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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1381:

  Turi Teigen, CFA candidate, prepares the following question for her weekly Level 1 study program.

  Using the graph (along with the list of assumptions), determine which of the following statements is CORRECT.

  A. The expected return on Portfolio Y could be 15. 00%.
  B. The expected return on Portfolio Z is greater than the required return.
  C. The required return on Portfolio X is 10.25%.
  D. Portfolio X is overvalued.
  C. The required return on Portfolio X is 10.25%.

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  Explanation

  Note: RR = required return, ER = expected return.Remember that the SML graph plots systematic, or beta, risk versus expected return. Thus, the numbers on the x-axis represent beta. Using the Capital Asset Pricing Model (CAPM) equation,

  RR = Rf+ (ERM?Rf) * Beta = 5. 0% + (7. 5%) * 0.7 = 10.25%.

  Portfolio Y lies below the SML and is thus overvalued and the expected return must be less than the required return. Using the CAPM, RR = Rf+ (ERM?Rf) * Beta = 5. 0% + (7. 5%) * 1.0 = 12. 50%. (On the exam, you can quickly determine the

  RR for a portfolio/asset with a beta of 1.0 by adding the risk-free rate and the market premium.) Since the ER must be less than the RR, the ER must be less than 12. 50% and cannot be 15. 00%. Since Portfolio Z is on the SML, it is fairly

  valued and RR = ER. Since Portfolio X lies above the SML, it isundervalued.

• Question 1382:

  Point-and-figure charts include

  A. high, low, and ending prices for a given period.
  B. all ending prices.
  C. all daily volumes and ending prices.
  D. only significant price changes.
  D. only significant price changes.

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  Explanation

  With a point-and-figure chart, a technical analyst determines which price interval to record as significant (two points, for example) and records price changes equal to or larger than this, regardless of time interval. Given a graph, an analyst would try to discern price trends.

• Question 1383:

  Given that the expected dividend payout ratio for a firm is 0.25, its expected profit margin is 0.12, its expected financial leverage is 0.95, its expected return on capital is 1.26, its expected EBIT is $403, and its expected growth rate is 8%, what is the firm's expected total asset turnover?

  A. 1.39
  B. 0.939
  C. 1.02
  D. Not enough information
  E. 0.839
  B. 0.939

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  Explanation

  The growth rate of a firm is equal to expected retention rate of earnings multiplied by its expected ROE. The retention rate is equal to 1 - dividend payout ratio (1 - 0.25 = 0.75). The ROE is thereby equal to the growth rate divided by the retention rate (0.08 / 0.75 = 0.107). The ROE can be set equal the profit margin multiplied by the total asset turnover multiplied by financial leverage. Rearranging this yields that the total asset turnover is equal to the ROE divided by the profit margin and the financial leverage: 0.107 / (0.12 x 0.95) = 0.939.

• Question 1384:

  Scott works for a regional brokerage firm. He estimates that Walkton Industries will increase its dividend by $1.50 a share during the next year. He realized that this increase is contingent on pending legislation that would, if enacted, give Walkton a substantial tax break. The U.S. representative for Walkton's home district has told Scott that, although he is lobbying hard for the bill and prospects for passage look good, Congress's concern over the federal deficit could cause the tax bill to be voted down. Walkton has not made any statements regarding a change in dividend policy. Scott writes in his research report, "We expect Walkton's stock price to rise by at least $8.00 a share by the end of the year. Because the dividend will increase by $1.50 a share, the stock price gain will be fueled, in large part, by the increase in the dividend. Investors buying the stock at the current time should expect to realize a total return of at least 15 percent on the stock." Which of the following is/are true?

  I. Scott violated the Standards because he used material inside information.

  II. Scott violated the Standards because he failed to separate opinion from fact.

  III.

  Scott did not violate the Standards.

