card receivables

Automobile loans

Which of the following orders would most likely go unexecuted?

A short sale order above the market price

A marketable limit order

A market order

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.

I & II

II only

I only

Which of the following is least likely an (International Organization of Securities Commissions) (IOSCO) principle for issuers? Issuers should:

timely, fully and accurately disclose financial results, risks and other material information to investors.

make consistent choices with respect to accounting standards and their financial statements should be comparable.

prepare their financial statements using internationally acceptable accounting standards.

Jack purchased a bond which pays 5% per year in the first four years, 6% per year during the next five years, and 7% per year during the six years after that. What type of bond has Jack just purchased?

Step-up

Floater

Deferred coupon

Jason Briggs purchased a 3-month call option by paying $0.08. The exercise price of the option is $1.32 while the underlying is priced at $1.35. Is the option currently in-the-money and at what price will break-even occur?

In-the-money: No; Break-even price: $1.27.

In-the-money: Yes; Break-even price: $1.35.

In-the-money: Yes; Break-even price: $1.40.

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.

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

the inventory account and is expensed through cost of sales.

the net pension liability account in the balance sheet.

salaries and other administrative expenses.

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.

CFA 1 - 50 Questions