17年CFA一级mock
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CFA level1-Mock-120 1/38 Questions 1~18 Relate to Ethics
..............................................................
2
Questions 19~32 Relate to Quantitative analysis
...................................
8
Questions 33~44 Relate to Economics
...................................................
13
Questions 45~68 Relate to Financial Statement Analysis
...................
16
Questions 69~76 Relate to Corporate finance
......................................
23
Questions 77~88 Relate to Equity investment
......................................
26
Questions 89~94 Relate to Derivatives
..................................................
30
Questions 95~106 Relate to Fixed-income Analysis
.............................
32
Questions 107~110 Relate to Alternative Investments
........................
35
Questions 111 ~120 Relate to Portfolio Management
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36
CFA level1-Mock-120 2/38 Questions 1~18 Relate to Ethics 1.
Darden Crux, CFA, a portfolio manager at SWIFT Asset Management Ltd., (SWIFT) calls a
friend to join him for dinner. The friend, a financial analyst at Cyber Kinetics (CK), declines
the invitation and explains she is performing due diligence on Orca Electronics, a company
CK is about to acquire. After the phone call, Crux searches the Internet for any news of the
acquisition but finds nothing. After verifying that Orca is on SWIFT's approved stock list,
Crux purchases Orca's common stock and call options for selective SWIFT clients. Two
weeks later, CK announces its intention to acquire Orca. The next day, Crux sells all of the
Orca securities, giving the fund a profit of $3 million. What action should Crux most likely
have taken to avoid violating any CFA Institute Standards of Professional Conduct?
A.
Purchase the stock and call options for all clients.
B.
Trade only after analyzing the stock diligently and thoroughly.
C.
Refuse to trade based on the information.
2.
According to the GIPS standards a verification report confirms all of the following except
whether:
A.
processes and procedures are designed to calculate and present compliant performance results.
B.
specific composite presentations are accurate.
C.
a firm has complied with all firm-wide composite construction requirements.
3.
Alexander Newton, CFA, is the chief compliance officer for Mills Investment Limited.
Newton institutes a new policy requiring the pro rata distribution of new security issues to all
established discretionary accounts for which the new issues are appropriate. The policy also
provides for the exclusion of newly established discretionary accounts from the distribution
until they have reached their one-month anniversary date. This policy is disclosed to all
existing and potential clients. Did Newton most likely
violate any CFA Institute Standards of
Professional Conduct?
MOCK EXAM 120
CFA level1-Mock-120 3/38 A.
No, because the policy has been adequately disclosed to all existing and potential clients.
B.
Yes.
C.
No, because the allocation policy is not inequitable under the standards.
4.
Which of the following least likely
reflects the two primary principles of the CFA Institute
Rules of Procedure for Professional Conduct?
A.
Confidentiality of proceedings.
B.
Fair process to the member and candidate.
C.
Public disclosure of disciplinary sanctions.
5.
Vishal Chandarana, an unemployed research analyst, recently registered for the CFA Level I
exam. After two months of intense interviewing, he accepts a job with a stock brokerage
company in a different region of the country. Chandarana posts on a blog how being a CFA candidate really helped him get a job. He also notes how relieved he was when his new
employer did not ask him about being fired from his former employer. Which CFA Institute
Standards of Professional Conduct did Chandarana least likely violate?
A.
Reference to CFA Institute, the CFA Designation, and the CFA Program.
B.
Loyalty to Employers.
C.
Misconduct.
6.
Miranda Grafton, CFA, purchased a large block of stock at varying prices during the trading
session. The stock realized a significant gain in value before the close of the trading day, so
Grafton reviewed her purchase prices to determine what prices should be assigned to each
specific account. According to the Standards of Practice Handbook, Grafton's least
appropriate action is to allocate the execution prices:
A.
on a first-in, first-out basis with consideration of bundling orders for efficiency.
B.
across the participating client accounts at the same execution price.
C.
across the participating client accounts pro rata on the basis of account size.
7.
Noor Mawar, CFA, manages a trust fund whose beneficiary is an orphaned 18-year-old
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CFA level1-Mock-120 4/38 student. The investment policy dictates that trust assets are expected to provide the student with a stable, low-risk source of income until she reaches the age of 30 years. Based on information from a blog, the student asks Mawar to invest in a new business venture that she expects will provide high returns over the next five years. Mawar ignores the request, instead securing conservative investments to provide sufficient income. Did Mawar most likely
violate the CFA Institute Standards of Professional Conduct? A.
No, because the client's objectives were met.
B.
No, because the investment time frame does not match the investment horizon.
C.
Yes.
8.
Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors, a mid-sized
mutual fund firm investing in domestic securities. She has watched the hedge fund boom and
on numerous occasions suggested her firm creates such a fund. Senior management has
refused to commit resources to hedge funds. Attracted by potential higher fees associated with
hedge funds, Grabbo and several other employees begin development of their own hedge fund
to invest in international securities. Grabbo and her colleagues are careful to work on the fund
development only on their own time. Because Atlantic management thinks hedge funds are a
fad, she does not inform her supervisor about the hedge fund creation. According to the
Standards of Practice Handbook, Grabbo should most likely
address which one of the Codes
and Standards immediately?
A.
Disclosure of Conflicts
B.
Additional Compensation Arrangements
C.
Priority of Transactions
9.
The Global Investment Performance Standards (GIPS) were developed for the benefit of:
A.
broker/dealers.
B.
prospective clients.
C.
regulators.
10. From the point of view of an investor, unethical behavior by investment professionals can
CFA level1-Mock-120 5/38 most likely
lead to which of the following? A.
Increased willingness to accept risk.
B.
Rise in the demand for investments.
C.
Demand for a higher return.
11. During an on-site company visit, Marsha Ward, CFA, accidentally overheard the chief
executive officer of Stargazer, Inc. discussing the company's tender offer to purchase
Dynamica Enterprises, a retailer of Stargazer products. According to the CFA Institute
Standards of Professional Conduct, Ward most likely
cannot use the information because:
A.
it relates to a tender offer.
B.
she does not have a reasonable and adequate basis for taking investment action.
C.
it was overheard and might be considered unreliable.
12.
According to the CFA Institute Code of Ethics and Standards of Professional Conduct, trading
on material nonpublic information is least likely
to be prevented by establishing:
A.
personal trading limitations.
B.
selective disclosure.
C.
firewalls.
13.
James Woods, CFA, is a portfolio manager at ABC Securities. Woods has reasonable grounds
to believe his colleague, Sandra Clarke, a CFA Level II candidate, is engaged in unethical
trading activities that may also be in violation of local securities laws. Woods is not Clarke's
supervisor, and her activities do not impact Woods or any of the portfolios for which he is
responsible. Based on the Code and Standards, the recommended course of action is for
Woods to:
A.
report Sandra Clarke to the appropriate governmental or regulatory organization.
B.
not take any action because he is not directly involved.
C.
report Sandra Clarke to ABC's trading supervisor or compliance department.
14.
Rebecca Wong is enrolled to take the Level I CFA exam. Her friend William Leung purchased
CFA level1-Mock-120 6/38 Level I study materials from a well-known CFA review program the previous year. Leung made a photocopy of the previous year's copyrighted materials and sold it to Wong to help her study. Who most likely
violated the CFA Institute Code of Ethics or any Standards of Professional Conduct? A.
Neither violated. B.
Only Leung violated. C.
Both violated. 15.
Which of the following is not a component of the CFA Institute Code of Ethics? A.
Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession. B.
Promote financial integrity and seek to prevent and punish abuses in the financial markets. C.
Place the integrity of the investment profession and the interests of clients above your own personal interests. 16.
In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to: A.
the unique characteristics of each asset class. B.
all aspects of performance measurement. C.
various measures of risk. 17.
Albert Nyakenda, CFA, was driving to a client's office where he was expected to close a multi-million-dollar deal, when he was pulled over by a traffic policeman although he did not believe he had violated any traffic laws. When Nyakenda realized the policeman planned to wrongly ticket him for speeding, he offered to buy him "lunch" so that he could quickly get to his client's office. The lunch would cost significantly more than the ticket. The alternative was to go to the police station and file a complaint of being wrongly accused that would also involve going to court the next day to present his case. Did Nyakenda most likely
violate the CFA Institute Code of Ethics? A.
Yes.
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CFA level1-Mock-120 7/38 B.
No, because the cost of lunch is more than the ticket. C.
No, because he was wrongly accused. 18.
Fundamental Asset Managers claims compliance with the CFA Institute Global Investment Performance Standards (GIPS) and manages both discretionary and non-discretionary accounts. When constructing a single composite for Fundamental, Juma Dzuya includes all discretionary, fee-paying accounts with both value and growth strategies. Does the composite constructed by Dzuya most likely
meet the criteria of the GIPS standards? A.
No, because of non-similar investment strategies. B.
No, because non-discretionary accounts are not included. C.
Yes.
CFA level1-Mock-120 8/38 Questions 19~32 Relate to Quantitative analysis 19.
The arithmetic and geometric mean are calculated for the same data. If there is variability in the data, compared with the arithmetic mean, the geometric mean will most likely
be: A.
greater. B.
equal. C.
smaller. 20.
When testing a hypothesis, the power of a test is best described as the: A.
probability of rejecting a true null hypothesis. B.
same as the level of significance of the test. C.
probability of correctly rejecting the null hypothesis. 21.
If two events, A and B, are independent and the probability of A does not equal the probability of B [i.e., P(A) ≠ P(B)], then the probability of Event A given that Event B has occurred [i.e., P(A│B)] is best described as:
A.
P(A). B.
P(B│A).
C.
P(B). 22.
Cumulative Probabilities for a Standard Normal Distribution
P
(
Z
≤
x
) = N
(
x
) for x
≥ 0 or
P
(
Z
≤
z
) = N
(
z
) for z
≥ 0
x
or z
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
1.10
0.8643
0.8665
0.8686
0.8708
0.8729
0.8749
0.8770
0.8790
0.8810
0.8830
1.20
0.8849
0.8869
0.8888
0.8907
0.8925
0.8944
0.8962
0.8980
0.8997
0.9015
1.30
0.9032
0.9049
0.9066
0.9082
0.9099
0.9115
0.9131
0.9147
0.9162
0.9177
…
1.90
0.9713
0.9719
0.9726
0.9732
0.9738
0.9744
0.9750
0.9756
0.9761
0.9767
2.00
0.9772
0.9778
0.9783
0.9788
0.9793
0.9798
0.9803
0.9808
0.9812
0.9817
2.10
0.9821
0.9826
0.9830
0.9834
0.9838
0.9842
0.9846
0.9850
0.9854
0.9857
…
2.50
0.9938
0.9940
0.9941
0.9943
0.9945
0.9946
0.9948
0.9949
0.9951
0.9952
2.60
0.9953
0.9955
0.9956
0.9957
0.9959
0.9960
0.9961
0.9962
0.9963
0.9964
2.70
0.9965
0.9966
0.9967
0.9968
0.9969
0.9970
0.9971
0.9972
0.9973
0.9974
CFA level1-Mock-120 9/38 A variable is normally distributed with a mean of 5.00 and a variance of 4.00. Using the excerpt above from the cumulative distribution function for the standard normal random variable table, the probability of observing a value of –
0.40 or less is closest to: A.
