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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1151:

  Calculating the price change in a bond caused by a 1 percent decline in interest rates using only the modified duration equation will always result in an answer that is:

  A. too high.
  B. just right.
  C. too low.
  D. insignificant.
  C. too low.

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  Explanation

• Question 1152:

  The portfolio of securities of an investment company is typically managed by

  A. the company's board of directors.
  B. the company's analysts.
  C. the company's CEO.
  D. a legally separate investment management company.
  D. a legally separate investment management company.

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  Explanation

  The portfolio and most other administrative duties of the investment company are typically managed by a separate investment management company. In fact, that investment management company usually starts the investment company and picks its board of directors, who then hire the investment management company to manage the new investment company's portfolio.

• Question 1153:

  Steadybeta currently operates 3 projects, resulting in a beta of 1.27. It is considering a risky expansion project whose cash flow analysis indicates a beta of 2. 3. The project requires a capital commitment of $4. 8 million and has an NPV of $2 million. The current risk-free rate is 5. 6% and the market risk premium is 8.9%. Steadybeta's current market capitalization is $17. 2 million. If Steadybeta undertook the project, the required rate of return expected by its shareholders will be:

  A. 14. 8%
  B. 13. 9%
  C. 19.5%
  D. 16. 2%
  C. 19.5%

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  Explanation

  19.5% The firm can be considered a portfolio of 4 projects. The beta of a portfolio equals the weighted average of the betas of the individual components. The weight of a component equals the fraction of the market value it comprises. Since the project has an NPV of $2 million, its market value equals $6. 8 million and the market value after the project is undertaken will be $(17. 2+6. 8) = $24 million. Therefore, the beta of the firm after it undertakes the project equals 17. 2/24*1.27 + 6. 8/24*2. 3 = 1.56. The required rate of return then equals 5. 6% + 1.56*8.9% = 19.5%.

• Question 1154:

  A random variable with a mean equal to 6. 0 and a standard deviation of 1.5 has a coefficient of variation equal to ________.

  A. 0.25
  B. zero
  C. 4. 0
  D. 1.5
  E. none of these answers
  A. 0.25

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  Explanation

  The coefficient of variation equals the ratio of the standard deviation to the mean.

• Question 1155:

  If the Fed introduces an expansionary monetary policy:

  I. real interest rates fall.

  II. the U.S. dollar appreciates.

  III.

  the U.S. exports increase relative to imports.

  A. II and III
  B. I, II and III
  C. I and II
  D. I and III
  D. I and III

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  Explanation

  When the Fed introduces an expansionary monetary policy, the money supply increases, causing the real interest rate to fall. This leads to a flow of funds out of the U.S. and into economies with higher real rates. The decreased demand for the U.S. dollar causes it to depreciate. This, in turn, makes the U.S. goods cheaper relative to foreign goods, increasing the U.S. exports and decreasing its imports. Note that this offsetting increase in the demand for U.S. dollar works more slowly than the initial depreciation caused by the outflow of monetary funds.

• Question 1156:

  Which of the following is/are true about marketable securities?

  I. They are carried on the books at the market value.

  II. Transfers between different classifications are carried out at fair market value.

  III.

  Companies are not required to disclose the classification of the specific investment securities in the balance sheet.

  A. I and III
  B. I, II and III
  C. II and III
  D. II only
  C. II and III

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  Explanation

  Marketable securities are classified into various categories. Securities that are designated as "held-to- maturity" are reported at historical cost, not fair market value. Other categories prescribe a reporting at fair market value. Thus, (I) is not necessarily true. Despite this, when the classification of a security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement (in the case of trading and held-to-maturity securities) or as a separate component of shareholder equity (in the case of available-for-sale securities). Companies are not required to disclose securities classification on the balance sheet; disclosure can occur in the footnotes.

• Question 1157:

  An investor purchased 100 shares of a stock two years ago for $50 per share after deciding the stock would be a good value investment. Since the initial purchase, the stock price has fallen to $35 per share after several of the company's major customers canceled contracts. The investor has decided to purchase another 50 shares at the lower price. Which of the following behavioral biases best characterizes the investor's actions?

  A. Escalation bias.
  B. Momentum bias.
  C. Overconfidence bias.
  A. Escalation bias.

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  Explanation

• Question 1158:

  "Horizontal analysis" refers to:

  A. comparison of various quantities in a common-sized financial statement.
  B. comparison of a firm's financial statements with those of a similar firm.
  C. comparative analysis of financial statements as they evolve over time.
  D. comparative study of a firm's dependencies on businesses in the different industries in which it is active.
  C. comparative analysis of financial statements as they evolve over time.

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  Explanation

  In comparative financial analysis, one of the important parts is detecting trends in the changes that occur over time in the different financial statements. This trend analysis is quirkily referred to as "horizontal analysis," probably because comparison implies a side-by-side analysis of the financial items in the statements. Two popular techniques in horizontal analysis are "year-to-year change" analysis and "Index number trend series" analysis.

• Question 1159:

  Which of the following statements about the positions of the clearinghouse is CORRECT? The clearinghouse:

  A. takes no position.
  B. only takes short position to buyers.
  C. only takes long positions to sellers.
  D. takes short positions to buyers and long positions to sellers.
  D. takes short positions to buyers and long positions to sellers.

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  Explanation

• Question 1160:

  Rich owns a shoe factory. He believes that a recent monetary policy announcement will cause 5% inflation over the next year, equally effecting the price of shoes, the cost of inputs, and wages. How will Rich change his production plans considering this forecast?

  A. He will try to hide this information from his laborers.
  B. Cannot determine, this depends on how much prices actually inflate over the next year.
  C. He will increase shoe production because the expansionary monetary policy should boost consumer confidence and hence shoe demand.
  D. No changes.
  E. He will increase shoe production to take advantage of higher prices.
  D. No changes.

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  Explanation

  Anticipated inflation is always a wash for both consumers and producers, therefore Rich would not change his production plans. Remember that possible secondary effects, like an increase in consumer confidence, cannot be assumed. How high actual inflation is during the year is irrelevant since planning is based on forecasted inflation. This is an important concept for understanding how policy effects decision making. Note that if the entire economy thought exactly as Rich did, the expansionary monetary policy will have no real impact on the economy.