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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1181:

  The formula for joint probability is given by:

  A. P(AB) = P(A | B) * P(A)
  B. P(AB) = P(A | B) / P(B)
  C. P(AB) = P(A | B) * P(B)
  D. P(AB) = P(A | B) / [P(B) * P(A)]
  C. P(AB) = P(A | B) * P(B)

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  Explanation

  A joint probability takes the form of P(AB) = P(A | B) * P(B). Note that this is just a rearranged form of the formula for conditional probability.

• Question 1182:

  A technical analyst with Bullfighter.com, a noted investment research firm, has been examining the U.S. securities markets, and believes that the market is technically "overbought." Which of the following technical indicators would this analyst likely use to support his opinion? Choose the best answer.

  A. The CBOE Put/Call ratio is greater than 50%.
  B. The % of futures traders bullish on stock index futures has increased significantly.
  C. All of these choices are indicative of an "overbought" condition.
  D. The ratio of short sales by specialists is less than 50%.
  E. The diffusion index has declined significantly.
  F. The % of issues trading above their 200-day moving averages is greater than 80%.
  F. The % of issues trading above their 200-day moving averages is greater than 80%.

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  Explanation

  The % of issues trading below their 200-day moving average is frequently cited by technical analysts as a measure of oversold and overbought market conditions. Specifically, technical analysts see the market as "overbought" when 80% of issues are trading above their 200-day moving average, and consider a market "oversold" when 80% of issues are trading under their 200-day moving average. The "Diffusion Index" is a measure of market breadth, and is defined as [(# of advancing issues + 1/2 # of issues unchanged) / # of issues traded]. A decline in the diffusion index is indicative of an increase in declining issues relative to advancing issues. The CBOE Put/Call Ratio is a contrarian technical indicator used to gauge the sentiment of investment professionals, and a ratio greater than 50% would be viewed by technical analysts as bullish. Finally, contrarian technical analysts would view a large increase in the amount of futures traders who express bullish sentiment on stock index futures as a bearish signal.

• Question 1183:

  Deferred credits arise because of:

  A. an over-estimation of assets or earnings, which must now be reversed.
  B. none of these answers.
  C. the concept of accrual accounting.
  D. the use of cash accounting.
  C. the concept of accrual accounting.

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  Explanation

  Deferred credits can be liabilities incurred in the course of current business which are not yet recognized in the income statement or are unearned assets or revenues which have been recognized prematurely, as determined by the matching principle. Examples of these include deferred income taxes and unearned royalties received. In either case, accrual accounting dictates that such "mistakes" be corrected for through the use of deferred credits.

• Question 1184:

  The mean gross annual income of certified tack welders are normally distributed with the mean of $20,000 and a standard deviation of $2,000. The ship building association wishes to find out whether their tack welders earn more or less than $20,000 annually. The alternate hypothesis is that the mean is not $20,000. The 0.10 level of significance is to be used. What is the decision rule?

  A. Do not reject the null hypothesis if computed z lies between -1.96; otherwise, reject it
  B. None of these answers
  C. Reject the null hypothesis if computed z is below -1.96; otherwise, reject it
  D. Do not reject the null hypothesis if computed z lies greater than 1.645; otherwise, reject it
  E. Do no reject the null hypothesis if computed z lies between -1.645 and +1.645; otherwise, reject it
  E. Do no reject the null hypothesis if computed z lies between -1.645 and +1.645; otherwise, reject it

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  Explanation

  Since it is at the 10% significance level we must use z=+/-1.645. The null hypothesis Ho will not be rejected if the z-value falls between the critical value. We reject Ho if it falls beyond the critical level.

• Question 1185:

  Which of the following best describes the relationship between the relative maturation of an industry and the retention ratio of companies within the industry? Further, what is the proposed relationship between expected growth and the relative maturity of an industry?

  A. Negative relationship; negative relationship
  B. Positive relationship; negative relationship
  C. Negative relationship; positive relationship
  D. Negative relationship; no correlation
  E. Positive relationship; positive relationship
  A. Negative relationship; negative relationship

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  Explanation

  As an industry advances in maturity, growth of the overall industry will decline. As growth opportunities diminish, companies within the industry will be forced to pay out a larger proportion of their earnings as dividends; i.e. the dividend payout ratio will increase. Remember that the retention ratio is equal to (1 - the dividend payout ratio). Thus, the retention ratio of companies will likely decline as the industryadvances in maturity. The relationship between the dividend payout ratio and the maturity of the industry is negative and loosely linear.