8.85%. B.
2.44%. C.
0.35%. 23.
The dollar discount on a US Treasury bill with 91 days until maturity is $2,100. The face value of the bill is $100,000. The bank discount yield of the bill is closest to: A.
8.58%. B.
8.31%. C.
8.40%. 24.
An analyst applies four valuation screens to a set of potential investments. The screens are independent of each other. Valuation Screen
Probability of Passing
1
0.65
2
0.45
3
0.40
4
0.30
If there are 1,200 potential investments, the number expected to simultaneously pass all four screens is closest to: A.
97. B.
360. C.
42. 25.
Investor A and Investor B invest in a fund for two years: Year 1
Year 2
Fund Return
Positive
Negative
Portfolio
Money-Weighted Rate of Return
Investor A
7.5%
Investor B
8.2%
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CFA level1-Mock-120 10/38 Given the information in the table, which of the following is least likely
to be an explanation for the difference between the two money-weighted rates of return? A.
Investor B decreased the investment in the fund at the end of year 1 whereas investor A did not make any additions or withdrawals. B.
Investor A increased the investment in the fund at the end of year 1 whereas investor B did not make any additions or withdrawals. C.
The investors invested different amounts at inception and afterward did not make any additions or withdrawals. 26.
If the probability for an event Z is 14% (i.e., P(Z) = 14%), the odds for Z are closest to: A.
0.163. B.
0.123. C.
0.071. 27.
A financial contract offers to pay €1,200 per month for five years with the first payment made immediately. Assuming an annual discount rate of 6.5%, compounded monthly the present value of the contract is closest
to: A.
€61,330.
B.
€63,731.
C.
€61,663.
28.
Which of the following is best described as a discrete random variable? A.
The expected annual return on the Nikkei 225 Index over the next year. B.
The expected percentage change in a country's gross national product for the next year. C.
The number of days on which the DJIA experienced an increase since 2013. 29.
Assuming no short selling, a diversification benefit is most likely
to occur when the correlations among the securities contained in the portfolio are: A.
greater than +1. B.
equal to +1.
CFA level1-Mock-120 11/38 C.
less than +1. 30.
The following table shows the forecasted price movements of a stock that is currently priced at 40 and does not pay a dividend. Movement
Probability of Movement
Period Return if Movement
Up
65%
+10%
Down
35%
-10%
Using the binomial model, the probability that the stock's price will be $39.60 at the end of two periods is closest to: A.
22.75%. B.
45.50%. C.
42.25%. 31.
An analyst has established the following prior probabilities regarding a company's next quarter's earnings per share (EPS) exceeding, equaling, or being below the consensus estimate. Prior Probabilities
EPS exceed consensus
25%
EPS equal consensus
55%
EPS are less than consensus
20%
Several days before releasing its earnings statement, the company announces a cut in its dividend. Given this new information, the analyst revises his opinion regarding the likelihood that the company will have EPS below the consensus estimate. He estimates the likelihood the company will cut the dividend, given that EPS exceeds/meets/falls below consensus, as reported below. Probabilities the Company Cuts Dividends, Conditional on EPS Exceeding/Equaling/Falling below Consensus P(Cut div│EPS exceed)
5% P(Cut div│EPS equal)
10% P(Cut div│EPS below)
85% The analyst thus determines that the unconditional probability for a cut in the dividend, P(Cut div), is equal to 23.75%. Using Bayes' formula, the updated (posterior) probability that the company's EPS are below the consensus is closest to:
CFA level1-Mock-120 12/38 A.
72%. B.
85%. C.
20%. 32.
When two mutually exclusive projects with conventional cash flows are being ranked, the net present value (NPV) and internal rate of return (IRR) decision rules are most likely
to conflict when the: A.
projects have similar timing of cash flows. B.
projects' investments are of different scale. C.
projects have multiple IRRs.
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CFA level1-Mock-120 13/38 Questions 33~44 Relate to Economics 33.
A decrease in average weekly initial claims for unemployment is most likely
indicative of: A.
an economic recovery beginning. B.
an economic downturn beginning. C.
the business cycle reaching its peak. 34.
Successful advertising and product differentiation are most likely
to have a positive impact on the economic profits of a producer under: A.
monopolistic competition. B.
monopoly. C.
perfect competition. 35.
If the quantity demanded of pears falls by 4% when the price of apples decreases by 3%, then apples and pears are best described as: A.
inferior goods. B.
substitutes. C.
complements. 36.
Which characteristic is a firm least likely
to exhibit when it operates in a market with a downward sloping demand curve, many competitors, and zero economic profits in the long run? A.
No pricing power B.
Differentiated product C.
Low barriers to entry 37.
Holding the working-age population constant, if the labor force participation rate declines while the number of people employed remains unchanged, the unemployment rate will most likely
: A.
decrease. B.
remain unchanged.
CFA level1-Mock-120 14/38 C.
increase. 38.
Which of the following is least likely
to be a characteristic of a Giffen good? Its: A.
substitution effect is negative. B.
demand curve slopes upward. C.
income effect is negative. 39.
Externalities, in reference to a particular good, are most likely
to affect: A.
someone other than buyers and sellers. B.
buyers. C.
sellers. 40.
Stagflation is best described as an economic situation involving high inflation and high: A.
economic growth. B.
aggregate supply. C.
unemployment. 41.
The monthly demand curve for playing tennis at a particular club is given by the following equation: P
Tennis Match
= 9 –
0.20 × Q
Tennis Match
. The club currently charges members $4.00 to play a match but is considering adding a membership fee. If the club continues to charge the same per play charge, the most that it will be able to charge as a membership fee is closest to: A.
$62.50. B.
$162.50. C.
$40.00. 42.
The price of a good falls from $15 to $13. Given this decline in price, the quantity demanded of the good rises from 100 units to 120 units. The own-price elasticity of demand for the good is closest to: A.
-1.27. B.
-0.67.
CFA level1-Mock-120 15/38 C.
-1.50. 43.
The elasticity of demand for a good is most likely
greater when: A.
the good is a necessity. B.
the adjustment to a price change takes a longer time. C.
a lesser proportion of income is spent on the good. 44.
In a country with a high level of income, as domestic income rises, it is most likely
that an increase will occur in: A.
private saving and investment. B.
the trade balance. C.
the fiscal balance.
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CFA level1-Mock-120 16/38 Questions 45~68 Relate to Financial Statement Analysis 45.
Which of the following best describes a use of the balance sheet? A company's balance sheet: A.
includes detail on its cash receipts and payments made during a period. B.
provides detail on its overall financial position at the end of a period. C.
specifies how much revenue it generated during a period. 46.
Which of the following statements best describes a trial balance? A trial balance is a document or computer file that: A.
contains all business transactions recorded in the order in which they occur. B.
shows all business transactions by account. C.
lists all account balances at a particular point in time. 47.
An increase in which of the following items would most likely
result in an increase in a company's quick ratio, all else being held equal? A.
Receivables B.
Current liabilities C.
Inventory 48.
Which of the following is best described as a necessary characteristic for an effective financial reporting framework? A.
Consistency in the measurement basis used across the balance sheet B.
Uniform treatment of transactions by different entities C.
Transparency to the underlying economics 49.
A company acquires a license for $6,500 with the right to use the license for four years. Management expects to derive benefits from the license for three years and uses the straight-line amortization method. Accumulated amortization at the end of Year 2 is closest to: A.
$2,167. B.
$3,250. C.
$4,333.
CFA level1-Mock-120 17/38 50.
The convergence of global accounting standards has advanced to a degree that the Securities & Exchange Commission in the United States now mandates that foreign private issuers who use IFRS may report under: A.
U.S. GAAP or under IFRS with a reconciliation to U.S. GAAP. B.
U.S. GAAP with voluntary supplemental reporting under IFRS. C.
U.S. GAAP or under IFRS. 51.
All else being equal, if the purchase price of inventory is increasing, a company that accounts for its inventory under last-in, first-out (LIFO) instead of first-in, first-out (FIFO) is most likely
to have a: A.
lower net cash flow from operating activities. B.
lower market valuation of its common equity. C.
higher debt-to-equity ratio. 52.
The use of estimates in financial reporting is best described as: A.
a factor that reduces the understandability of financial statements. B.
avoidable through sophisticated accounting and auditing techniques. C.
acceptable despite the risk of manipulation by management. 53.
The following data is available on two companies that operate in the same industry: Metric ($ millions)
Company X
Company Y
Sales
11.2
14.5
Cost of goods sold
5.7
7.7
Administration costs
1.9
2.2
Interest expense
0.3
0.7
Research & development expenses
1.5
1.7
Which of the following statements is most appropriate? Better margin performance will be reported by: A.
Y at both the gross margin and operating margin levels. B.
Y at the gross margin level and X at the operating margin level. C.
X at the gross margin level and Y at the operating margin level.
CFA level1-Mock-120 18/38 54.
Which of the following statements is most accurate with respect to the jurisdiction underlying financial reporting? A.
Regulatory authorities are typically private sector, self-regulated organizations. B.
The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of standard-setting bodies. C.
Standard-setting bodies have authority because they are recognized by regulatory authorities. 55.
Which of the following statements is most accurate about the responsibilities of an auditor for a publicly traded firm in the United States? The auditor must: A.
state that the financial statements are prepared according to generally accepted accounting principles. B.
express an opinion about the effectiveness of the company's internal control systems. C.
ensure that the financial statements are free from error, fraud, or illegal acts. 56.
An accounting document that records transactions in the order in which they occur is best described as a: A.
general journal. B.
general ledger. C.
trial balance. 57.
At the time of signing a contract to build a bridge, a construction company has the following information available on the contract. Engineers estimate that the work will take three years and that 70% of the work will be completed by the end of Year 2. (£)
Total contract amount
500,000
Estimated cost to complete contract
300,000
Estimated expenses for Year 1
155,000
Estimated expenses for Year 2
55,000
Actual costs incurred were £150,000 and £51,000 in Years 1 and 2, respectively. The company recognizes revenue using the percentage-of-completion method based on expenses incurred. The revenue the company will recognize in Year 2 is closest to:
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CFA level1-Mock-120 19/38 A.
£91,667.
B.
£166,667.
C.
£85,000.
58.
Notes to financial statements most likely
include:
A.
a discussion of significant trends, events and uncertainties that affect the operating results.
B.
supplementary information about accounting policies, methods and estimates.
C.
an auditor's opinion as to the fair presentation of the financial statements.
59.
The following data is available on a company for the current year:
Metric
(£’000)
Comprehensive income
246,000
Dividends paid
60,000
Ending retained earnings
821,000
Opening retained earnings
580,000
The company will most likely
report other comprehensive income (OCI) (in £
'000) as a: A.
gain of 186,000.
B.
gain of 301,000.
C.
loss of 55,000.
60. Under International Financial Reporting Standards (IFRS), which of the following financial
statement elements most accurately represents inflows of economic resources to a company?
