» CFA 1 – 50 questions

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.

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

EBB Inc. entered into a three-year contract to construct a building with an estimated total cost of $32 million. Due to limitations, project costs are uncertain and the output of the project cannot be measured reliably. If at the end of year 1EBB spent $26 million, under U.S.GAAP EBB would most likely recognize:

$0 in any account until the project has completed.

$26 million as cost of construction.

$26 million as an increase in inventory account.

Investor N agrees to pay Investor R $18,000 in 3 months for 5000 bushels of corn. Investor N and Investor R most likely entered into a(n):

Swaps contract

Options contract

Forward contract

Which of the following is most accurate regarding a futures contract but not a forward contract?

A futures contract is standardized and sold on an exchange

A futures contract is not marked to market.

A futures contract is subject to more default risk

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:

Zero.

A negative amount.

A positive amount.

Which of the following options on the same underlying is most likely to have the highest value?

A European call option with six months to expiry.

A European call option with three months to expiry.

A European call option with nine months to expiry.

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:

less than 8.0%

equal to 8.0%

greater than 8.0%

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 using Viatex for the majority of her client's trades

Yes, by accepting research reports that do not benefit all of her clients

Convexity plays a stronger role in interest rate risk for:

large changes in interest rates.

all interest rate changes equally.

small changes in interest rates.

Which of the following schools of economists applies the utility theory and argues that the government should not counteract business cycles?

Neoclassical school

Social economics school

Austrian school

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.

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.

A hypothetical futures contract has a current market price of $19 and initial margin requirement of $9. The maintenance margin requirement is $4. For 15 short contracts, the price at which a margin call will trigger is:

$24.

$14.

$10.

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 implement adequate compliance procedures.

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.

Which of the following is a leading economic index?

Employees on non-agricultural progress

Average price rate

Average weekly hours of manufacturers

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 the call option and a decrease in the value of the put option.

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.

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

inflation.

interest rates.

technologies.

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.

Which of the following is the highest ranked unsecured debt?

Senior unsecured.

First lien loan.

Senior subordinated.

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.

Which of the following statements is most accurate?

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

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

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

Gary Cohn, CFA, a broker at Slater Investments, works primarily with high net worth individuals. One of his clients, Claire Stafford, has adopted a very successful investment strategy and made a number of successful trades over the past year. Having observed this pattern, Cohn replicates Stafford's trades in his personal account after carrying out the instructions in his client's orders. Has Cohn most likely violated the Standards?

No

Yes, with respect to priority of transactions

Yes, with respect to fair dealing

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

For unique investors

For all investors

For institutional investors

The joint probability of events A and B is 32 percent with the probability of event A being 60 percent and the probability of event B being 50 percent. Based on this information, the conditional probability of event A given event B has occurred is closest to:

53.3%.

64.0%.

30.0%.

In a positively skewed distribution:

Mode > Median

Mean > Median

Mean = Median

A consumer with a steeper indifference curve most likely indicates that his marginal rate of substitution (MRSXY) is:

greater and he can give up more of good Y to get an additional unit of good X.

greater and he cannot gain from voluntary exchange with the consumer whose MRSXY is lower.

lower and he can give up more of good X to get an additional unit of good Y.

At initiation, the values of a swap contract and a forward contract are most likely to be:

Positive

Zero

Negative

McKinney Alpha is an accredited research firm that only hires experienced and competent analysts offering them training and financial courses from time to time. The firm allows analysts to either prepare their own research or rely on secondary sources. Tyler Klein, an analyst at McKinney uses a research report prepared at Gemma Brokerage. If Klein will use that report, he will:

not violate any standard if he makes reasonable efforts to determine that research is sound and uses the information in good faith.

violate Standard I-C ‘Misrepresentation’ by relying on work not prepared by himself for his clients.

violate Standard IV-A ‘Loyalty to employers’ as he is not allowed to use the report prepared by Gemma Brokerage.

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

The cost is less than NRV

In all cases

The cost is higher than NRV

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

flatter

steeper

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

An investment bank

A block broker

A standard broker

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

the value of the broad market has decreased.

interest rates have decreased.

the level of market uncertainty has decreased.

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’ and ‘Material Nonpublic Information’.

‘Market Manipulation’ only.

‘Material Nonpublic Information’ only

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.

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

less effective as it is very time consuming.

more effective as it is easy to implement.

equally effective as both policies work well in combination.

Under which of the following situations would a nonparametric test be more appropriate than a parametric test?

When the sample size is small and significantly not normally distributed

When studying population variance

When comparing population means

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, 2 and 3 only.

categories 1 and 2 only.

all four categories.

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

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

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

After 5-years of service with Jacob Securities as a financial planner, Shane Alvarado planned to start his own practice in his hometown. He informed his employer through email three days before starting his independent practice. The employer was on a business trip for a week and on his return he accepted his resignation. Alvarado always maintained his personal records related to training programs that he conducted at Jacob Securities, and he used that material in his new project. Alvarado:

violated the standards by using records but is in compliance with standards in notifying his employer regarding his independent practice.

is in compliance with standards regarding timely notification and using his own personal records.

violated the standards by rendering services without receiving consent from his employer and by using records.

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

Fixed income indices

Equity indices

Real estate indices

Under which measurement scale is data categorized, but not ranked?

An interval scale.

A nominal scale.

An ordinal scale.

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 cannot be applied to bonds issuance.

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.

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 can be exercised before expiration.

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

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?

Contango

Inverted

Backwardation

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

Prices of domestic products will increase.

Russian exporters will gain.

Imports from Russia will increase.

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

Financial strength

Interest rates

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?

Moral hazard

Fraud

Adverse selection

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?

US GAAP

Neither under IFRS nor under US GAAP

IFRS

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?

An arbitrageur

A dealer

A broker

The efficiency of an unbiased estimator is measured by its:

mean value.

variance

sample size.

CFA 1 - 50 Questions