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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1471:

  Another name for "covered" person is ________.

  A. guardian
  B. none of these answers
  C. ombudsman
  D. access person
  E. fiduciary
  F. supervisor
  D. access person

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  Explanation

  Access or covered persons have knowledge of pending or actual investment recommendations or action. The firm's definition of access (covered) person should be broad enough to cover all people with that knowledge.

• Question 1472:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$25,000>, Year 1: $5,000, Year 2: $0, Year 3: $30,000? (Note that the <> are used to indicate a negative number).

  A. 6. 21%
  B. 15. 15%
  C. 14. 34%
  D. 13. 37%
  E. 12. 12%
  D. 13. 37%

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 25000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 0 ENTER DownArrow DownArrow 30000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 25000 CHS BlueShift CFo 5000 BlueShift CFj 0 BlueShift CFj 30000 BlueShift CFj Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1473:

  What quarterly payment would you have to make to pay off a $5,000 debt in 7 years, assuming the first payment is made 3 months from today and interest accrues at 6% per year, compounded quarterly?

  A. $220.01
  B. $72. 96
  C. $145. 01
  D. $372. 96
  E. $757. 78
  A. $220.01

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  Explanation

  On the BAII Plus, press 28 N, 6 divide 4 = I/Y, 5000 PV, 0 FV, CPT PMT. On the HP12C, press 28 n, 6 ENTER 4 divide i, 5000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/ Y value set to 1. The value of "N" is set to 28 since there are 28 quarters in 7 years (7 x 4 = 28).

• Question 1474:

  Which of the is/are true?

  I. The probability of type II error equals 1 - significance level.

  II. A higher significance level is makes it easier to reject a null hypothesis.

  III. Minimizing the chance of a Type I error minimizes the probability of Type II error.

  IV.

  The higher the probability of Type II error, the higher is the chance that the alternative will be accepted when it is true.

  A. II and IV
  B. IV only
  C. I and IV
  D. III and IV
  E. II only
  F. I only
  G. I, II and IV
  H. III only
  A. II and IV

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  Explanation

  The probability of Type I (not type II) error equals 1 - the significance level. The significance level represents an upper bound on the probability that the null hypothesis is true given the observed sample. The higher this level is set, the easier it is to say that the null is false (though the probability that you are making a mistake in rejecting the null also becomes higher!). Type I and Type II errors represent two different types of errors and are not directly related. A relationship like (III) appears tempting but is not true. For the purposes of CFA Level I exam, (IV) can be taken to be true, though technically, it is not entirely accurate. It holds only if the alternative hypothesis is exactly complementary to the null hypothesis i.e. the null hypothesis and the alternative hypothesis span the entire range of values that the variable being tested can take. If you set up the alternative hypothesis incorrectly, then rejection of the null does not necessarily imply that the alternative is true; it could also imply that you have not taken all the possibilities into consideration. For e.g., suppose a theory does not rule out the possibility that a variable X can be negative but you mistakenly set up the hypotheses as Ho: X = 0, H1: X > 0. Then clearly, even if you reject the null hypothesis, it does not imply that X can take only positive values. Recognizing such mistakes in setting up a hypothesis test is crucial.

• Question 1475:

  Tim Jan, CFA, relies on the earnings multiplier model in performing his fundamental analysis. His model is based on the constant-growth DDM. Jan is evaluating two stocks, A and B, that have the same 10% required rate of return and the same expected growth rate in dividends. Stock A has a higher retention rate than stock B. Which stock should have the higher P/E ratio?

  A. Stock A.
  B. Stock B
  C. Both stocks should have the same P/E ratio
  B. Stock B

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  Explanation

• Question 1476:

  Marlene Gooseberry, an institutional money manager with Middle Road Brokerage, has been examining a stock market series and has determined the following information:

  Anticipated ending value: 2060 Expected dividends during the period: $41.20 Observed beginning value: 1579.81 Required rate of return: 21%

  Using this information, what is the anticipated rate of return for this stock market series? (Assume a oneyear holding period).

