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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1531:

  Serena Zaltz is a portfolio manager at Katalina Investments, a small boutique in Connecticut. She currently manages 3 client accounts, one of which belongs to John Hersham. John recently told Serena that if his portfolio beat the SandP500 by 75 basis points over the next 3 months, he would give 10 basis points to her as a "superior performance reward." Serena told him this was unnecessary but John insisted that such an arrangement be made on a handshake. Serena subsequently spoke to her supervisor, Helena, about it and Helena did not object to the arrangement. Then, Serena has:

  A. has violated Standard IV (A.3) - Independence and Objectivity.
  B. has violated Standard III (D) - Disclosure of Additional Compensation Arrangements.
  C. not violated any code of conduct.
  D. has violated Standard IV (B.8) - Disclosure of Referral Fees.
  B. has violated Standard III (D) - Disclosure of Additional Compensation Arrangements.

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  Explanation

  While Serena may have informed her employer orally about her additional compensation arrangement, Standard III (D) requires written notification to the employer and this includes any form of communication that can be documented. Such written disclosures act as paper trails of all such arrangements and act as a deterrent to such arrangements except in the more compelling cases.

• Question 1532:

  An investor is considering investing in Tawari Company for one year. He expects to receive $2 in dividends over the year and feels he can sell the stock for $30 at the end of the year. What is the maximum he can pay now to earn at least a 14 percent return on his investment?

  A. $28.
  B. $29.
  C. $30.
  D. $32.
  A. $28.

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  Explanation

  HPR = [D + (End - Beginning]/Beginning 14 = [2 + (30 - P)]/P 1.14P = 32 so P = $28.07

• Question 1533:

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

  A. Probability of success remains constant from trial to trial
  B. Each outcome results from two trials
  C. Each trial is independent
  D. All of these answers are characteristics of the binomial distribution?
  E. Each outcome is mutually exclusive
  B. Each outcome results from two trials

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  Explanation

  The binomial distribution does not state that outcomes have to come from a certain number of trials.

• Question 1534:

  The short-interest ratio is equal to

  A. the outstanding short interest on an exchange divided by the daily volume of trading on the exchange. A low short-interest ratio would be interpreted by technical analysts as a bearish sign, because of the small potential demand for stocks by those who have sold short by not yet covered their sales.
  B. the outstanding short interest on an exchange divided by the daily volume of trading on the exchange. A high short-interest ratio would be interpreted by technical analysts as a bearish sign, because a large amount of short sales indicates investors' expectations of declining share prices.
  C. the outstanding short interest on an exchange divided by the market capitalization of shares on the exchange. A low short-interest ratio would be interpreted by technical analysts as a bullish sign, because a small amount of short sales indicates investors' expectations of rising share prices.
  D. the outstanding short interest on an exchange divided by the number of long positions held. A high short-interest ratio would be interpreted by technical analysts as a bullish sign, because of the large potential demand for stocks by those who have sold short but not yet covered their sales.
  A. the outstanding short interest on an exchange divided by the daily volume of trading on the exchange. A low short-interest ratio would be interpreted by technical analysts as a bearish sign, because of the small potential demand for stocks by those who have sold short by not yet covered their sales.

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  Explanation

  Technical analysts interpret the short-interest ratio contrary to initial intuition. Because short sales reflect investors' expectations of declining share prices, a large amount of short sales might be taken as a bearish sign. But technical analysts prefer to focus on the potential demand for shares that short sales create. Once an investor has sold short a stock, he will eventually have to repurchase it to cover his position.

• Question 1535:

  Each of the following is true regarding Standard II (A), except:

  A. You may not state that you have completed Level I, II, or III until you have received the CFA designation.
  B. This standard relates to oral statements.
  C. All of these answers.
  D. This standard relates to business cards and letterheads.
  E. You must be registered for the next CFA exam in order to call yourself a candidate.
  F. There is no designation for someone who has passed Level I, II, or III.
  A. You may not state that you have completed Level I, II, or III until you have received the CFA designation.

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  Explanation

  Standard II (A) relates to the responsibility of AIMR members and candidates to use their professional designation properly and in a non-misleading manner. A person must be registered to take the next scheduled CFA exam to be a "candidate" in the CFA program. There is no designation for someone who has passed Level I, II, or III of the CFA exam. Candidates may state, however, that they have completed Level I, II, or III. The standard applies to all related explanations or descriptions of the CFA designation, including letterheads and business cards, resumes, directory listings, printed advertising, brochures and oral statements to clients and prospects.