A.
Assets
B.
Revenues
C.
Owners' equity
61. The notes to the financial statements of a company reporting under U.S. GAAP contains the
following information for the year 2014:
Note 11. Property and Equipment (all figures in $ thousands) Depreciation expense for 2014 is $362. This amount includes capitalized interest of $143. Interest is allocated and capitalized to construction in progress by applying the firm’s cost of borrowing rate to qualifying assets. Interest capitalized in 2014 is $170.
CFA level1-Mock-120 20/38 Ignoring the effects of income taxes, the expensing of previously capitalized interest most likely
causes the company's cash flow from operations to be: A.
unaffected. B.
higher. C.
lower. 62.
The following is selected balance sheet data for a company along with information about its financial and operating lease obligations. As of 31 December 2014 (€ millions)
Long-term debt 1,347 Total shareholder’s equity
11,268 Total assets 20,097 Note 18. Financial and Operating Leases A. Financial Leases The implicit interest rate on finance leases for 2014 was 6.0%. B. Operating Lease Commitments as of 31 December 2014 (€ Millions)
Due 1 January 2015 130 Due 1 January 2016 130 Due 1 January 2017 130 Due 1 January 2018 130 Due 1 January 2019 80 Total of future lease payments thereafter* 240 Total commitments 840 *After 2019, all lease payments are assumed to be the same as in 2019. If the company were to capitalize its long-term leases, its adjusted long-term debt-to-assets ratio as of the end of December 2014 would be closest to: A.
10.4%. B.
9.9%. C.
10.2%. 63.
For which of the following assets is it most appropriate to test for impairment at least annually? A.
A patent with a legal life of 20 years B.
A trademark with an indefinite expected life
CFA level1-Mock-120 21/38 C.
Land
64.
An analyst gathers the following information about a company:
LIFO reserve as of 31 December 2013
$420,000
LIFO reserve as of 31 December 2014
$450,000
Marginal tax rate
30%
If the company had used the first-in, first-out (FIFO) method instead of last-in, first-out (LIFO), its 2014 net income would most likely
have been: A.
$21,000 higher.
B.
$30,000 lower.
C.
$9,000 higher.
65.
The following excerpt was taken from the notes of a company's financial statements that were
prepared in accordance with International Financial Reporting Standards. All figures are in
thousands of Australian dollars.
Note 12: Broadcast Licenses During 2014, the company successfully disposed of broadcast licenses that were held for sale for A$37,900 (net book value of A$23,500). Based on the successful completion of that sale, the impairment losses taken in 2012 on other licenses have been reversed, restoring those intangible assets to their amortized historical cost. Broadcast licenses are amortized over a period of 15
–
25 years.
The note leads an analyst to believe that the rapid reversal of the impairment loss related to the broadcast licenses arose as an attempt by management to manage earnings. If the analyst's belief is correct, her analysis of the original 2013 financial statements would most likely
have shown that, compared with the economic reality in 2013, the company had: A.
understated fixed asset turnover.
B.
understated ROA.
C.
overstated net profit margin.
66.
For which of the following inventory valuation methods is the gross profit margin least likely
to be the same under both a perpetual inventory system and a periodic inventory system?
A.
Specific identification
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CFA level1-Mock-120 22/38 B.
FIFO C.
LIFO 67.
Which of the following statements best describes the role of the International Organization of Securities Commissions (IOSCO)? The IOSCO A.
is the oversight body to which the International Accounting Standards Board (IASB) reports. B.
assists in attaining the goal of cross-border cooperation in combating violations of securities laws. C.
is responsible for regulating financial markets of member nations. 68.
In early January 2015, an analyst sees a news release that a company he follows (which reports under US GAAP) will be forced to reduce output from one of its major product lines at its highly specialized ceramics plant in response to a new technology introduced by its major competitor. The table summarizes information and estimates that the analyst has gathered from various sources about the plant and its future prospects. Selected Information Related to the Ceramics Production Plant
End of 2014 ($ thousands)
Carrying amount of plant
1,604
Undiscounted expected future net cash flows
1,350
Present value of expected future net cash flows
1,050
Fair value of plant
1,225
Revised estimate of useful life
4 years
Depreciation method
Straight line
Revised estimate of residual value
$200
If the above information and estimates prove accurate, the depreciation expense that should be reported for 2015 related to the plant will be closest to: A.
$306 thousand. B.
$256 thousand. C.
$213 thousand.
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CFA level1-Mock-120 23/38 Questions 69~76 Relate to Corporate finance 69.
When computing the weighted average cost of capital (WACC) and assuming a fixed-rate non-callable bond is currently selling above par value, the before-tax cost of debt is closest to the: A.
yield to maturity. B.
current yield. C.
coupon rate 70.
A company has 100 million shares outstanding. The share price of a company's stock is £15 just prior to announcing a £100 million expansionary investment in a new plant and estimates that the present value of future after-tax cash flows will be £150 million. Analysts, however, estimate the new plant's profitability will be lower than the company's expectations. The company's stock price will most likely
: A.
increase by less than £0.50 per share. B.
drop below £15 per share due to the cannibalization of revenue from the new plant. C.
increase by the new plant's net present value per share. 71.
A company has an equity beta of 1.4 and is 60% funded with debt. Assuming a tax rate of 35%, the company’s asset beta is closest to:
A.
1.01. B.
0.98. C.
0.71. 72.
The following information is available for a company: •
Bonds are priced at par and have an annual coupon rate of 9.2%. •
Preferred stock is priced at $8.18 and pays an annual dividend of $1.35. •
Common equity has a beta of 1.3. •
The risk-free rate is 4% and the market premium is 11%. •
Capital structure: Debt = 30%; Preferred stock = 15%; Common equity = 55%. •
The tax rate is 35%.
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CFA level1-Mock-120 24/38 The weighted average cost of capital (WACC) for the company is closest to: A.
14.3%. B.
11.5%. C.
13.4%. 73.
The cost of which source of capital most likely
requires adjustment for taxes in the calculation of a firm’s weighted average cost of ca
pital? A.
Common Stock B.
Preferred stock C.
Bonds 74.
Which of the following transactions is most likely
to affect a company's financial leverage ratio? A.
Payment of a 9% stock dividend B.
An increase in cash dividends paid C.
Completion of a previously announced 1-for-20 reverse stock split 75.
When computing the cash flows for a capital project, which of the following is least likely
to be included? A.
Opportunity costs B.
Financing costs C.
Tax effects 76.
Given the following information about a firm: •
debt-to-equity ratio (D/E) of 50%, •
tax rate of 40%, •
cost of debt of 8%, and •
cost of equity of 13% T
he firm’s weighted average cost of capital (WACC) is closest to:
A.
10.3%.
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CFA level1-Mock-120 25/38 B.
8.9%. C.
7.5%.
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CFA level1-Mock-120 26/38 Questions 77~88 Relate to Equity investment
77.
An equity fund manager is considering a market index as the benchmark for his portfolio, and he has the following preferences: •
the index should have a contrarian effect; •
shares held by controlling shareholders should be included; •
dividends should be included in the weighting of constituent securities; and •
the weights of constituent securities should not be arbitrarily determined by the index provider Which of the following weightings of indices best meets the fund manager’s preferences?
A.
Equal B.
Float-adjusted market capitalization C.
Fundamental 78.
A trader who owns shares of a stock currently trading at $100 per share places a ‘GTC, stop $90, limit $85 sell’ order (GTC means good till cancelled). Assuming the specified stop condition is satisfied and the order becomes executed, which of the following statements is most accurate? A.
The order becomes a market order when the price falls below $85 and remains valid for execution. B.
The order will be executed at either $90 or $85. C.
The trader faces a maximum realized loss of $15. 79.
If the following three stocks are held in a portfolio, the portfolio’s total return on an equal-weighted basis is closest to: Stock
Number of Shares Owned
Beginning of Period Price per Share ($)
End of Period Price per Share ($)
Dividend per Share during the Period ($)
A
500
40
37
2.00
B
320
50
52
1.50
C
800
30
34
0.00
A.
6.37%. B.
3.28%.
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CFA level1-Mock-120 27/38 C.
5.94%. 80.
A market has the following limit orders standing on its book for a particular stock: Buyer
Bid Size
Limit Price
Seller
Offer Size
Limit Price
(# of shares)
($)
(# of shares)
($)
1
500
18.5
1
200
20.2
2
300
18.9
2
300
20.35
3
400
19.2
3
400
20.5
4
200
20.1
4
100
20.65
5
100
20.15
5
200
20.7
If a trader submits an immediate-or-cancel limit buy order for 700 shares at a price of $20.50, the average price the trader would pay is closest to: A.
$20.50. B.
$20.58. C.
$20.35. 81.
The advantages to an investor owning convertible preference shares of a company most likely
include: A.
less price volatility than the underlying common shares. B.
an opportunity to receive additional dividends if the company's profits exceed a pre-specified level. C.
preference dividends that are fixed contractual obligations of the company. 82.
The economic equilibrium interest rate in a well-functioning financial system is most likely
determined by: A.
the time consumption preferences of borrowers. B.
central bank policy. C.
the supply and demand of money.
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CFA level1-Mock-120 28/38 83.
A trader buys a stock at $30 and wants to limit downside risk. Which of the following orders will most likely
guarantee that he can sell the stock at $25? (GTC means good till cancelled) A.
GTC, stop $25, limit $25 sell order B.
Put option buy market order with a strike price of $25 C.
GTC, stop $25, market sell order 84.
An investor buys a stock on margin. Assume that the interest on the loan and the dividend are both paid at the end of the holding period. The data related to the transaction are as follows: Number of shares
500
Purchase price per share
$28
Leverage ratio
3.33
Commission
$0.05/share
Position holding period
Six months
Sale price per share
$30
Call money rate
5% per year
Dividend
$0.40 / share
The investor’s total return on this investment over the margin holding period is closest to:
A.
16.7%. B.
21.4%. C.
15.6%. 85.
Which of the following statements is most accurate with respect to rebalancing and reconstitution of security market indices? A.
A price-weighted index requires rebalancing more than a market-capitalization-weighted index. B.
Equal-weighted indices require frequent rebalancing. C.
Turnover within an index results from a reconstitution but not from rebalancing. 86.
A trader buys a stock at $64 on margin with a leverage ratio of 2.5 and a maintenance margin of 30%. Below what price will a margin call most likely
occur? A.
$54.86 B.
$44.80
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CFA level1-Mock-120 29/38 C.
$36.57
87.
The behavioral bias in which investors tend to avoid realizing losses but rather seek to realize
gains is best described as:
A.
the disposition effect.
B.
mental accounting.
C.
the gambler’s fallacy.
88.
Compared with its market-value-weighted counterpart, a fundamental-weighted index is least
likely
to have a:
A.
momentum effect.
B.
value tilt.
C.
contrarian effect.
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CFA level1-Mock-120 30/38 Questions 89~94 Relate to Derivatives 89.
According to put-call parity, if a fiduciary call expires in the money, the payoff is most likely
equal to the:
A.
difference between the market value of the asset and the face value of the risk-free bond.
B.
market value of the asset.
