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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1551:

  An AIMR member has violated one of the AIMR code of ethics standards. However, according to the laws of the country governing his behavior, he has done nothing wrong. Then,

  A. AIMR can take disciplinary action against her.
  B. AIMR cannot take disciplinary action against her.
  C. there is no violation of the code since local laws were adhered to.
  D. none of these answers.
  A. AIMR can take disciplinary action against her.

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  Explanation

  A member must always abide by the AIMR code, unless the local laws in any given case are stricter, in which case, the stricter standard applies. Standard I. Hence, every violation of the code of ethics is always subject to disciplinary action.

• Question 1552:

  The sampling method in which a sample is selected by first dividing the population into groups and then selecting members from each group is known as:

  A. simple random sampling.
  B. stratified random sampling.
  C. cluster sampling.
  D. systematic random sampling.
  B. stratified random sampling.

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  Explanation

  The population is divided into strata or subcategories and a sample is randomly selected from each strata.

• Question 1553:

  Consider the following information about a common stock:

  Price per share: $115. 88 Next dividend per share: $2. 80 Required return: 15. 25% per year Expected growth rate: 12. 75% per year

  What is the value of this common stock?

  A. $129
  B. $112
  C. $101
  D. None of these answers is correct.
  E. $103
  F. The answer cannot be determined from the information provided.
  B. $112

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  Explanation

  To determine the value of a common stock using the Infinite Period Dividend Discount Model, use the following equation:

  {V = [d1 / (k - g)]}

  Where: V = the value of the common stock at t0, d1 = the annual dividend at t1 (which is found by multiplying d0 by (1 + g), k = the investor's required rate of return, and g = the anticipated annual growth rate.

  In this example, all of the necessary information has been provided, and incorporating this information into the Infinite Period DDM will lead to the following:

  {V = [$2. 80 / (0.1525 - 0.1275] = $112}

  This value is very close to the value of the common stock in the open market.

  An important observation: notice that we have valued this common stock as a perpetuity, rather than a finite series of cash flows. The reasoning behind this approach should be somewhat intuitive. Specifically, unlike a bond, whose cash flows

  possess a finite lifespan, the cash flows (i.e. dividends) produced by a common stock could theoretically last forever. Is this a realistic assumption for most common stocks? What about a stock that pays little or no dividend?

• Question 1554:

  Which of the following is a false statement?

  A. CPI is calculated using a market basket of consumer goods.
  B. CPI is a broad measure of prices throughout the economy.
  C. The GDP deflator is used to calculate real GDP from nominal GDP.
  D. Both CPI and the GDP deflator suffer from substitution bias.
  E. The CPI and the GDP deflator tend to move in the same direction.
  B. CPI is a broad measure of prices throughout the economy.

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  Explanation

  CPI is designed to measure the changes in the price level of consumer goods only. Since GDP includes productions in all sectors, not just the consumer sector, consumer price inflation is inadequate to calculate real GDP from nominal GDP.

• Question 1555:

  Which of the following AIMR Standards states that referral fees must be disclosed in writing to clients or customers?

  A. V
  B. VI (A)
  C. IV (B.8)
  D. IV
  C. IV (B.8)

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  Explanation

  Standard IV (B.8) - Disclosure of Referral Fees states: "Members shall disclose to clients and prospects any consideration or benefit received by the member or delivered to others for the recommendation of any services to the client or prospect."

• Question 1556:

  The matching principle requires that

  A. non-operating gains and losses should be netted against each other.
  B. a proportion of each dollar collected will be assumed to be a recovery of cost.
  C. revenues earned and expenses incurred in generating those revenues should be reported in the same income statement.
  D. assets will be matched to the liabilities incurred to purchase them.
  C. revenues earned and expenses incurred in generating those revenues should be reported in the same income statement.

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  Explanation

  Performance can be measured only if the related revenues and cost are accounted for in the same period.

• Question 1557:

  If the premium on the market portfolio increases, the price of a firm's share ________, all else equal.

  A. is not affected
  B. decreases
  C. increases
  D. can be all of these answers.
  B. decreases

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  Explanation

  If the premium on the market portfolio increases, the expected return on the stock goes up, too. All else equal, this can happen only if the price of the stock decreases.

• Question 1558:

  What is the present value today of these annual cash flows: <$10,000>, $5,000, $4,000, $3,000, $2,000? Assume the first cash flow occurs today and an interest rate of 8% per year, compounded annually. (Note that the <> are used to indicate a negative number).

  A. $1,910.54
  B. $2,045. 10
  C. $2,110.45
  D. $2,380.01
  E. $4,000.00
  A. $1,910.54

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  Explanation

  You could solve this question using several different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 10000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 8 ENTER DownArrow CPT. On the HP12C, press these keys: 10000 CHS BlueShift CFo 5000 BlueShift CFj 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj. Then press 8 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.

• Question 1559:

  Pickles Corp. is a company which sells bottled iced tea. The company is thinking about expanding its operations into the bottled lemonade business. Which of the following factors should the company incorporate into its capital budgeting decision as it decides whether or not to enter the lemonade business?

  A. All of the statements are correct.
  B. If the company doesn't produce lemonade, it can lease the building to another company and receive after-tax cash flows of $500,000 a year.
  C. The company will spend $3 million to renovate a building for the proposed project.
  D. If the company enters the lemonade business, its iced tea sales are expected to fall 5 percent as some consumers switch from iced tea to lemonade.
  E. None of the statements are correct.
  A. All of the statements are correct.

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  Explanation

  These are all incremental cash flows and should be considered.

• Question 1560:

  Jim, an investment manager with Smith, Kleen and Associates, is in the process of determining the annualized return for a client portfolio. Jim uses a specific three-step process to determine this annualized return, which is detailed as follows:

  Step 1:

  Jim prices the portfolio immediately prior to any significant addition or withdrawal of funds. The portfolio is broken into specific subperiods based on the dates of cash inflows and outflows. The product of the subperiods is 10 years.

  Step 2:

  Jim calculates the holding period return of the portfolio for each subperiod.

  Step 3:

  Jim calculates the geometric mean of the annual returns. This calculation is used as the annual portfolio return measure.

  Which of the following best describes the final calculation produced by Jim?

  A. Dollar-weighted rate of return
  B. Time-weighted rate of return
  C. Modified Internal Rate of Return
  D. Annualized holding period return
  E. Geometrical rate of return
  F. Asset-weighted rate of return
  B. Time-weighted rate of return

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  Explanation

  The process illustrated in this example is the calculation of the time-weighted rate of return. This method of calculating portfolio returns is superior in many respects to the dollar-weighted rate of return, which is also known as the IRR. The reason for this relative superiority is the fact that the time-weighted rate of return is not sensitive to portfolio additions or withdrawals. So said, the time-weighted rate of return is more popular in the field of investment management.

  While "annualized holding period return" is a tempting choice, it does not represent the best possible answer. "Geometrical rate of return" could refer to several return measures, but not the time-weighted rate of return.