CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1031:

  You are examining a special group of 5 stock market indices. Of these 5, the returns were 4%, 8%, 12%, 16%, and 10%. What is the population standard deviation of this group of stock market indices?

  A. 10%.
  B. 4%.
  C. 0%.
  D. 16%.
  B. 4%.

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  Explanation

  The population standard deviation is the positive square root of the population variance. The population variance is equal to the sum of the squared differences between each population member and the population mean, divided by the number of items in the population. In this case, we have a mean of 10%. The first squared difference will be (4% - 10%)^2 = 0.0036. The others will be 0.0004, 0.0004, 0.0036, and 0. The sum of these squared differences is 0.008, and divided by 5, we get 0.0016 = 16%%. The square root of this gives us our population standard deviation of 4%.

• Question 1032:

  All else equal, which of the following is/are true about break-even point?

  I. An increase in the sale price per unit increases the break-even quantity.

  II. An increase in the variable cost per unit increases the break-even quantity.

  III.

  An increase in the fixed costs increases the break-even quantity.

  A. III only
  B. I and II
  C. I only
  D. II and III
  E. I, II and III
  F. II only
  G. I and III
  D. II and III

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  Explanation

  The break-even quantity is the number of units that must be sold to just cover the fixed and variable costs. An increase in revenues per unit will decrease the break-even quantity while an increase in costs per unit will increase the break-even quantity.

• Question 1033:

  Debbie Chon, CFA, is evaluating a put option on Lincoln Industrial. Lincoln's current stock price is $64 per share and the company will pay a $0.56 dividend. The 90-day U.S. Treasury bill is yielding 5. 3%. Lincoln's 3-month European call option with a strike price of $70 has a premium of $3. 50. Based on the put-call parity, calculate the value of the associated Lincoln put option.

  A. $8.05
  B. $8.60
  C. $9.15
  C. $9.15

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  Explanation

• Question 1034:

  In explaining the factors in the dividend discount model that affect a stock's expected price-to-earnings (/) ratio, which of the following statements is least accurate? Holding other factors constant:

  A. as the difference between k (required rate of return on the stock) and g (expected constant growth rate of dividends) widens, the value of/decreases.
  B. as g increases, the value of/increases.
  C. as the expected dividend payout ratio decreases, the value of/increases.
  C. as the expected dividend payout ratio decreases, the value of/increases.

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  Explanation

• Question 1035:

  Which of the following is a definition of inflation:

  I. a pervasive increase in prices

  II. too many dollars chasing too few goods

  III. a general decline in the value of money

  IV.

  a general increase in wages

  A. II, IV
  B. I, II, III, IV
  C. I, II, III
  D. II only
  E. I, III
  F. I, II
  C. I, II, III

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  Explanation

  Inflation is a pervasive increase in prices which is caused by too many dollars chasing too few goods.

  A price increase that has some other cause (such as an improvement in a product) is not inflationary.

  Therefore these two ideas are inseparable from the definition of inflation. Since prices are increasing, each unit of currency can buy fewer goods. Hence, a general decline in the value of money.

• Question 1036:

  An investment of $100 grows in three years to $221. The investor observes that the annual arithmetic rate of return and the geometric rate of return were the same over this period. The annual arithmetic rate of return must be ________.

  A. 30.26%
  B. 23. 93%
  C. 40.33%
  D. 24. 32%
  E. 27. 84%
  A. 30.26%

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  Explanation

  If the annual geometric rate of return is r, then 100 * (1 + r)^3 = 221. This gives r = 30.26%. Note that the only way the mean will be equal to the geometric mean if every year, the stock experienced a return of 30.26% per year.

• Question 1037:

  Sensitivity Analysis ignores: A. the range of likely values that key variables can take.

  B. changes in some of the key variables.

  C. none of these answers.

  D. effect on the IRR of changes in project variables.

  Correct Answer. A
  A

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  Explanation

  One of the drawbacks of Sensitivity Analysis is that it ignores the range of likely values that key variables can take. This is rectified using Scenario Analysis.

• Question 1038:

  A project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. The project's cost of capital is 10%. The project's NPV equals ________.

  A. $2,043
  B. $1,938
  C. $1,428
  D. $1,393
  D. $1,393

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  Explanation

  The discounted cash flow at the end of year N is obtained by dividing that year's cash flow by 1.1N, since the project's cost of capital is 10%. Using this, the discounted cash flows are:

  -636, -744, +902, +1,093, +1,428.

  The Present value of the cash flows is = -636 - 744 + 902 + 1,093 + 1,428 = $2,043. The net present value of the project = $(2,043 - 650) = $1,393.

• Question 1039:

  JonesCorp just entered into a plain vanilla interest rate swap as the fixed-rate receiver. The swap has a tenor of four years and makes payments quarterly on a netted basis. At the time the swap was initiated the LIBOR term structure was flat causing LIBOR to be equal to the swap fixed rate. Under which of the following circumstances would JonesCorp be required to make a future net payment to the swap counterparty?

  A. The LIBOR term structure becomes upward sloping.
  B. The LIBOR term structure remains flat but shifts down.
  C. The LIBOR term structure becomes downward sloping.
  A. The LIBOR term structure becomes upward sloping.

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  Explanation

• Question 1040:

  Which of the following is/are true about open-ended funds?

  I. The redemption price equals the NAV in the absence of a redemption charge.

  II. The load charge, if any, typically is a constant percentage of the amount invested.

  III.

  The NAV of a no-load fund equals its purchase price.

  A. III only
  B. I and III
  C. II and III
  D. I and II
  E. II only
  F. I only
  B. I and III

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  Explanation

  The offer price i.e. the price at which you can buy a share equals

  NAV/(1-load charge) while the redemption price, in the absence of a redemption fee, equals the NAV. The load charge, if any, typically declines as the size of the order increases.