C.
face value of the risk-free bond.
90.
In the binomial model, the difference between the up and down factors best represents the:
A.
moneyness of an option.
B.
volatility of the underlying.
C.
pseudo probability.
91.
An investor purchases 100 shares of common stock at €50 each and simultaneously sells call
options on 100 shares of the stock with a strike price of €55 at a premium of €1 per option. At
the expiration date of the options, the share price is €58. The investor's profit is closest to:
A.
€400.
B.
€900.
C.
€600.
92.
Which of the following derivatives is least likely
to be classified as a contingent claim?
A.
A call option contract
B.
A credit default swap
C.
A futures contract
93.
A swap in which the investor receives a variable payment in line with market conditions and
makes a fixed payment can best be replicated by purchasing a:
A.
series of forward contracts, each with an initial value of zero.
B.
set of long futures contracts which are matched with short forward contracts.
C.
floating rate bond which is financed using a fixed rate bond.
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CFA level1-Mock-120 31/38 94.
The underlying in a forward rate agreement is most likely
a(n): A.
exchange rate. B.
growth rate of an equity index. C.
interest rate.
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CFA level1-Mock-120 32/38 Questions 95~106 Relate to Fixed-income Analysis 95.
Compared with an otherwise identical option-free bond, when interest rates fall, the price of a
callable bond will:
A.
rise more.
B.
fall less.
C.
rise less.
96. In the securitization process which of the following is most likely
a third party to the
transaction? The:
A.
special purpose entity.
B.
seller of the collateral.
C.
financial guarantor.
97. For bonds that are otherwise identical, the one exhibiting the highest level of positive
convexity is most likely
the one that is:
A.
putable.
B.
option-free.
C.
callable.
98.
Assume the following annual forward rates were calculated from the yield curve.
Time Period
Forward Rate
0y1y
0.50%
1y1y
0.70%
2y1y
1.00%
3y1y
1.50%
4y1y
2.20%
The four-year spot rate is closest to: A.
1.348%.
B.
1.178%.
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CFA level1-Mock-120 33/38 C.
0.924%.
99.
A credit analyst is least likely
to use matrix pricing to estimate the required yield and price of
a(n):
A.
inactively traded investment grade bond.
B.
actively traded speculative grade bond.
C.
newly underwritten bond.
100. Consider a five-year option-free bond that is priced at a discount to par value. Assuming the
discount rate does not change, one year from now the value of the bond will most likely
:
A.
decrease.
B.
stay the same.
C.
increase.
101. An investor purchases a 5% coupon bond maturing in 15 years for par value. Immediately
after purchase, the yield required by the market increases. The investor would then most likely
have to sell the bond at:
A.
a discount.
B.
a premium.
C.
par.
102. All else being equal, the difference between the G-spread and the Z-spread for a
non-Treasury security will most likely
be larger when the:
A.
security has a bullet maturity rather than an amortizing structure.
B.
yield curve is flat.
C.
yield curve is steep.
103. A BBB rated corporation wishes to issue debt to finance its operations at the lowest cost
possible. If it decides to sell a pool of receivables into a special purpose vehicle (SPV), its
primary motivation is most likely
to:
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CFA level1-Mock-120 34/38 A.
allow the corporation to retain a first lien on the assets of the SPV.
B.
receive a guaranty from the SPV to improve the corporation's credit rating.
C.
segregate the assets into a bankruptcy-remote entity for bondholders.
104. Credit spreads are most likely
to narrow during:
A.
economic expansions.
B.
a period of flight to quality.
C.
economic contractions.
105. Which of the following most likely
exhibits negative convexity?
A.
An option-free bond
B.
A putable bond
C.
A callable bond
106. What type of risk most likely
affects an investor's ability to buy and sell bonds in the desired
amounts and at the desired time?
A.
Market liquidity
B.
Default
C.
Spread
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CFA level1-Mock-120 35/38 Questions 107~110 Relate to Alternative Investments
107. Which of the following investments most likely
provides an investor with indirect equity
exposure to real estate?
A.
Real estate limited partnerships
B.
Commercial mortgage-backed securities
C.
Real estate investment trusts
108. An alternative investments fund that uses leverage and takes long and short positions in
securities is most likely
a:
A.
leveraged buyout fund.
B.
venture capital fund.
C.
hedge fund.
109. Which of the following least likely
describes an advantage of investing in hedge funds
through a fund of funds? A fund of funds may provide investors with:
A.
access to managers who can negotiate better redemption terms.
B.
lower fees because of economies of scale.
C.
access to due diligence expertise.
110. High-water marks are typically used when calculating the incentive fee on hedge funds. They
are most likely
used by clients to:
A.
claw back the management fees.
B.
avoid paying twice for the same performance.
C.
avoid prime brokerage fees.
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CFA level1-Mock-120 36/38 Questions 111 ~120 Relate to Portfolio Management
111. The risk-free rate is 5% and the market risk premium is 8%. If the beta of TRL Corp. is 1.5,
based on the capital asset pricing model (CAPM), the expected return of TRL's stock is
closest to:
A.
15.5%.
B.
17.0%.
C.
9.5%.
112. An asset management firm generated the following annual returns in their US large-cap
equity portfolio:
Year
Net Return (%)
2008
–
34.8
2009
32.2
2010
11.1
2011
–
1.4
The 2012 return needed to achieve a trailing five-year geometric mean annualized return of 5% when calculated at the end of 2012 is closest to: A.
35.2%.
B.
17.9%.
C.
27.6%.
113. The point of tangency between the capital allocation line (CAL) and the efficient frontier of
risky assets most likely
identifies the:
A.
optimal risky portfolio.
B.
global minimum-variance portfolio.
C.
optimal investor portfolio.
114. Which of the following is least likely
an assumption underlying the capital asset pricing
model (CAPM)?
A.
There are no restrictions on short selling assets.
B.
Investors analyze securities according to their own future cash flow estimates and probability
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CFA level1-Mock-120 37/38 distributions. C.
The amount invested in an asset can be as much or as little as the investor wants. 115.
An asset has an annual return of 19.9%, standard deviation of returns of 18.5%, and correlation with the market of 0.9. If the standard deviation of returns on the market is15.9% and the risk-free rate is 1%, the beta of this asset is closest to: A.
1.16 B.
1.02. C.
1.05. 116.
A return-generating model that provides an estimate of the expected return of a security based on such factors as earnings growth and cash flow generation is best described as a: A.
macroeconomic factor model. B.
market factor model. C.
fundamental factor model. 117.
An investor with $10,000 decides to borrow an additional $5,000 at the risk-free rate and invest all the available funds in the market portfolio. This investor's portfolio beta is closest to: A.
0.5. B.
1.5. C.
1.0. 118.
A 35-year old financial analyst expects to retire at the age of 65 and is interested in investing to fund her retirement. She describes herself as being financially astute with average risk tolerance. Which asset class is least likely
to be suitable for a majority allocation in her portfolio to meet her retirement needs? A.
Long-term bonds B.
Exchange-listed equities C.
US Treasury bills
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CFA level1-Mock-120 38/38 119.
A portfolio manager decides to temporarily invest more of a portfolio in equities than the investment policy statement prescribes because he expects equities will generate a higher return than other asset classes. This decision is most likely
an example of: A.
strategic asset allocation. B.
tactical asset allocation. C.
rebalancing. 120.
Based on the capital asset pricing model (CAPM), the expected return on FGL Corp's shares is 12%. Using a model independent of the CAPM, an analyst has estimated the returns on the stock at 10%. Based on this information, the analyst is most likely
to consider the stock to be: A.
overvalued. B.
correctly valued. C.
undervalued.
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CFA level1-Mock-120 1/44 Questions 1~18 Relate to Ethics
.............................................................................................
2
Questions 19~32 Relate to Quantitative analysis
..................................................................
8
Questions 33~44 Relate to Economics
.................................................................................
14
Questions 45~68 Relate to Financial Statement Analysis
..................................................
18
Questions 69~76 Relate to Corporate finance
.....................................................................
27
Questions 77 ~88 Relate to Equity investment
....................................................................
30
Questions 89~94 Relate to Derivatives
.................................................................................
34
Questions 95~106 Relate to Fixed-income Analysis
............................................................
36
Questions 107~110 Relate to Alternative Investments
.......................................................
40
Questions 111 ~120 Relate to Portfolio Management
.........................................................
42
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CFA level1-Mock-120 2/44 Questions 1~18 Relate to Ethics 1.
Correct answer: B. Members/candidates who possess material nonpublic information that could affect the value of an investment should not act or cause others to act on the information as stated in Standard II(A). Crux traded on the material information that Orca is about to be acquired by Cyber Kinetics. The information is non-public because it is not publicly available, which was verified when Crux researched Orca on the Internet and found nothing about the acquisition. CFA Level I "Guidance for Standards I-VII," CFA Institute Standard II(A) 2.
Correct answer: B.
GIPS verification does not ensure the accuracy of any specific composite presentations. CFA Level I “
Introduction to the Global Investment Performance Standards (GIPS),” CFA Institute Section V
–
Verification 3.
Correct answer: B. Under Standard III (B)-Fair Dealing, members and candidates should disclose to clients and prospective clients how they select accounts to participate in and how they determine the amount of securities each account will buy or sell. Trade allocation procedures must be fair and equitable, and disclosure of inequitable allocation methods does not relieve the member or candidate of this obligation. All discretionary accounts should be treated in the same manner. Treating newer accounts differently would be considered inequitable regardless of whether this policy is disclosed. CFA Level I "Guidance for Standards I-VII," CFA Institute Standard III (B) 4.
Correct answer: C.
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CFA level1-Mock-120 3/44 The two principles of the Rules of Procedure for Professional Conduct are confidentiality of proceedings and fair process to the member or candidate. CFA Level I "Rules of Procedure for Professional Conduct" 5.
Correct answer: A. There is no evidence Chandarana violated Standard VII(B)
–
Reference to CFA Institute, the CFA Designation, and the CFA Program with regard to his being a CFA candidate. Specifically, Chandarana does not overstate his competency or imply he will achieve superior performance as a result of his CFA designation. It does appear, however, Chandarana did not act with integrity when he hid information that could potentially harm his new employer's reputation, thus violating Standard I(D)
–
Misconduct and Standard IV(A)
–
Loyalty. CFA Level I "Guidance for Standards I
–
VII" Standard VII(B)
–
Reference to CFA Institute, the CFA Designation, and the CFA Program, Standard I(D)
–
Professionalism, Standard IV(A)
–
Duty to Employers 6.
Correct answer: C. According to Standard III (B) best practices include allocating pro rata on the basis of order size, not account size. All clients participating in the block trade should receive the same execution price and be charged the same commission. CFA Level I "Guidance for Standards I-VII," CFA Institute Standard III(B) 7.
Correct answer: A. The client is the trust/trustees, not the beneficiary. Mawar followed Standard III(C)
–
Suitability by managing the trust assets in a way that would likely result in a stable source of income while keeping the risk profile low, thereby complying with the investment objectives of the trust. CFA Level I
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CFA level1-Mock-120 4/44 "Guidance for Standards I
–
VII" Standard III(C)
–
Suitability 8.
