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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1331:

  This is the measure of the number of buyers versus sellers to indicate the institutional investor sentiment.

  A. Block Uptick-Downtick Ratio
  B. Mutual Fund Cash Positions
  C. Margin Debt
  D. Short Sales by Specialists
  A. Block Uptick-Downtick Ratio

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  Explanation

  If a block trade (institutional trading) price is higher than prior transaction price, this is called uptick, if otherwise then downtick: the development of block uptick (buyers) downtick (sellers) ratio indicates investors' sentiment. A ratio bigger than one indicatesmore buyers, i.e. bullish sentiment.

• Question 1332:

  Kira Trace, research analyst at an investment banking firm, took the Level 1 CFA examination in 2001, but did not pass. Last year, she studied alone, and only for one-month before the exam. This year, she is starting earlier and is working with a mentor, Anton Park, CFA. While discussing asset pricing models with Park, Trace makes the following statements. Park can see that Trace still needs to study this area because only one of her statements is correct. Which statement is CORRECT?

  A. According to the Capital Asset Pricing Model (CAPM), the rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is the market expected return.
  B. Assuming assets are not perfectly positively correlated, the systematic risk of a portfolio decreases as more assets are added.
  C. Adding the risk-free asset to a portfolio will reduce return and total risk.
  D. It is difficult for the individual investor to achieve the benefits from diversification because significantly reducing risk requires the purchase of approximately 1,000 securities.
  A. According to the Capital Asset Pricing Model (CAPM), the rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is the market expected return.

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  Explanation

  Diversification reduces unsystematic or unique risk. With the risk-free asset and a portfolio of risky assets, the equation for the expected standard deviation is linear:wA . A combination of the risk free asset and a portfolio always gives more return for a given level of risk. Risk tends to be reduced, but assuming that assets are not perfectly positively correlated, an investor can achieve the benefits of diversification by adding just one security (Markowitz). Studies have shown that approximately 18-30 stocks are needed for proper diversification. The main point is that the number ofstocks required is small and is significantly less than all securities (and significantly less than 1,000 securities).

• Question 1333:

  What deposit would you need to make today in order to withdraw $200 a month, beginning next month, for the next 5 years, if the deposit will accrue interest at 8% per year, compounded monthly?

  A. $7,237. 66
  B. $9,863. 69
  C. $11,492. 59
  D. $8,399.27
  E. $9,141.23
  B. $9,863. 69

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  Explanation

  On the BAII Plus, press 60 N, 8 divide 12 = I/Y, 200 PMT, 0 FV, CPT PV. On the HP12C, press 60 n, 8 ENTER 12 divide i, 200 PMT, 0 FV, PV. The answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 1334:

  Which of the following represents a "contrary opinion" technical indicator?

  A. Mutual fund cash position.
  B. Diffusion Index.
  C. T-Bill-Eurodollar Yield Spread.
  D. None of these answers is correct.
  E. Short sales by specialists.
  F. The Confidence Index.
  A. Mutual fund cash position.

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  Explanation

  Of the choices listed, only "mutual fund cash positions" represents a contrarian technical indicator. Technical analysts often believe that the majority of market participants are incorrect in their opinions about market direction and valuation, especially during periods preceding market peaks and troughs. This style of thinking is often referred to as "contrary opinion" technical analysis.

  The mutual fund cash position is a contrary opinion technical indicator because contrarian technical analysts believe that mutual funds will be wrong in their forecasts of market direction. Technical analysts often use mutual funds as a proxy for institutional investors, and believe that the mutual fund cash position provides important insight into the sentiment of institutional investors. Specifically, these technical analysts believe that a high mutual fund cash position, which indicates that mutual funds are bearish on the market, is actually a signal of an impending upward move in stock prices. Conversely, a low mutual fund cash position is viewed as bearish by contrarian technical analysts. The intuition behind this opinion is relatively straightforward - a low mutual fund cash position indicates a low amount of buying power within mutual funds, i.e. there is less money available to support stock prices.

  Several studies have examined the cash ratio's ability to predict market cycles and have determined its usefulness is less than that implied by the technical analyst community. The Confidence Index is a measure of yield spreads between high-grade corporate bonds and the yields on average corporate bonds. The Diffusion Index measures the breadth of the market, and is found by taking the total volume of advancing shares plus one-half of the issues unchanged, divided by the total number of issues traded. The ratio of short sales by specialists is used by technical analysts to track the opinions of the "smart money," and the yield spread between T-Bills and Eurodollars is used to measureinternational sentiment and confidence. The T-Bill-Eurodollar Yield Spread is another example of a "smart money" technical indicator.

• Question 1335:

  RipOff Dealers, Inc. offers a financing plan for car purchases, charging 2% per month. If a car costs $30,000, what's the monthly payment you will have to make - starting a month from now - if you need 5 years to pay off the debt on the car?

  A. $824
  B. $513
  C. $863
  D. $798
  C. $863

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  Explanation

  The payments constitute an ordinary annuity. The present value of an n-period annuity that starts paying at the end of the current period equals PV = (C/r)*[1 - 1/(1+r)^n] where C is the payment per period and r is the one-period interest rate. In this example, the annuity is over 5*12 = 60 periods and the per period rate equals 2%. So the present value of the payments equals (C/0.02)*[1 - 1/1.02^60] = 30,000 (given). Solving for C gives the per month payment equal to $863.

