» CFA 1 – 10 questions

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

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

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

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

Which of the following is least likely a characteristic of open-ended mutual funds?

An open-end structure makes it easy to grow in size but creates pressure on the portfolio manager to manage the cash inflows and outflows.

In open-end funds, new shares are created and sold at a premium or a discount to net assets values depending on the demand for the shares.

Open-end funds accept new investment money and issue additional shares to existing or new investors. Therefore, the number of outstanding shares changes after every new investment.

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

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.

with poor profitability.

that are expensive for good reason.

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

Under which of the following situations would an increased return on equity (ROE) more likely be perceived negatively by shareholders?

Increasing ROE is always a positive signal

ROE increases as a result of a leverage increase

ROE increases while book value of equity remains constant

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.

undervalued by $15.13.

overvalued by $11.36.

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

Zero

Negative

Positive

Sullivan Investments, an asset management firm, complied with the GIPS standards on 1 January 2006. Can Sullivan link its non-GIPS compliance performance for periods beginning on or after 1 January 2000 with its GIPS compliance performance?

Yes

Only if it discloses periods of non-compliance.

No

Which of the following statements is most likely correct regarding the fundamental weighting method?

It is not biased towards shares of firms with largest market capitalization.

It is similar to momentum investment strategy where securities’ weights are reduced when their relative investment values are increased.

It is biased towards highest priced stocks as they receive highest weights in the index.

CFA 1 - 10 Questions