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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 121:

  Which of the following is not expressly incorporated into the Degree of Total Leverage (DTL) calculation?

  A. Sales
  B. Fixed costs
  C. Variable costs
  D. Interest expense
  E. None of these answers
  F. Common shares outstanding
  F. Common shares outstanding

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  Explanation

  The Degree of Total Leverage (DTL) calculation measures the percentage change in EPS from a given percentage change in sales. The equation used to produce DTL is as follows:

  {DTL = [(Sales - Variable Costs) / (Sales - Variable Costs - Fixed Costs - Interest Expense)]. Of all the choices listed, "only the number of common shares outstanding" is not expressly incorporated into the DTL calculation.

• Question 122:

  An economy is currently experiencing high inflation. A Keynesian would suggest which of the following to combat this:

  I. Increasing interest rates.

  II. Increasing tax rates.

  III. Decreasing government expenditure.

  IV.

  Raising reserve requirements.

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

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  Explanation

  To control high inflation, Keynesians suggest cutting back on aggregate demand by either raising taxes or decreasing the size of the budget deficit by decreasing government expenditures. They thus recommend a restrictive fiscal policy to combat high inflation. Note that changing the reserve requirement is not an option available to the Federal government in the U.S. because the reserve requirement is set by an independent body, The Federal Reserve.

• Question 123:

  You are reviewing a list of 8 recommended securities and wish to invest in 4. You will put 40% of your capital in one, 30% in another, 20% in the third, and 10% in the last one. How many different ways can you choose among the 8 securities and invest according to your design?

  A. 1,980.
  B. 1,680.
  C. 1,774.
  D. 1,860.
  B. 1,680.

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  Explanation

  The combination, or binomial formula, gives the number of ways that k objects can be chosen from n items, without regard to the order of choosing. The formula is (n choose k) = n! / [k! *(n-k)!]. However, in this case, the order does matter. If we choose stocks 3, 1, 7, and 5, we don't consider that the same as choosing 5, 7, 1 and 3, because the portfolio weights would differ. We need the general permutation formula, which gives the number of ways that k objects can be chosen from n items, with regard to order. The formula is n_P_k = n! / (n-k)!. Here, it is 8! / (8-4)! = 8 * 7 * 6 * 5 = 1,680.

• Question 124:

  An financial analyst is in the process of measuring the annualized return of an investment portfolio. Consider the following information:

  t0: purchase an initial 1 share of Microscam for $65. 40 t1: purchase an additional 1 share of Microscam for $68.12 t1: receive a dividend of $0.75 t2: purchase an additional 1 share of Microscam for $75. 95 t2: receive a dividend of $0.77 t3: sell 3 shares for $82. 76 per share

  Assuming no taxes or transaction costs, that dividends are not reinvested, and that each period represents one year, what is the time-weighted rate of return per year on this portfolio?

  A. 8.27% per year
  B. The answer cannot be calculated from the information provided.
  C. None of these answers is correct.
  D. 10.73% per year
  E. 14. 43% per year
  F. 8.92% per year
  F. 8.92% per year

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  Explanation

  The time-weighted rate of return is the preferred method of return calculation in the investment management industry, primarily because the return calculation it produces is not sensitive to significant additions and withdrawals of funds from

  portfolios under examination. The calculation of the time-weighted rate of return involves three steps, which are illustrated as follows:

  Step 1:

  Price the portfolio immediately prior to any significant additions or withdrawals. Separate the portfolio into a series of subperiods based on the dates of cash inflows and outflows.

  Step 2:

  Calculate the holding period return for each subperiod.

  Step 3:

  Determine the annualized holding period return by linking or compounding the holding period return of each subperiod. If the investment is for more than one year, use the geometric mean of the annual returns as the time-weighted rate of

  return. If the investment is for less than one year, compound the subperiod returns to obtain an annualized measurement.

  To begin the process of determining the time-weighted rate of return, we would break the portfolio up into the following series of cash flows. However, in this example, the cash flows are already aggregated for us and we can move on to the

  next step: determining the holding period return for each subperiod. This process is detailed as follows:

  t1: [($68.12 ending price + $0.75 dividend received - $65. 40 beginning price) / $65. 40 beginning price] = 5. 306%.

  t2: [($75. 95 ending price + $0.77 dividend received - $68.12 beginning price) / $68.12 ending price] = 12. 625%

  t3: [$82. 76 ending price - $75. 95 beginning price / $75. 95 beginning price] = 8.966%

  Now that the holding period returns for each subperiod have been calculated, the determination of the time-weighted rate of return can take place. Since the duration of these transactions exceeds one year,we must take the geometric mean

  of the annual returns to obtain the time-weighted rate of return. This is done by taking the cube root of [(1 + .05306) * (1 + .12625) * (1 + .08966], subtracting 1, and multiplying by 100%, which leads to a time-weighted rate of return of .0892 or

  8.92%.