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

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  Explanation

  This question relates to Standard IV (A.2), Research Reports. Scott issued a research report stating that the stock price of Walkton is expected to rise to $8 a share "because the dividend will increase by $1.50 a share." Yet, he made this assertion fully aware the dividend will increase only if Congress enacts certain legislation, which is an uncertain prospect. By stating that the dividend will increase, Scott failed to separate fact from opinion. The information on the passing of legislation is not material inside information because it does not come from or pertain to company operations.

• Question 1385:

  An investor has two stocks, Stock A and Stock B in her portfolio. What is the variance of theportfolio given the following information about the two stocks?

  A. .1472.
  B. .1832.
  C. .0217.
  D. .0096.
  C. .0217.

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  Explanation

  Variance of two-stock portfolio =[++ 2=[(.7(.2+ (.3(.15+ (2)(.7)(.3)(.2)(.15)(.0032)] = .0217

• Question 1386:

  The Target Copy Company is contemplating the replacement of its old printing machine with a new model costing $60,000. The old machine, which originally cost $40,000, has 6 years of expected life remaining and a current book value of $30,000 versus a current market value of $24,000. Target's corporate tax rate is 40 percent. If Target sells the old machine at market value, what is the initial after tax outlay for the new printing machine?

  A. -$22,180
  B. -$36,000
  C. -$30,000
  D. -$33,600
  E. -$40,000
  D. -$33,600

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  Explanation

  Initial outlay Cost of new machine-$60,000 Salvage value (old)+ 24,000 Tax effect of sale = $6,000(0.4) = + 2,400 After-tax outlay =-$33,600

• Question 1387:

  Standard IV (B.3) deals with ________.

  A. Duty to Employer
  B. Professional Misconduct
  C. Interactions with Clients and Prospects
  D. None of these answers
  E. Prohibition against Use of Material Nonpublic Information
  F. Preservation of Confidentiality
  G. Fair Dealing
  H. Investment Process
  G. Fair Dealing

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  Explanation

  Standard IV (A) deals with the Investment Process. Standard III (B) deals with Duty to Employer. Standard IV (B.3) deals with Fair Dealing. Standard IV (B) deals with Interactions with Clients and Prospects. Standard V (A) deals with Prohibition against Use of Material Nonpublic Information. Standard IV (B.5) deals with Preservation of Confidentiality. Standard II (B) deals with Professional Misconduct.

• Question 1388:

  The weight of an offensive lineman may be 210 pounds, 210.1 pounds, 210.13 pounds or 210.137 pounds depending on the accuracy of the scale. What is this an illustration of?

  A. none of these answers
  B. discrete random variable
  C. continuous random variable
  D. all of these answers
  E. complement rule
  C. continuous random variable

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  Explanation

  The weight changes are in a random fashion and without a separate interval. Therefore it is continuous and random.

• Question 1389:

  Foreign funds are those that invest

  A. only outside of the developed world.
  B. completely or partially outside of the U.S.
  C. only outside of the U.S.
  D. only in emerging markets.
  B. completely or partially outside of the U.S.

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  Explanation

  The two kinds of foreign funds are international funds and global funds. International funds invest only in non-U.S. securities. Global funds invest in both U.S. and non-U.S. securities. Investment in foreign funds by American investors provides them with an added degree of diversification.

• Question 1390:

  Which of the following is correct?

  A. Without tariff protection the number of jobs available to domestic workers would decline.
  B. Less than 5 percent of world output is sold in a country different from the one in which it is produced.
  C. Exports represent about 30 percent of U.S. GDP.
  D. Regarding international trade, if one country gains, another country must lose.
  E. The volume of international trade has grown rapidly in recent decades.
  E. The volume of international trade has grown rapidly in recent decades.

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  Explanation

  The volume of international trade, enhanced by improved transportation and communication has grown rapidly in recent years. Approximately 21 percent of the world's total output is now sold in a country other than that in which it was produced. This is double the figure of three decades ago.