• Question 1336:

  What amount would you have in your savings account in 5 years, if it has a balance of $1,234 today and you deposit an additional $1,234 two years from today? Assume that the savings account earns 5% per year, compounded annually.

  A. $10,048.91
  B. $3,003. 44
  C. $2,468.00
  D. $2,999.86
  E. $3,149.86
  B. $3,003. 44

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  Explanation

  Solve this question as two compound interest problems. The first $1,234 will be in the account for 5 years. The second $1,234 will be in the account for 3 years. Find the FV of both values 5 years from today and add them together. On the BAII Plus, press 5 N, 5 I/Y, 1234 PV, 0 PMT, CPT FV, which yields $1,574. 93. Then press STO 1. Then press 3 N, CPT FV, which yields $1,428.51. Press + RCL 1 = to see the answer. On the HP12C, press 5 n, 5 i, 1234 PV, 0 PMT, FV. Then press STO 1. Then press 3 n, FV. Press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1337:

  The management fee of an investment management firm typically ranges from ________.

  A. one to two percent of the total value of the fund
  B. none of these answers
  C. one-quarter to one-half percent of the total value of the fund
  D. one-half to one percent of the total value of the fund
  C. one-quarter to one-half percent of the total value of the fund

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  Explanation

  The management fee of an investment management firm typically ranges from one-quarter to one-half percent of the total value of the fund, with a sliding scale as the size of the fund increases.

• Question 1338:

  Rocky Johnson, CFA, manages a large capitalization equity mutual fund. His superiors have requested that he provide them the appropriate benchmarks to compare future performance against. Johnson makes the following statements:

  Statement 1:We should use an unweighted index because it would best reflect the large company bias in the portfolio.

  Statement 2:Stocks in the portfolio frequently split the number of shares outstanding. Therefore, in the long run, the Dow Jones Industrial Average would best reflect these events.

  Are Johnson's two statements correct?

  A. No. Both statements are incorrect.
  B. Statement 1 is correct and Statement 2 is incorrect.
  C. Statement 1 is incorrect and Statement 2 is correct.
  A. No. Both statements are incorrect.

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  Explanation

• Question 1339:

  Using the one-year holding period and multiple-year holding period dividend discount model (DDM), calculate the change in value of the stock of Monster Burger Place under the following scenarios. First, assume that an investor holds the

  stock for only one year. Second, assume that the investor intends to hold the stock for two years. Information on the stock is as follows:

  The value of the stock if held for one year and the value if held for two years are, respectively:

  A. $27. 50 and $35. 25.
  B. $25. 22 and $29.80.
  C. $27. 50 and $29.80.
  D. $29.80 and $32. 50.
  B. $25. 22 and $29.80.

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  Explanation

  First, we need to calculate the required rate of return. When a stock's beta equals 1, the required return is equal to the market return, or 10.0%. Thus, ke= 0.10.Alternative: Using the capital asset pricing model (CAPM), ke= Rf+ Beta * (Rm?

  Rf) = 4. 5% + 1 * (10.0% - 4. 5%) = 4. 5% + 5. 5% = 10.0%.

  Next, we need to calculate the dividends for years 1 and 2.

  Then, we use the one-year holding period DDM to calculate the present value of the expected stock cash flows (assuming the one-year hold).

  Finally, we use the multi-period DDM to calculate the return for the stock if held for two years.

  P0= [D1/ (1 + ke)] + [D2/ (1 + ke)2]+[P2/ (1 + ke)2] = [$2. 75 / (1.10)] + [$3. 03 / (1.10)2] + [$30.0 / (1.10)2] =$29.80.Note:since the growth rate in dividends, g, was equal to ke, the present value of next year's dividend is equal to last year's

  dividend (for periods 1 and 2). Thus, a quick calculation would be 2. 5 * 2 + $30.00 / (1.10)2 = 29.80.

• Question 1340:

  When Modigliani and Miller relaxed their assumption of zero taxes, they concluded which of the following?

  A. Firm's will wish to issue preferred stock.
  B. A firm's value is maximized only when it uses no debt.
  C. Business risk will become the main determinant of a firm's value.
  D. Dividend policy will dominate the investment decision.
  E. A firm's capital structure is irrelevant.
  F. A firm's value is maximized only when it uses 100% debt.
  F. A firm's value is maximized only when it uses 100% debt.

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  Explanation

  When MandM relaxed their "no-taxes" assumption, they concluded that a firm's value was maximized only when its capital structure is composed of 100% debt. This is due to the tax-deductibility of debt. Due to these tax-shelter benefits, companies who are financed by 100% debt pass the maximum amount of their operating income to investors, and this should increase the attractiveness of the firm as an investment. MandM would be criticized on this finding, particularly because the risk of bankruptcy was completely ignored. This criticism would give birth to the "Trade-off Theory of Leverage," which states that companies will balance the tax-shelter benefits of debt with the increased interest rates and risk of bankruptcy that are associated with increased debt levels..