  If you chose 10.73%, remember that it is the geometric mean that is used in the time-weighted rate of return calculation, not the arithmetic mean.

• Question 125:

  Which of the following determine(s) the supply curve?

  I. Supply curves of factor resources.

  II. Total money supply flowing in the economy.

  III.

  Cost of running operating capacity at a given level. IV. Prices of related goods.

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

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  Explanation

  Note that the total money supply in the economy determines the values plotted on the price-axis of a supply curve.

• Question 126:

  Mike Jordan recently met his old friend, Charlie Barklee, who's an accomplished statistician. Charlie showed him his new model for predicting stock prices and after considerable discussion, Mike was convinced the model was a viable alternative to his current methodology for picking stocks. To test it, he downloaded historical data from a well-known statistical data provider's web site. The tests indicated that some parts of the model needed fine tuning, which Mike implemented himself, without Charlie's help. Mike:

  A. cannot circulate the model since it is not publicly available.
  B. can show his clients the model, without any special disclosures, because all of the tests were done by him with publicly available data.
  C. none of these answers.
  D. must acknowledge Charlie's contribution. Otherwise, he would be in violation of the code of ethics and be subject to disciplinary action from AIMR.
  D. must acknowledge Charlie's contribution. Otherwise, he would be in violation of the code of ethics and be subject to disciplinary action from AIMR.

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  Explanation

  Standard II (C) - Prohibition against Plagiarism.

• Question 127:

  The situation of monopsony is most closely affiliated with which of Porter's Five Forces of industry competition?

  A. Bargaining power of suppliers
  B. Rivalry among existing firms
  C. Threat of substitute products
  D. Bargaining power of buyers
  E. Threat of new entrants
  D. Bargaining power of buyers

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  Explanation

  A monopsony exists when there is only one buyer for a product or service. This is contrasted by a monopoly, where there are many buyers and only one seller. Monopsony is most closely characterized by the bargaining power of buyers, as the sole buyer has much power in influencing prices. If there exists only one buyer for an industry or company's product, the bargaining power of suppliers will be small. This will lead to increased competition in the industry.

  While monopsony is a rare situation, it nonetheless occurs. For example, certain automobile parts are purchased only by one of the large auto manufacturers. These automobile manufacturers have tremendous pricing power from their suppliers, to many of which they are the only customer.

• Question 128:

  Net profit margin for a market series is difficult to estimate because it is very ________.

  A. stable
  B. costly
  C. volatile
  D. inaccurate
  C. volatile

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  Explanation

  Net profit margin for a market series is difficult to estimate because it is highly volatile, a result of changes in depreciation, interest and tax rate over time.

• Question 129:

  Which of the following is/are true?

  I. If P(A or B) = P(A) + P(B), A and B are independent

  II. If P(A and B) = P(A).P(B), A and B are mutually exclusive

  III.

  If P(A and B) = P(A) + P(B), P(A) = P(B) = 0

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

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  Explanation

  If A and B are independent, P(A and B) = P(A).P(B) and vice versa. If A and B are mutually exclusive, P(A and B) = 0. Note that P(A or B) = P(A) + P(B) - P(A and B). Hence, if P(A and B) = P(A) + P(B), the P(A or B) = 0. This implies that neither A nor B can occur, giving P(A) = P(B) = 0.

• Question 130:

  A tire manufacturer advertises that "one-half of our new all-season radial tire last at least 50,000 miles. An immediate adjustment will be made on any tire that does not last 50,000 miles." You purchased four of these tires. What is the probability that all four tires will wear out before traveling 50,000 miles?

  A. None of these answers
  B. 1/10, or 0.10
  C. 1/4, or 0.25
  D. 1/16, or 0.0625
  E. 1/64, or 0.0156
  D. 1/16, or 0.0625

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  Explanation

  1/2*1/2*1/2*1/2 = 1/16 where 1/2 is the probability that a tire will wear our before 50,000 miles.