  A. 33. 00%
  B. 27. 79%
  C. 25. 31%
  D. 21.31%
  E. None of these answers is correct.
  A. 33. 00%

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  Explanation

  To calculate the expected rate of return for a stock market series, the following information must be known:

  The beginning value for the series, the anticipated ending value for the series, and the amount of any dividends and/or shareholder distributions during the period.

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation:{E(R) = [(EV - BV + Div) / BV]}. Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.

  In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows: {E(R) = [$2060 - $1579.81 + $41.20] / $1579.81} = 33. 00%.

  This is significantly greater than the required rate of return (21%). If the assumptions behind the expected ending value and dividends are both realistic and accurate, investment in this stock market series is likely advisable.

• Question 1477:

  Assume that there is a widely accepted belief in the U.S. that 1-year interest rates will remain stable at their current level of 3. 25%. A yield curve derived from spot rates on U.S. Treasury securities shows the following data:

  Maturity Spot Rate

  1 year 3. 25%

  2 years 4. 00%

  5 years 6. 80%

  10 years 7. 20%

  The yield curve based on this data is least consistent with which theory of the term structure of interest rates?

  A. Pure expectations.
  B. Liquidity preference.
  C. Market segmentation.
  A. Pure expectations.

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  Explanation

• Question 1478:

  What annual interest rate, compounded annually, would cause a series of 20 deposits of $500 to accumulate to $18,000, if the first deposit is made one year from today?

  A. 6. 15%
  B. 4. 94%
  C. 7. 25%
  D. 2. 78%
  E. 5. 80%
  E. 5. 80%

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  Explanation

  On the BAII Plus, press 20 N, 0 PV, 500 PMT, 18000 +/- FV, CPT I/Y. On the HP12C, press 20 n, 0 PV, 500 PMT, 18000 CHS FV, i.

• Question 1479:

  Which of the following statements is true?

  A. One-half of all mutual funds are 95% or more diversified, providing one of their most important benefits. Studies have also found that most mutual funds have maintained the stability of their correlation with the market, and of their risk-adjusted returns.
  B. Three-quarters of all mutual funds are 90% or more diversified, providing one of their most important benefits. Studies also have found that most mutual funds have maintained the stability of their correlation with the market, and of their risk class.
  C. Three-quarters of all mutual funds are 95% or more diversified, providing one of their most important benefits. Studies also have found that most mutual funds have maintained the stability of their correlation with the market, but not of their risk class.
  D. Three-quarters of all mutual funds are 80% or more diversified, providing one of their most important benefits. But studies also have found that most mutual funds have not maintained the stability of their correlation with the market, or of their risk class.
  B. Three-quarters of all mutual funds are 90% or more diversified, providing one of their most important benefits. Studies also have found that most mutual funds have maintained the stability of their correlation with the market, and of their risk class.

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  Explanation

  Diversification is one of the main benefits of mutual funds. Most funds are highly diversified, and tend to keep their level of diversification with the market. They also tend to maintain the same risk class, if not consistent risk-adjusted returns.

• Question 1480:

  James Larson, CFA, manages a large capitalization growth mutual fund. Larson's benchmark is the Russell 1000 Growth index. Larson's colleague, Kevin Moore, CFA, manages an index fund which mimics the Russell 1000 index. Moore

  believes that the capital markets are fully efficient, while Larson disagrees. Larson defends his position with the following supporting statements. Statement 1:Market participants must be adequately compensated for processing new

  information to ensure the markets remain efficient. Yet a perfectly efficient market provides no incentive to sufficiently reward investors for processing new information. Hence, markets cannot be fully efficient.

  Statement 2:Low trading costs have led to greater trading activity, which has had the unintended consequence of greater securities mispricing.

  Are Larson's statements correct?

  A. Yes.
  B. Only Statement 1 is correct.
  C. Only Statement 2 is correct.
  B. Only Statement 1 is correct.

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  Explanation