  As an industry becomes more mature, growth opportunities decline. This relationship is also loosely linear.

• Question 1186:

  The WACC of a firm equals 10.67%. The pre-tax cost of debt equals 8.4%, the firm pays 38% taxes and the firm's equity holders expect a rate of return of 17%. The firm's debt-to-equity ratio equals ________.

  A. 1.41
  B. 0.72
  C. 1.16
  D. 0.86
  C. 1.16

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  Explanation

  Let E/(D+E) =

  A. Then,

  WACC = (1-A)*(1-t)*RD + A*RE, where t is the tax rate. Therefore,

  10.67% = (1-A)*(1-38%)*8.4% + A*17%. Hence, A = E/(D+E) = 0.463 and (D+E)/E = 1/0.463 = 2. 16.

  This gives D/E = 1.16.

• Question 1187:

  Each individual owning shares in an investment company's fund ________.

  A. owns the right to change the fund composition
  B. owns a percentage of the investment company's total portfolio
  C. owns a few individual investments within the fund
  D. owns a percentage of the investment company
  B. owns a percentage of the investment company's total portfolio

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  Explanation

  Because the fund is financed and owned by a pool of investors, each investor will be entitled to a portion of the earnings generated by the fund, although no one completely owns the fund. The investment company usually manages the fund composition.

• Question 1188:

  James Clinton, a portfolio manager with Middle Road Investment Advisors, is trying to estimate the appropriate earnings multiplier for the automobile industry. In his analysis, James examines the expected growth rate of dividends for the industry, as well as the expected dividend payout ratio and required rate of return. From this information, James proceeds toward an estimation of the earnings multiplier for the series.

  Which of the following best describes this method of estimating an earnings multiplier for an industry?

  A. The specific estimate approach
  B. Macroanalysis
  C. Microanalysis
  D. The rate of change approach
  E. The arbitrage pricing method
  F. Input-output analysis
  C. Microanalysis

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  Explanation

  The answer called for in this question is "microanalysis." This method involves an examination of the components of the earnings multiplier, including the anticipated growth rate of dividends, the required rate of return, and the dividend payout ratio. Once these variables have been examined, both from the perspective of trend analysis and point estimation, a value for the earnings multiplier is deduced. Microanalysis is contrasted by macroanalysis, which involves an examination of the relationship between the earnings multiplier of a stock market series and the earnings multiplier of the overall market. For example, an individual projecting an earnings multiplier for a software index using macroanalysis would begin by examining the relationship between the P/E ratio of the software index and the P/E ratio of a broad market index such as the Standard and Poors 500. Both historical trends and point estimates would be examined, and from this information, a projection of the earnings multiplier for the stock market series is deduced.

  Input-output analysis is used in the examination of competitive forces within an industry. The arbitrage pricing model is a security valuation model which allows for several relevant "situation specific" variables. Finally, the "specific estimate" and "rate of change" approaches are used to estimate the earnings multiplier of a stock market series, rather than an industry.

• Question 1189:

  Valuation of PPandE and natural resources emphasizes all of the following accounting objectives except ________.

  A. accounting for monies invested in assets
  B. historical cost
  C. conservatism principle
  D. reality
  D. reality

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  Explanation

  The financials portray historical information; they do not paint a picture of today.

• Question 1190:

  An acceleration in the growth rate of the money supply is known as ________.

  A. expansionary monetary policy
  B. restrictive monetary policy
  C. the quantity of money
  D. the velocity of money
  E. excess supply of money
  A. expansionary monetary policy

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  Explanation

  The Fed generally pumps additional money into the economy via open market operations - the purchase of bonds in the open market. The consequence of this action is usually a rise in the real interest rate. The Fed can also implement expansionary monetary policy through manipulation of the discount rate. A higher discount rate will serve to contract the money supply; a lower rate will expand the money supply.