Correct answer: A. According to Standard VI(A) Disclosure of Conflicts, Grabbo should disclose to her employer her hedge fund development because this activity could possibly interfere with her responsibilities at Atlantic. In setting up a hedge fund, Grabbo was not acting for the benefit of her employer. She should have informed Atlantic she wanted to organize the hedge fund and come to some mutual agreement on how this process would occur. CFA Level I "Guidance for Standards I-VII," CFA Institute Standard IV(B), Standard VI(A), Standard VI(B) 9.
Correct answer: B. The GIPS standards benefit two main groups: investment management firms and prospective clients. GIPS-compliant presentations allow prospective clients to know that the track record of a GIPS-compliant fund manager is complete and fairly presented. CFA Level I "Introduction to the Global Investment Performance Standards (GIPS)" Section III 10.
Correct answer: C. Unethical behavior erodes and destroys trust. Investors with low levels of trust are less willing to accept risk and, therefore, will likely demand a higher return for the use of their capital. They may also choose to invest elsewhere or to not invest at all. CFA Level I "Ethics and Trust in the Investment Profession," Bidhan L. Parmar, Dorothy C. Kelly, David B. Stevens Section 5
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CFA level1-Mock-120 5/44 11.
Correct answer: A. Trading on the information is restricted given that it relates to a tender offer; it is clearly material, nonpublic information as stated in Standard II(A). CFA Level I "Guidance for Standards I-VII," CFA Institute Standard II(A) 12.
Correct answer: B. Selective disclosure occurs when companies discriminate in making material nonpublic information public. Corporations that disclose information on a limited basis create the potential for insider-trading violations. See Standard II(A). CFA Level I "Guidance for Standards I-VII," CFA Institute Standard II(A) 13.
Correct answer: C. Under Standard 1(A) in situations where a member or candidate is aware of employer engagement in unethical or illegal activity, it is recommended that they attempt to stop the behavior by bringing it to the attention of a supervisor or the firm's compliance department. CFA Level I "Guidance for Standards I-VII," CFA Institute Standard I(A) 14.
Correct answer: C. Photocopying copyrighted material, regardless of the year of publication, is a violation of Standard I(A) because copyrighted materials are protected by law. Candidates and members must comply with all applicable laws, rules, and regulations and must not knowingly participate or assist in a violation of laws. CFA Level I "Guidance for Standards I-VII," CFA Institute
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CFA level1-Mock-120 6/44 Standard I(A) 15.
Correct answer: B. Punishing abuse in the financial markets is not one of the six components of the Code of Ethics. CFA Level I “
Code of Ethics,” CFA Institute
Section: The Code of Ethics 16.
Correct answer: C. Historically, the GIPS standards focused primarily on returns. In the spirit of fair representation and full disclosure, and in order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to risk. CFA Level I "The GIPS Standards," CFA Institute Section: Overview 17.
Correct answer: A. Nyakenda was effectively trying to bribe the policeman so that he would not issue a speeding ticket. This action violates the Code of Ethics. Despite feeling he was wrongly accused, it is only his opinion, and may not be based on fact or upheld in a court of law. Nyakenda has a responsibility to act with integrity and in an ethical manner as required by the Code of Ethics. CFA Level I "Guidance for Standards I-VII," CFA Institute 18.
Correct answer: A. A composite must include all actual fee-paying, discretionary portfolios managed in accordance with the same investment mandate, objective, or strategy (Standard IV
–
Composites). By including both the value and growth portfolios, the composite is made up of portfolios with different investment mandates or strategies. CFA Level I
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CFA level1-Mock-120 7/44 "Introduction to the Global Investment Performance Standards (GIPS)" Composites
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CFA level1-Mock-120 8/44 Questions 19~32 Relate to Quantitative analysis 19.
Correct answer: C. The geometric mean is always less than or equal to the arithmetic mean. The only time the two means will be equal is when there is no variability in the observations. CFA Level I "Statistical Concepts and Market Returns," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 5.4.2 20.
Correct answer: C. The power of a test is the probability of correctly rejecting the null hypothesis
—
that is, the probability of rejecting the null when it is false. CFA Level I "Hypothesis Testing," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 2 21.
Correct answer: A. Two events, A and B, are independent if and only if P(A
│
B) = P(A) or, equivalently, P(B
│
A) = P(B). The wording of the question precludes P(A) = P(B); therefore, P(B) and P(B
│
A) cannot be correct. CFA Level I "Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 2 22.
Correct answer: C. First the outcome of interest, –
0.40, is standardized for the given normal distribution: Z = (X –
µ)/σ = (–
0.40 –
5.00)/2 = –
2.70. Then use the table to find the probability of a Z value being 2.70 standard deviations below the
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CFA level1-Mock-120 9/44 mean (i.e., when z ≤
0). The value is 1 –
P(Z ≤
+2.70). In this problem, the solution is: 1 –
0.9965 = 0.0035 = 0.35%. CFA Level I "Common Probability Distributions," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 3.2 23.
Correct answer: B. Solve for bank discount yield, r
BD
, using: r
BD
= (D/F) × (360/t); r
BD
= (2,100/100,000)×(360/91) = 0.083077 ~ 8.31%. CFA Level I "Discounted Cash Flow Applications," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 4 24.
Correct answer: C. Because the screens are independent, the probability of passing all four simultaneously is the product of their respective probabilities: P(ABCD) = P(A) P(B) P(C) P(D), where P(A) = 0.65 and is the probability of passing Valuation Screen 1, P(B) = 0.45 andis the probability of passing Valuation Screen 2, P(C) = 0.40 andis the probability of passing Valuation Screen 3, P(D) = 0.30 and is the probability of passing Valuation Screen 4. P(ABCD) = 0.65 × 0.45 × 0.40 × 0.30 = 0.0351. Given 1,200 potential investments, approximately 1,200 × 0.0351 = 42.12 ~ 42 will pass the screens. CFA Level I "Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
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CFA level1-Mock-120 10/44 Section 2 "Financial Statement Analysis: Applications," Thomas R. Robinson, Jan Hendrik van Greuning, Elaine Henry, and Michael A. Broihahn Section 5 25.
Correct answer: C. The money-weighted rate of return (MWR) is sensitive to the additions and withdrawals of funds in a portfolio over the course of an investment. If, at inception, investor A and B invest amounts of different size in the same fund but then neither add nor withdraw any cash for two years, they will obtain exactly the same MWR. In contrast, if investor A increases the investment in the fund at the end of year 1 and investor B does not make any additions or withdrawals, then Investor A will have a lower MWR than investor B because in year 2 the fund underperformed with respect to year 1. By the same token, if investor B decreases the investment at the end of year 1 and investor A does not make any additions or withdrawals, then investor B will have a higher MWR than investor A because she decreased the investment before an underperforming year. CFA Level I "Discounted Cash Flow Applications," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 3 26.
Correct answer: A. Odds are calculated as P(Z)/[1 –
P(Z)]. In this problem, 0.14/0.86 = 0.16279 ~ 0.163. CFA Level I "Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 2 27.
Correct answer: C. Using a financial calculator: N = 60; the discount rate, I/Y = (6.5%/12) = 0.54166667; PMT = €1,200; Future value = €0; Mode = Begin; Calculate present value (PV): PV = €61,662.62.
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CFA level1-Mock-120 11/44 Alternatively: Treat the stream as an ordinary annuity of 59 periods and add the current value of €
1,200 to the derived answer. Using a financial calculator: N = 59; the discount rate, I/Y = (6.5%/12) = 0.54166667; PMT = €1,200; Future value = €0; Mode = End; Calculate PV: PV = €60,462.62; Total PV = €1,200 + €60,462.62 = €61,662.62.
CFA Level I "The Time Value of Money," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 6.1 28.
Correct answer: C.
A discrete random variable is a random variable that can take on at most a countable number of possible values. The number of days on which the DJIA experienced an increase since 2013 is the only choice with a discrete number of possible values. CFA Level I "Common Probability Distributions," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 2 29.
Correct answer: C. As long as security returns are not perfectly positively correlated, diversification benefits are possible. CFA Level I "Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 3
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CFA level1-Mock-120 12/44 30.
Correct answer: B. -U,U: End value=$48.40, -U,D: End value=$39.60 -D,U: End value=$39.60, -D,D: End value=$32.40 Where U= up moce and D= down move The probability of an up move followed by a down move is 0.65*0.35=0.2275 The probability of a down move followed by an up move us 0.35*0.65=0.2275 Both of these sequences result in an end value of $39.60. Therefore the probability of an end value of: $39.60 is (0.2275+0.2275)=45.50% Alternatively the following formula could be used:
!
1
(1
)
! !
n
x
x
x
n
x
n
n
p x
P X
x
p
p
p
p
x
n
x
x
Where n=2 (number of period) x=1 (number of up move) p=0.65 (probability of an up move)
2 1
1
1
2 1
2
2!
1
0.65
1
0.65
0.65 (1
0.35)
2
0.65
0.35
45.50%
1
2
1 !1!
p
CFA Level I "Common Probability Distributions," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle 40
44
48.4
39.6
36
32.4
P=65% P=65% P=35% P=35% P=35% P=65% t=3 t=2 t=1
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CFA level1-Mock-120 13/44 Section 2.2 31.
Correct answer: A. Bayes' formula: Updated probability of event given the new information: Probability of the new information given event
Prior probability of event
Unconditional probability of the new information
where Updated probability of event given the new information: P(EPS below
│
Cut div); Probability of the new information given event: P(Cut div
│
EPS below) = 85%; Unconditional probably of the new information: P(Cut div) = 23.75%; Prior probability of event: P(EPS below) = 20%. Therefore, the probability of EPS falling below the consensus is updated as: P(EPS below
│
Cut div) = [P(Cut div
│
EPS below)/P(Cut div)] ×
P(EPS below) = (0.85/0.2375) × 0.20 = 0.71579 ~ 72% CFA Level I "Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Sections 2, 4.1 32.
Correct answer: B. Conflict between the NPV and IRR decision rules can arise when evaluating mutually exclusive projects with conventional cash flows because 1) the scale of investments may differ and/or 2) the timing of the cash flows may differ. CFA Level I "Discounted Cash Flow Applications," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle Section 2.3 "Capital Budgeting," John D. Stowe and Jacques R. Gagné
Section 4.8
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CFA level1-Mock-120 14/44 Questions 33~44 Relate to Economics
33.
Correct answer: A. Average weekly initial claims for unemployment insurance is a leading indicator of economic activity, and a decrease in it is an indication of rehiring at the start of a recovery. CFA Level I "Understanding Business Cycles," Michele Gambera, Milton Ezrati, and Bolong Cao Section 5 34.
Correct answer: A. Advertising and product differentiation are most likely to have a positive impact on the economic profits of producers under monopolistic competition. The monopoly aspect of this structure arises from the ability to differentiate its product. CFA Level I "The Firm and Market Structures," Richard G. Fritz and Michele Gambera Sections 2.1, 2.2 35.
