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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1241:

  An AIMR member who lives in Atlantis, where some laws are stricter than the AIMR Code of Ethics and others are less strict, should follow:

  A. Atlantis' laws, since the member resides in Atlantis.
  B. A combination of the two which results in a stricter set of laws.
  C. AIMR code, since the code is a strict set of rules.
  D. Not clear from the information provided.
  B. A combination of the two which results in a stricter set of laws.

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  Explanation

  A member must always abide by the AIMR code (Standard I), unless the local laws in any given case are stricter, in which case, the stricter standard applies.

• Question 1242:

  Which of the following is not a characteristic of the normal probability distribution?

  A. Bell shaped
  B. Symmetrical
  C. All of these answers
  D. Positively skewed
  E. Asymptotic
  D. Positively skewed

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  Explanation

  The normal probability distribution is not skewed but bell shaped and symmetric.

• Question 1243:

  John Cochrun is a reputed money manager who is also an AIMR member. John recently discovered that some employees at the firm where he is employed have been engaging in some questionable activity which could very well be construed as insider trading by the SEC. John, however, does not think the activity is egregious enough to be reported to the SEC. In any case, he does not want to be known as "the rat who blew the whistle." By not reporting the criminal activity, John has:

  A. has not violated the AIMR code.
  B. violated the AIMR code, Standard I (B) - Fundamental Responsibilities.
  C. violated the AIMR code, Standard III (C) - Disclosure of Conflicts to the Employer.
  D. violated the AIMR code, Standard III (B) - Duty to the Employer.
  A. has not violated the AIMR code.

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  Explanation

  The AIMR code does not require members to report legal violations to the appropriate authorities, as long as they don't associate themselves with such activities.

• Question 1244:

  Which one of the following is NOT a condition of the binomial distribution?

  A. Independent trials
  B. Only two outcomes
  C. Probability of success remains constant from trial to trial
  D. At least 10 observations
  E. None of these answers
  D. At least 10 observations

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  Explanation

  There no requirement regarding the number of observations.

• Question 1245:

  How does inflation impact interest rates, all else equal?

  A. increases the real rate; increases the nominal rate
  B. has no direct impact on interest rates
  C. has no effect on the real rate; increases the nominal rate
  D. increases the real rate; has no effect on the nominal rate
  E. impossible to determine
  C. has no effect on the real rate; increases the nominal rate

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  Explanation

  The real rate of interest is simply the nominal rate less inflation. Therefore, the real rate is not directly effected by inflation, while the nominal rate would rise as inflation rises.

• Question 1246:

  There are two popular methods for estimating the earnings multiplier for an industry or a stock market series, which of the following correctly lists these two techniques?

  A. The top-down and the bottom-up approach
  B. Discounted cash flow estimation, regression analysis
  C. Scenario Analysis, Monte Carlo Simulation
  D. More than one of these answers is correct
  E. The direction of change and the specific estimate approach
  F. Microanalysis and macroanalysis
  D. More than one of these answers is correct

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  Explanation

  More than one of these answers is correct. Specifically, the "direction of change" and the "specific estimate" are methods of forecasting the earnings multiplier of a stock market series and "microanalysis" and "macroanalysis" are used to

  forecast the earnings multiplier for an industry.

  When estimating the earnings multiplier for an industry, there are two common methods - the "direction of change" and the "specific estimate" approaches. The direction of change approach begins with the present earnings multiplier for a

  stock market series and seeks to estimate both the amount and direction of any change based upon changes in the components of the P/E ratio - the required rate of return, the anticipated growth rate of dividends, and the dividend payout

  ratio.

  This approach is contrasted by the specific estimate approach, which involves the estimation of a specific value for the earnings multiplier based on a series of projections for values of the components of the earnings multiplier components.

  When using this approach, analysts commonly confine their estimates to a series of scenarios, typically a best case, worst case, and base case scenario. There are two common methods for estimating the earnings multiplier for an industry macroanalysis and microanalysis. Macroanalysis involves an examination of the relationship between the earnings multiplier for an industry and the earnings multiplier for the market. Microanalysis involves an estimation of the specific

  variables that influence the earnings multiplier, including the required rate of return, the estimated growth rate, and the dividend payout ratio. While the top down and bottom up method are similar to macroanalysis and microanalysis,

  respectively, they do not represent the best possible answer. Specifically, the top-down and bottom up approaches are typically used to identify investment opportunities, not for the estimation of an industry earnings multiplier.