• Question 1536:

  Which of the following statements regarding confidence levels and/or tests of significance is/are false? Choose the best answer.

  A. In most hypothesis tests, the significance level is set equal to 0.10, 0.05, or 0.01. B. All else equal, the probability of a Type I error decreases as the level of confidence increases.
  C. The probability of a Type I error is denoted by the Greek letter alpha.
  D. The confidence level of a hypothesis test can be found by subtracting the level of significance from the number one.
  E. More than one of these answers is false.
  F. The significance level of a test is equal to the power of a test.
  F. The significance level of a test is equal to the power of a test.

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  Explanation

  Remember that the power of the test is equal to (1 - Type II error probability). This is because in most hypothesis tests, the level of significance, denoted by alpha, is set equal to the probability of a Type I error. Statisticians are primarily concerned with the probability of a Type I error, and rarely specify the probability of a Type II error. Determining the probability of a Type II error, which is defined as the act of incorrectly failing to reject the null hypothesis, is inherently difficult to determine. The probability of a Type I error, however, can be determined with relative ease. A Type I error is defined as the act of incorrectly rejecting the null hypothesis. The remaining answers are all correct.

• Question 1537:

  Which of the following is/are true about pension plans?

  I. In a defined benefit plan, the investment risks are borne by the employer.

  II. In a defined contribution plan, the investment risks are borne by the employee.

  III.

  The employee has investment flexibility with defined contribution plan.

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

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  Explanation

  In a defined benefit contribution plan, the employee makes definite contributions to the pension plan from the regular salary. Investment of these contributions is at the discretion of the employee and the size of the benefits paid out depends upon the total contributions made and the fund performance. Thus, in this plan, the risk of pension plan performance is borne by the employee and not the employer.

• Question 1538:

  A mortgage holding company has found that 3% of its mortgage holders default on their mortgage and lose the property. Furthermore, 90% of those who default are late on at least two monthly payments over the life of their mortgage as

  compared to 45% of those who do not default.

  What is the probability that a mortgagee with two or more late monthly payments will default on the mortgage and lose the property?

  A. 0.039
  B. 0.058
  C. 0.436
  D. None of these answers
  E. 0.027
  B. 0.058

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  Explanation

  We have P(def)=0.03. P(not def) = 0.97. P(two late payments/def) = 0.90. P(two late payments/not def) = 0.45. Using Bayes formula: p(def/two late payments) = (0.03*0.9)/(0.03*0.9 + 0.97*0.45) = 0.058.

• Question 1539:

  A firm's earnings break point equals $98 million. Its net income is $58 million and it is committed to a dividend payout ratio of 30%. It's after-tax cost of debt equals 9% and its shareholders demand an expected rate of return of 15%. The firm's WACC equals ________.

  A. 12. 2%
  B. 9.8%
  C. 11.5
  D. 10.3%
  C. 11.5

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  Explanation

  The retained earnings of the firm = $58*0.7 = $40.6 million. If the earnings breakpoint is $98 million then the firm must issue $(98-40.6) = $57. 4 million in debt to maintain constant D/E ratio. This implies that the firm's D/E ratio equals 57. 4/40.6 = 1.41. Debt comprises 57. 4/98 = 58.57% of the capital structure. Therefore, WACC = 0.5857*0.09 + 0.4143*15% = 11.49%.

• Question 1540:

  Projects A and B are mutually exclusive and will be repeated. The company's cost of capital is 12. 5 percent. tProj. A-Cash FlowsProj. B-Cash Flows 0- 10,000- 10,000 1+ 40,000+ 30,000 2+ 50,000+ 30,000 3+ 30,000+ 30,000 4+ 20,000+ 30,000 5+ 30,000 What is the equivalent annual annuity (EAA) of the best project?

  A. $24,227
  B. $27,192
  C. $32,811
  D. $23,243
  E. $35,000
  C. $32,811

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  Explanation

  First find the NPV of each project, using the cash flow register:

  Project A NPV = $98,617. 59.

  Project B NPV = $96,817. 05.

  Then find EAA:

  Project A:

  N = 4; I = 12. 5; PV = -98,617. 59; FV = 0; solve for PMT = $32,810.85.

  Project B:

  N = 5; I = 12. 5; PV = -96,817. 05; FV = 0; solve for PMT = $27,191.46.

  Project A has the higher EA

  A.