CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 1591:

  The implications of stock market efficiency for fundamental analysis indicates that using the top-down approach to analyze a firm will yield:

  A. superior returns using past and current information.

  B. superior returns compared to a randomly selected buy-and-hold portfolio of stocks.

  C. returns that are not superior if the analysis only looks at past and current information.

  D. superior returns using only past information.

  Correct Answer: C

  The evidence is that fundamental analysis does not lead to superior returns using the top-down approach if the analyst uses only past and current information. The analyst's job has to be directed towards doing a superior job of estimating the variables that cause long-run trends in realized returns.

• Question 1592:

  Market efficiency is NOT based on which of the following assumptions?

  A. A large number of profit maximizing participants are analyzing securities independently.

  B. All of these choices are correct.

  C. Market participants always correctly adjust prices when new information is received.

  D. The expected returns implicitly include risk in the price of a security.

  Correct Answer: C

  Market efficiency does not assume that market participants correctly adjust prices, just that their price adjustments are unbiased.

• Question 1593:

  An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. If the shares of stock later sold for $200 per share, what is the rate of return on the margin transaction?

  A. 400%.

  B. 100%.

  C. 200%.

  D. 500%.

  Correct Answer: A

  200 shares at a cost of $100/share is $20,000 (i.e., 200x100). With a 40% initial margin requirement, the cost of the investment would be $20,000x0.4=$8,000. When the shares are sold, the portfolio is worth $40,000 ($200x200). Hence, the rate of return would be [(40,000/8,000)-1]x100 = 400%.

• Question 1594:

  All of the following statements are true about futures and options clearing houses except:

  A. The clearinghouse acts as the opposite side of all trades once they are initiated.

  B. The clearinghouse guarantees that traders in the futures market will honor their obligations.

  C. The clearinghouse requires the daily settlement of all margin accounts.

  D. Clearinghouses have defaulted on less than one half of one percent of their trades.

  Correct Answer: D

• Question 1595:

  Which of the following statements about margin is false?

  A. The initial margin must be posted within three days of the trade.

  B. Each trader's margin account is marked-to-market at the end of every day to reflect any gains and losses they have experienced for that day.

  C. If the margin account balance falls below the maintenance margin level, the trader must bring it back up to the initial margin level.

  D. The initial margin on a contract approximately equals the maximum daily price fluctuation of the contract.

  Correct Answer: A

  Margin must be posted before the trade.

• Question 1596:

  Which one of the following statements is true?

  A. When the stock price is above the strike price, a put option is in-the-money.

  B. When the stock price is below the strike price, a call option is in-the-money.

  C. When the stock price is above the strike price, a put option is out-of-the-money.

  D. When the stock price is below the strike price, a call option is at-the-money.

  Correct Answer: C

• Question 1597:

  Which of the following statements about put options is false?

  A. The most the buyer of a put can lose is the premium.

  B. The most the buyer can gain is unlimited.

  C. The most the writer can lose is the stock's price less the premium.

  D. The most the writer can gain is the put's premium.

  Correct Answer: B

• Question 1598:

  Which of the following statements about call options at expiration are true?

  A. The call buyer's maximum loss is the call option's premium.

  B. The profit potential to the buyer of the option is unlimited.

  C. The potential loss to the writer of the call option is unlimited.

  D. The greatest profit the writer of a call option can make is the stock price minus the premium.

  Correct Answer: D

• Question 1599:

  Frank Holmes, CFA, is reviewing Martha Inc, a distributor. Holmes is interested in the company's European-style call option, which has a value of $5.90. Currently, Martha's stock is trading at $33 per share and pays no dividend. The exercise price of both the call and put options is $30, with 80 days to expiration. The current risk-free rate is 5.50%. Martha's put option sells for $2.75. Calculate the synthetic call option value.

  A. $3.35

  B. $5.75

  C. $6.10

  Correct Answer: C

• Question 1600:

  Kim Lee is valuing a closely held private shoe retailing company. She compares the company to other shoe retailing competitors that are publicly traded and are highly liquid. Relative to the private company, the shares of the publicly traded competitors most likely include a:

  A. marketability discount.

  B. minority interest discount.

  C. control premium.

  Correct Answer: B