• Question 1247:

  If the Fed starts following a contractionary monetary policy:

  I. the U.S. trade deficit with other countries rises.

  II. the unemployment rate increases.

  III.

  real interest rates increase.

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

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  Explanation

  When the Fed institutes a contractionary monetary policy, the real interest rates rise because money supply falls. This makes the opportunity cost of current consumption higher, reducing consumer demand and spending. This lower demand leads to lower production and higher unemployment. Further, the U.S. dollar tends to strengthen because foreign investments in U.S. increase due to higher real interest rates. The exports fall due to this. The effect on imports is more ambiguous since reduced consumer spending decreases imports but a stronger dollar increases them. The net effect is usually seen to be an increase in trade deficit due to a larger fall in exports.

• Question 1248:

  Emmy Noether is a senior division manager at Harding and Harding, a money management firm. Emmy is quite fastidious about following the rules of the investment industry and has established specific procedures and guidelines designed to prevent any violations. Recently, it surfaced that one of the employees reporting to Emmy, William Bathwater, had been secretly using inside information on a computer maker to generate profits in his portfolio. William had been extremely clever at hiding these profits and only a serendipitous audit by the Compliance Department revealed the pattern. Emmy, in her capacity as William's supervisor, has:

  A. has not violated any standard in the AIMR code of ethics.
  B. none of these answers.
  C. violated Standard III (E) - Responsibilities of Supervisors - by failing to check William's behavior.
  D. violated Standard III (B) - Duty to the Employer - by failing to check William's behavior.
  A. has not violated any standard in the AIMR code of ethics.

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  Explanation

  Under Standard III (E) - Responsibilities of Supervisors, members must take reasonable care to ensure that their subordinates do not violate any laws or the code of conduct. This includes designing effective procedures to deter fraudulent activity. However, no amount of scrutiny can prevent the cleverest of frauds. What is expected of the members is that they be diligent enough in carrying out their duties. In the present case, given the facts, Emmy cannot be faulted for William's criminal activity since she hasn't been found to be negligent in any way. Hence, she has not violated Standard III (E) - Responsibilities of Supervisors nor any other standards.

• Question 1249:

  Which of the following best describes the primary reason for the greater volatility of the earnings multiplier of a stock market series compared to the EPS for the same series? Choose the best answer.

  A. The price-to-earnings ratio is less insulated from accounting distortions than is the EPS figure; i.e. it is harder to "normalize."
  B. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS figure; i.e. the earnings multiplier is "forward looking."
  C. The EPS figure is subject to a deleveraging effect caused by changes in the capital structure. * None of these answers is correct.
  D. The P/E ratio is more sensitive to increases in a company's dividends.
  E. The earnings multiplier is more sensitive to changes in the spread between "k" and "g."
  E. The earnings multiplier is more sensitive to changes in the spread between "k" and "g."

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  Explanation

  The greater relative volatility of the earnings multiplier versus the EPS figure is primarily attributable to an increased sensitivity to changes in the spread between the required rate of return "k" and the anticipated growth rate "g." Remember that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  {P/E = [D/E / (k - g)]}

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As you can see, changes in the spread between the required rate of return and the anticipated growth rate can have a dramatic effect on the earnings multiplier figure for a stock market series. While the earnings multiplier is sensitive to changes in the dividend payout ratio, volatility in this figure is not cause for the increased volatility of the earnings multiplier versus the EPS figure.

• Question 1250:

  Which approach to probability is exemplified by the following formula?

  Prob. of Event happening = No. of times event occurred in the past/Total no. of observations.

  A. A priori approach
  B. None of these answers
  C. Relative frequency approach
  D. Subjective approach
  C. Relative frequency approach

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  Explanation

  When we based the probability on the number of times the events has occurred in the past over the total number of observations, we are using the relative frequency approach.