Correct answer: B. The cross-price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in the price of a substitute or complement. If the cross-price elasticity of demand is positive, the goods are substitutes. In this case, the 4 percent decline in quantity of pears is divided by the 3 percent decline in the price of apples, which is a positive number: -4 / -3 = +1.33. CFA Level I “
Topics in Demand and Supply Analysis,” Richard V. Eastin, and Gary L. Arbogast
Section 2.4 36.
Correct answer: A. The characteristics of monopolistic competition include a large number of competitors, low pricing power, and the production of differentiated products (through advertising and other
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CFA level1-Mock-120 15/44 non-price strategies), but these still result in some pricing power. The ease of entry results in zero economic profits in the long run. CFA Level I "The Firm and Market Structures," Richard G. Fritz and Michele Gambera Sections 2.1, 2.2, 4 37.
Correct answer: A. For a given working-age population, a decline in the labor force participation rate (often caused by an increase in discouraged workers) reduces the labor force. If the number of people employed remains the same while the labor force becomes smaller, the number of workers defined to be unemployed must be smaller and thus the unemployment rate lower. The following example illustrates the direction of change:
Initial Case
After Change
Working-age population
100
100
Labor force = Employed + Unemployed
60 + 20 = 80
60 + 15 = 75
Labor force participation rate
80%
75%
Unemployment rate
20/80 = 25%
15/75 = 20%
Labor force participation rate = Labor force/Working age population
Unemployment rate = Unemployed/Labor force
CFA Level I “
Understanding Business Cycles,” Michele Gambera
, Milton Ezrati, and Bolong Cao Section 4.1 38.
Correct answer: A. A Giffen good is an inferior good. All inferior goods have a negative income effect (less is purchased as income rises). While the substitution effect is always positive for all goods, for a Giffen good the income effect is so strong and so negative that it overpowers the substitution effect –
the result is that as its price declines, less of it is purchased: this results in a positively sloped individual demand curve. CFA Level I “
Topics in Demand and Supply Analysis,” Richard V. Eastin and Gary L. Arbogast
Sections 2.6
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CFA level1-Mock-120 16/44 39.
Correct answer: A. An externality is a cost or benefit that affects someone other than the seller or the buyer of a good. CFA Level I "Demand and Supply Analysis: Introduction," Richard V. Eastin and Gary L. Arbogast Section 3.12 40.
Correct answer: C. Declines in short-run aggregate supply bring about stagflation, an economic situation with a combination of high inflation and high unemployment. CFA Level I "Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz Section 3.4.4 41.
Correct answer: A. On rearrangement, the demand function is: Q
Tennis Match
=45-5.0*P
tennis Match The number of matches played per month at: $4.00/match=45-5.0*4.00=25 The Y-intercept of the demand curve occurs when Q=0; P=9 The X-intercept of the demand curve occurs when P=0; Q=45 In addition to the per play charge, the club will be able to charge the consumer surplus: the area under the demand curve above the current price per match to a total of 25 matches: 1/2*($9-$4)*25=
$62.50.
This is illustrated in the diagram as triangle A
CFA Level I PRICE Quantity 2
4
6
8
10
12
35
5
10
15
20
25
30
40
45
A
B
C
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CFA level1-Mock-120 17/44 “
Demand and Supply Analysis: Introduction,” Richard V. Eastin and Gary L. Arbogast Section 3.9 “
Demand and Supply Analysis: Consumer Demand,” Richard V. Eastin and Gary L. Arbogas
Section 6.2 42.
Correct answer: A. The own-price elasticity of demand (
x
d
P
E
) is calculated as: 120
100
%
(120
100) / 2
1.27
13
15
%
(13
15) / 2
x
d
d
x
P
x
Q
E
P
, where
%
d
x
Q
is the change in quantity (in %) and %
x
P
is the change in price (in %). CFA Level I “
Topics in Demand and Supply Analysis,” Richard V. Eastin, and Gary L. Arbogast
Section 2.2 43.
Correct answer: B. For most goods and services, the long-run demand is much more elastic than the short-run demand. For example, if gas prices rise, consumers cannot quickly change their mode of transportation, but will likely do so in the longer run. CFA Level I “
Topics in Demand and Supply Analysis,” Richar
d V. Eastin, and Gary L. Arbogast Section 2.2.2 44.
Correct answer: A.
In a country with a high level of income, as domestic income rises, private saving and investment will increase. CFA Level I "Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz Section 3.1.1
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CFA level1-Mock-120 18/44 Questions 45~68 Relate to Financial Statement Analysis 45.
Correct answer: B. The balance sheet enables an analyst to evaluate a company's liquidity, solvency, and overall financial position. It discloses what an entity owns, what it owes, and what the owners' claims are at a specific point in time. CFA Level I "Understanding Balance Sheets," Elaine Henry and Thomas R. Robinson Section 2 46.
Correct answer: C. A trial balance is a document that lists account balances at a particular point in time. CFA Level I "Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn Section 6 47.
Correct answer: A. Because inventories are excluded from the quick ratio, holding all other variables constant, an increase in cash, marketable securities, or receivables will increase a company's quick ratio. In addition, holding all other variables constant, an increase in current liabilities will decrease a company's quick ratio. CFA Level I "Understanding Balance Sheets," Elaine Henry and Thomas R. Robinson Section 7.2 "Financial Analysis Techniques," Elaine Henry, Thomas R. Robinson, and Jan Hendrik van Greuning Section 4.3.2 48.
Correct answer: C. An effective framework should enhance the transparency of the underlying economics through the
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CFA level1-Mock-120 19/44 financial statements; transparency arises through full disclosure and fair presentation. CFA Level I "Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning and Thomas R. Robinson Section 6.1 49.
Correct answer: C. Accumulated amortization for the intangible asset at the end of Year 2 is closest to $4,333. At the end of the second year, amortization taken = 2 years × (6,500/3) = $4,333. CFA Level I "Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon Section 3.2 50.
Correct answer: C. Historically, the Securities & Exchange Commission required reconciliation for foreign private issuers that did not prepare financial statements in accordance with U.S. GAAP. However the reconciliation requirement was eliminated as of 2008 for companies that prepared their financial statements under IFRS. CFA Level I "Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning and Thomas R. Robinson Sections 4, 7 51.
Correct answer: C. With rising costs of inventory, a company using LIFO compared with FIFO will report a higher cost of sales and lower profits. This scenario will result in lower increments to retained earnings and a higher debt-to-equity ratio. CFA Level I "Inventories," Michael A. Broihahn Sections 3.7, 4
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CFA level1-Mock-120 20/44 52.
Correct answer: C. The use of estimates creates limitations in the accounting model because estimates provide a vehicle for manipulation by unscrupulous management. However, estimates are considered necessary to the faithful representation of the economic performace and position of a company. CFA Level I "Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen O'Connor Rubsam, Elaine Henry and Michael A. Broihahn Section 7.1 53.
Correct answer: C. Common size statements offer a convenient way to compare companies of different magnitudes. Company X reports better (higher) gross margin performance. Company Y reports better (higher) operating margin performance. Metric (common size)
Company X
Company Y
Comparison
Sales
100%
100%
Cost of goods sold
51
53
Gross margin (GM)
49
47
X’s GM is higher
Administrative costs
17
15
Research & development expenses
13
12
Operating margin (OM)
19
20
Y’s OM is higher
CFA Level I "Understanding Income Statements," Elaine Henry and Thomas R. Robinson Section 7.1 54.
Correct answer: C. Without the recognition of the standards by the regulatory authorities, such as the US SEC, the private sector standard-setting bodies, such as US Financial Accounting Standards Board, would have no authority. CFA Level I "Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning, and Thomas R. Robinson Section 3
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CFA level1-Mock-120 21/44 55.
Correct answer: B. For a publicly traded firm in the United States, the auditor must express an opinion as to whether the company's internal control system is in accordance with the Public Accounting Oversight Board, under the Sarbanes
–
Oxley Act. The opinion is given either in a final paragraph in the auditor's report or as a separate opinion. CFA Level I "Financial Statement Analysis: An Introduction," Elaine Henry and Thomas R. Robinson Section 3.1.7 56.
Correct answer: A. The general journal records transactions in the order in which they occur (chronological order) and is thus sorted by date. CFA Level I "Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn Section 6.1 57.
Correct answer: C. The company will recognize revenue as follows: Year
Costs Incurred
(£)
Percentage of Costs Incurred to Date
Revenue Recognized per Year
1
150,000
£150,000/£300,000 = 50%
50% × £500,000 = £250,000
2
51,000
£201,000/£300,000 = 67%
Amount recognized is 67% less amounts previously recognized (50%)
67% × £500,000 –
£250,000 =£85,000
CFA Level I "Understanding Income Statements," Elaine Henry and Thomas R. Robinson Section 2 58.
Correct answer: B. The notes disclose information about the accounting policies, methods, and estimates used to
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CFA level1-Mock-120 22/44 prepare the financial statements. CFA Level I "Financial Statement Analysis: An Introduction," Elaine Henry and Thomas R. Robinson Section 3.1.5 59.
Correct answer: C. Metric
(£’000)
Ending retained earnings
821,000
Less: opening retained earnings
(580,000)
Add back: dividends paid
60,000
Net income
301,000
Comprehensive income
246,000
OCI = Comprehensive income –
net income
55,000 LOSS
CFA Level I "Understanding Income Statements," Elaine Henry and Thomas R. Robinson Section 8 60.
Correct answer: B. The financial statement elements under IFRS are assets, liabilities, owners' equity, revenue, and expenses. Revenues are inflows of economic resources. Assets are economic resources but not inflows. Equity is the residual claim on those economic resources. CFA Level I "Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen O'Connor Rubsam, Elaine Henry, and Michael A. Broihahn Section 3 61.
Correct answer: A. The expensing of the previously capitalized interest is a non-cash amount and does not affect cash flow from operations. Under US GAAP, cash flow from operations is higher as a result of the initial capitalizing of interest but not its subsequent expensing. If the interest had not been capitalized, interest expense would have been greater and net income and cash from operations lower.
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CFA level1-Mock-120 23/44 CFA Level I "Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon Section 2.1 62.
Correct answer: B. If the leases were capitalized, both total assets and liabilities would increase by the present value of the lease payments, as shown in the following table. Present Value of Operating Lease Payments (€ Millions)
The lease commitments after 2019 are assumed to be the same as in 2019, so there are estimated to be 240/80 = 3 additional payments.
The present value of the operating lease payments can be calculated as the sum of the present values of two annuities-in-advance (PVA
ADV
): a four-year annuity starting immediately (beginning of 2015) and another four-year annuity starting in four years (2019)
Years
Cash Flow × Annuity-in-Advance Factor
Discount by
Present Value
at Start of 2015
2015 to 2018
130 × PVA
ADV
(4 years, 6%) = 477.5
Not required
477.5
2019 and beyond
80 × PVA
ADV
(4 years, 6%) = 293.8 at 2019
4
1
1.06
232.7
Total
710.2
PVA
ADV
(4 years, 6%) by financial calculator: N = 4; I = 6; PMT = 1; Mode = BGN; Compute PV
Adjusted Long-Term Debt/Asset Ratio Calculation
Adjusted long-term debt
1,347 + 710 =
2,057
Adjusted total assets
20,097 + 710 =
20,807
Adjusted long-term debt/asset ratio
2,057/20,807 =
9.9%
CFA Level I "Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon Alternatively, the individual cash flows can be separately discounted.
Present Value of Operating Lease Payments (€ millions)
Year
Cash Flow
Cash Flow x PV Factor
PV
0
130
130 × PV(0y, 6.0%)
130.0
1
130
130 × PV(1y, 6.0%)
122.6
2
130
130 × PV(2y, 6.0%)
115.7
3
130
130 × PV(3y, 6.0%)
109.1
4
80
80 × PV(4y, 6.0%)
63.3
Beyond 4
240/80 per year = 3 years
80 × PVA(3y, 6.0%) × PV(4y, 6.0%)
169.4
Total
710.1
PVA (3 years, 6%) by financial calculator: N = 3; I = 6; PMT = 1; Mode = END; Compute PV
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CFA level1-Mock-120 24/44 Section 9.2.1 "Non-Current (Long-Term) Liabilities," Elizabeth A. Gordon and Elaine Henry Section 3.2.1 63.
Correct answer: B. Intangible assets with indefinite lives need to be tested for impairment at least annually. Property, plant, and equipment (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment. CFA Level I “
Understanding Balance Sheets,” Elaine Henry and Thomas R. Robinson
Sections 4.1, 4.3 “
Long-
Lived Assets,” Elaine Henry and Elizabeth A. Gordon
Sections 5.1, 5.2, 5.3 64.
Correct answer: A. Change in LIFO reserve
($ thousands)
2014 LIFO reserve –
2013 LIFO reserve
= $450 –
$420 = $30
FIFO cost of goods sold (COGS) =
LIFO COGS –
Change in LIFO reserve
LIFO COGS –
$30
If an increase in the LIFO reserve occurs, LIFO COGS will be higher than FIFO by the amount of the increase.
With a lower COGS under FIFO, pretax income will be higher by $30,000.
With a lower COGS under FIFO, after-tax income will be higher
by $30,000 × (1 –
0.30) = $21,000.
CFA Level I "Inventories," Michael A. Broihahn Section 4.1 65.
Correct answer: C. The broadcast licenses were written down in 2012, but the write-down was reversed in 2014. Therefore, during 2013 the intangible assets were understated, which would have understated amortization expense for the year and increased profit. Thus, in 2013 net profit margin was overstated. CFA Level I
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CFA level1-Mock-120 25/44 "Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon Sections 5.2 and 5.5 "Financial Reporting Quality," Jack Ciesielski, Elaine Henry, and Thomas I. Selling Sections 4.2.1 and 4.2.3 66.
Correct answer: C. The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods but not always under LIFO. CFA Level I “
Inventories,” Michael A. Broihahn
Section 3.6 67.
Correct answer: B. The IOSCO is not a regulator of financial markets. Its role is to assist in attaining the goal of uniform regulation and enforcement of international financial standards and in attaining the goal of cross-border cooperation in combating violations of securities and derivative laws. CFA Level I "Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning, and Thomas R. Robinson Section 3.2.1 68.
Correct answer: B. At the end of 2014, a test of impairment is required because “events or changes in circumstances indicate that its carrying amount may not be recoverable.” (All amounts $ thousands)
US GAAP Impairment Test:
Step 1: Assess recoverability: Compare carrying amount with undiscounted future net cash flows.
Carrying amount = 1,604 > 1,350 (expected future net cash flows):
The recoverability test is not satisfied, so an impairment loss is required.
Step 2: Determine impairment loss:
Carrying amount - Fair value =
1,604 - 1,225 = 379
New carrying value: 1,225
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CFA level1-Mock-120 26/44 Estimated depreciation in 2015
New carrying value- revised residual value
revised useful life
$1225
$200
4
years
CFA Level I "Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon Sections 3.1 and 5.1
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CFA level1-Mock-120 27/44 Questions 69~76 Relate to Corporate finance 69.
Correct answer: A. With a fixed-rate non-callable bond, the before-
tax cost of debt is the bond’s yield to maturity.
CFA Level I “
Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 3.1 70.
Correct answer: A. The value of a company is the value of its existing investments plus the net present values of all of its future investments. The NPV of this new plant is £150 million - £100 million = £50 million. The price per share should increase by NPV per share or £50 million ÷ 100 million shares = £0.50 per share. As the new plant's profitability is less than expectations, the NPV per share (and hence the increase in the stock price) should therefore be slightly below £0.50 per share. CFA Level I "Capital Budgeting," John D. Stowe, and Jacques R. Gagné
Section 4.10 71.
Correct answer: C. Note: 60% debt financing is equivalent to a debt-to-equity ratio of 1.50 = 0.60/(1 –
0.60). β
Asset
= β
EQ
× {1/[1 + (1 –
t)D/E)]} = 1.4/[1 + (1 –
0.35) × 1.5] = 0.7089. CFA Level I “
Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake Section 4.1 72.
Correct answer: A. The yield to maturity on a par value bond is the coupon rate of the bond r
d
=9.2% $1.35
16.5%
$8.18
p
p
p
D
r
P
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CFA level1-Mock-120 28/44
4%
1.3 11%
18.3%
e
F
M
F
r
R
E R
R
(1
)
d d
p
p
e e
WACC
w r
t
w r
w r
30%
9.2%
(1
35%)
15% 16.5%
55% 18.3%
14.33%
WACC
CFA Level I “
Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 2, 2.1, 3.2, 3.3 “
Portfolio Risk and Return: Part II,” Vijay Singal
Section 3.2.6 73.
Correct answer: C. Bonds are a form of debt that must be adjusted for taxes when calculating the weighted average cost of capital. CFA Level I “
Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 2.1 74.
Correct answer: B. Cash dividends affect a company's capital structure and financial leverage ratios by reducing assets and shareholders' equity. CFA Level I "Dividends and Share Repurchases: Basics," by George H. Troughton and Gregory Noronha Section 2.4 75.
Correct answer: B. Financing costs are not included in a cash flow calculation but are considered in the calculation of the discount rate. CFA Level I “
Capital Budgeting,” John D. Stowe and Jacques R. Gagné
Section 3
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CFA level1-Mock-120 29/44 76.
Correct answer: A. 1
/
0.50
Convert to the weight for debt: 3
(1
/
)
(1
0.50)
D
D
E
E
D
E
2
1
The weight for equity is one minus the weight of debt: 1
3
3
WACC=Weight of debt
Cost of debt
(1-Tax)+Weight of equity
Cost of equity
1
2
0.08
1
0.40
0.13
0.1026
10.3%
3
3
CFA Level I “
Cost of Capital,” Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Sections 2, 2.1, 2.2
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CFA level1-Mock-120 30/44 Questions 77 ~88 Relate to Equity investment
77.
Correct answer: C. Fundamental weighting satisfies the fund manager’s preferences. Fundamental indices use a single measure, such as total dividends, to weight the constituent securities. Fundamentally weighted indices generally will have a contrarian effect, in that the portfolio weights will shift away from securities that have increased in relative value and toward securities that have fallen in relative value whenever the portfolio is rebalanced. All shares are included in a fundamental weighted index. CFA Level I “
Security Market Indices,” Paul D. Kaplan and Dorothy C. Kelly
Section 3.2.4 78.
Correct answer: C. The order becomes valid when the price falls to, or below, $90. The “limit $85 sell” indicates that the trader is unwilling to sell below $85. Thus, the trader faces a maximum loss of $15 ($100 –
$85). CFA Level I “
Market Organization and Structure,” Larry Harris Section 6.2 79.
Correct answer: C. Equal weighting assigns an equal weight to each constituent security at inception. Therefore, it is the sum of the total return from each security divided by the number of securities in the portfolios. Stock
(
P
1 –
P
0 + D
)/
P
0
Total Return (%)
A
(37 –
40 + 2.00)/40 =
–
2.5
B
(52 –
50 + 1.50)/50 =
7.00
C
(34 –
30 + 0)/30 =
13.33
Portfolio return with equal weighting:
(
–
2.50 + 7.00 + 13.33)/3 =
5.94
CFA Level I “
Security Market Indices,” Paul D. Kaplan and Dorothy C. Kelly
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CFA level1-Mock-120 31/44 Section 3.2.2 80.
Correct answer: C. The limit buy order will be filled first with the most aggressively priced limit sell order and will be followed by filling with the higher priced limit sell orders that are needed up to and including the limit buy price until the order is filled. Average price = [(200 × $20.20) + (300 × $20.35) + (200 ×$20.50)]/700 = $20.35. CFA Level I “
Market Organizati
on and Structure,” Larry Harris
Sections 6.1, 8.2.2.1 81.
Correct answer: A. Convertible preference shares tend to exhibit less price volatility than the underlying common shares because the dividend payments are known and more stable. CFA Level I “
Overview of Equity Securities,” Ryan C. Fuhrmann and Asjeet S. Lamba Section 3.2 82.
Correct answer: C. The economic equilibrium interest rate in a well-functioning financial system is determined by the aggregate supply and demand of money. An expected rate of return exists, in theory, in which the aggregate supply of funds for investing and the aggregate demand for funds through borrowing and equity issuing are equal. CFA Level I "Market Organization and Structure," Larry Harris Sections 2.2, 4.2 83.
Correct answer: B. Option contracts can be viewed as limit orders for which execution is guaranteed at the strike price. Therefore, a put buy order at a strike price of $25 will guarantee selling the stock at $25.
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CFA level1-Mock-120 32/44 CFA Level I “
Market Organization and Structure,” Larry Harris
Section 6.2 “
Option Markets and Contracts,” Don M. Chance
Section 2 84.
Correct answer: B. Initial investment
[($28 × 500) × (1/3.33)] + ($0.05 × 500)
$4,229
–
Purchase commission
$0.05 × 500
–
25
+ Trading gain
($30 –
$28) × 500
1,000
–
Margin interest paid
$9,800 × 0.05 × 6 months
–
245
+ Dividends received
$0.40 × 500
200
–
Sales commission paid
$0.05 × 500
–
25
= Remaining equity
$5,134
Return on investment
($5,134 –
$4,229)/$4,229
21.4%
CFA Level I “
Market Organization and Structure,” Larry Harris
Section 5.2 85.
Correct answer: B. After an equal-weighted index is constructed and the prices of constituent securities change, the index is no longer equally weighted. Therefore, maintaining equal weights requires frequent adjustments (rebalancing) to the index. CFA Level I “
Security Market Indices,” Paul
D. Kaplan and Dorothy C. Kelly Section 3.2.2 86.
Correct answer: A. 1
1
Equity=
0.4; Initial equity=$64
0.4=$25.6
Leverage ratio
2.5
$25.60
$64
Critical P for margin call=
/
30%;
$54.86
Equity
Price
P
P
share
Share
P
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CFA level1-Mock-120 33/44 Alternate solution: Debit balance
$64
0.6
$54.86
1
Maintenance margin %
1
0.3
CFA Level I “
Market Organization and Structure,” Larry Harris
Section 5.2 87.
Correct answer: A. Behavioral biases in which investors tend to avoid realizing losses but, rather, seek to realize gains is the disposition effect. CFA Level I “
Market Efficiency,” by W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake
Section 5.3 88.
Correct answer: A. The momentum effect is a characteristic of a market-capitalization-weighted index, not a fundamental index. CFA Level I “
Security Market Indices,” Paul D. Kaplan and Dorothy C. Kelly
Section 3.2.4
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CFA level1-Mock-120 34/44 Questions 89~94 Relate to Derivatives
89.
Correct answer: B. A fiduciary call, defined as a long position in a call and in a risk-free bond, generates a payoff that is equal to the market value of the asset if it expires in the money. CFA Level I "Basics of Derivative Pricing and Valuation," Don M. Chance Section 4.1.9 90.
Correct answer: B. The volatility of the underlying is captured in the binomial model by the difference between the up and down factors. CFA Level I "Basics of Derivative Pricing and Valuation," Don M. Chance Section 4.2 91.
Correct answer: C. Because the share price (ST) is greater than the strike price (X), the investor collects the premium plus the difference between the strike price and purchase price: X –
S0 + c0. In this case, 100 × (€55 –
€50 + €1) = €600.
CFA Level I "Risk Management Applications of Option Strategies," Don M. Chance Section 2.2.1 92.
Correct answer: C. A futures contract is classified as a forward commitment in which the buyer undertakes to purchase the underlying asset from the seller at a later date and at a price agreed on by the two parties when the contract is initiated. CFA Level I "Derivative Markets and Instruments," Don M. Chance Section 4.1.2
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CFA level1-Mock-120 35/44 93.
Correct answer: C. The payment structure is replicated by being long the floating rate bond, while being short the fixed rate bond. CFA Level I "Basics of Derivative Pricing and Valuation," Don M. Chance Section 3.3 94.
Correct answer: C. The underlying in a forward rate agreement is an interest rate. CFA Level 1 “
Basics of Derivative Pricing and Valuation,” Don M. Chance
Section 3.1.4
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CFA level1-Mock-120 36/44 Questions 95~106 Relate to Fixed-income Analysis 95.
Correct answer: C. When interest rates fall, the price of the embedded call option increases. The price of a callable bond equals the price of an option-free bond minus the price of the embedded call option. So, the price of the callable bond will not increase as much as an option-free bond because the price of the call option is increasing. As interest rates fall, the bond is more likely to be called, limiting the upside price increase potential. CFA Level I "Fixed-Income Securities: Defining Elements," Moorad Choudhry and Stephen E. Wilcox Section 5.1 96.
Correct answer: C. In the securitization process the seller of the collateral, the special purpose entity, and the servicer of the loan are the main parties. All other parties, including independent accountants, lawyers/attorneys, trustees, underwriters, rating agencies, and financial guarantors are third parties to the transaction. CFA Level I "Introduction to Asset-Backed Securities", Frank J. Fabozzi Section 3.2 97.
Correct answer: A. When interest rates rise, a putable bond is more likely to be put back to the issuer by the investor, limiting the loss of value and giving the bond more positive convexity than an option-free bond. In contrast, a callable bond is likely to be called from the investor when interest rates fall, limiting the gain in value and giving the bond negative convexity. CFA Level I "Understanding Fixed-Income Risk and Return," James F. Adams and Donald J. Smith Section 3.3 98.
Correct answer: C.
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CFA level1-Mock-120 37/44 The four-year spot rate can be computed as:
1
4
4
z =
1.005
1.007
1.01
1.015
1
0.924%
CFA Level I "Introduction to Fixed-Income Valuation," James F. Adams and Donald J. Smith Section 4 99.
Correct answer: B. Matrix pricing is most suited to pricing inactively traded bonds and newly underwritten bonds. A credit analyst is least likely to use matrix pricing to price an actively traded bond. CFA Level I "Introduction to Fixed-Income Valuation", James F. Adams and Donald J. Smith Section 3.2 100.
Correct answer: C. The bond is priced below its par value but will be worth exactly par value at maturity. Over time, assuming a stable discount rate, the value of the bond must rise so that it is equal to par at maturity. That is, the price is "pulled to par." CFA Level 1 "Introduction to Fixed-Income Valuation," James F. Adams and Donald J. Smith Section 2.3 101.
Correct answer: A. The bond would sell below par or at a discount if the yield required by the market rises above the coupon rate. Because the bond initially was purchased at par, the coupon rate equals the yield required by the market. Subsequently, if yields rise above the coupon, the bond's market price would fall below par. CFA Level 1 "Introduction to Fixed-Income Valuation," James F. Adams and Donald J. Smith Section 2.3
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CFA level1-Mock-120 38/44 102.
Correct answer: C. The main factor causing any difference between the nominal spread and the Z-spread is the shape of the Treasury spot rate curve. The steeper the spot rate curve, the greater the difference. CFA Level I "Introduction to Fixed-Income Valuation," James F. Adams and Donald J. Smith Section 5.2 103.
Correct answer: C. A key motivation for a corporation to establish a SPV is to separate it as a legal entity. In the case of bankruptcy for the corporation, the SPV is unaffected because it is not a subsidiary of the corporation. Given this arrangement, the SPV can achieve a rating as high as AAA and borrow at lower rates than the corporation. CFA Level I "Fixed-Income Securities: Defining Elements," Moorad Choudhry and Stephen E. Wilcox Section 3.1 104.
Correct answer: A. Credit spreads narrow during economic expansions and widen during economic contractions. During an economic expansion, corporate revenues and cash flows rise, making it easier for corporations to service their debt, and investors purchase corporates instead of Treasuries, thus causing spreads to narrow. CFA Level I "Fundamentals of Credit Analysis," Christopher L. Gootkind Section 6 105.
Correct answer: C. A callable bond exhibits negative convexity at low yield levels and positive convexity at high yield levels. CFA Level 1 "Understanding Fixed-Income Risk and Return," James F. Adams and Donald J. Smith
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CFA level1-Mock-120 39/44 Section 3.6 106.
Correct answer: A. The size of the spread between the bid price and the ask price is the primary measure of market liquidity of the issue. Market liquidity risk is the risk that the investor will have to sell a bond below its indicated value. The wider the bid
–
ask spread, the greater the market liquidity risk. CFA Level I "Fundamentals of Credit Analysis," Christopher L. Gootkind Section 2
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CFA level1-Mock-120 40/44 Questions 107~110 Relate to Alternative Investments 107.
Correct answer: B. Real estate investment trusts (REITs) provide investors with indirect equity real estate exposure. Real estate investment partnerships are a form of direct real estate equity investment. Commercial mortgage-backed securities (CMBSs) provide investors with indirect debt investment opportunities in real estate. CFA Level I "Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart Sections 5.1, 5.2 108.
Correct answer: C. Hedge funds invest in securities and may take long and short positions. They may also use leverage. CFA Level I "Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart Section 2.1 109.
Correct answer: B. The fees on funds of funds are usually higher. The fund of funds manager charges a fee, and there is a fee charged by each hedge fund. CFA Level I "Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart Section 3 110.
Correct answer: B. High-water marks help clients avoid paying twice for the same performance. When a hedge fund's value drops, the manager will not receive an incentive fee until the value of the fund returns to its previous level. CFA Level I "Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart
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CFA level1-Mock-120 41/44 Section 3.3.1
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CFA level1-Mock-120 42/44 Questions 111 ~120 Relate to Portfolio Management 111.
Correct answer: B. Using the CAPM relationship of E(R
i
) = R
f
+ [E(R
m
) –
R
f
]βi, we can estimate
the expected return as: E(R
i
) = 0.05+ (0.08)(1.5) = 17.0%. CFA Level I "Portfolio Risk and Return: Part II," Vijay Singal Section 4.2 112.
Correct answer: A.
5
2012
0.05
1
0.348
1
0.322
1
0.111
1
0.014
1
1
G
R
R
Holding period total return (cumulative) factor calculation through 2011: (1 –
0.348) × (1 + 0.322) × (1 + 0.111) × (1 –
0.014) = 0.652 × 1.322 × 1.111 × 0.986 = 0.9442. Compound total return (cumulative) factor at 5% per year of 5% for five years: 1.05
5
= 1.2763. Return needed in 2012 to achieve a compound annualized return of 5%: 1.2763/0.9442 = 1.3517 = 35.2%. Check: 0.944 × 1.352 = 1.276
(1/5)
= 1.050 = 5% annualized. CFA Level I "Portfolio Risk and Return: Part I," Vijay Singal Section 2.1.3 113.
Correct answer: A. The optimal risky portfolio lies at the point of tangency between the capital allocation line and the efficient frontier of risky assets. CFA Level I "Portfolio Risk and Return: Part I," Vijay Singal Section 5.4 114.
Correct answer: B.
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CFA level1-Mock-120 43/44 The CAPM requires that there are no restrictions on short selling (which is an assumption underlying frictionless markets) and that the amount invested in an asset can be as much or as little as the investor wants (that is, investments are infinitely divisible). The CAPM also assumes that all investors analyze securities in the same way using the same inputs for future cash flows and the same probability distributions; that is, it assumes that investors have homogenous expectations. CFA Level I "Portfolio Risk and Return: Part II," Vijay Singal Section 4.1 115.
Correct answer: C. β
= (ρ
i,m
σ
i
)/σ
m
β
= (0.90 × 0.185)/0.159 β
= 1.047. CFA Level I "Portfolio Risk and Return: Part II," Vijay Singal Section 3.2.4 116.
Correct answer: C. A return-generating model based on such factors as earnings growth and cash flow generation is a fundamental factor model. CFA Level I "Portfolio Risk and Return: Part II," Vijay Singal Section 3.2.1 117.
Correct answer: B. The weight in the market portfolio is 15,000/10,000 = 1.5 and the weight in the risk-free asset is –
5,000/10,000 = –
0.5. Because the beta of the risk-free asset is 0 and the market portfolio's beta is 1, the portfolio's beta is: βp = 0(–
0.5) + 1(1.5) = 1.5. CFA Level I
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CFA level1-Mock-120 44/44 "Portfolio Risk and Return: Part II," Vijay Singal Sections 2.2 and 4.2 118.
Correct answer: C. The investor has a 30-year time horizon and average risk tolerance, so she is able to accept the additional risk associated with exchange-listed equities and long-term bonds compared with US Treasury bills. CFA Level I "Basics of Portfolio Planning and Construction," Alistair Byrne and Frank E. Smuddle Section 2.2 119.
Correct answer: B. Tactical asset allocation is the decision to deliberately deviate from the policy exposures to systematic risk factors with the intent to add value based on forecasts of the near-term returns of those asset classes. CFA Level I Basics of Portfolio Planning and Construction," Alistair Byrne and Frank E. Smudde Section 3.3 120.
Correct answer: A. Because the estimated return on the stock is lower than the expected return using the CAPM, the stock does not compensate the investor for the level of risk and so it is most likely overvalued. CFA Level I "Portfolio Risk and Return: Part II," Vijay Singal Section 4.3
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