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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1671:

  What is the name of the act enacted in 1940 that reflects a Congressional recognition of the "delicate" fiduciary nature of an investment advisory relationship and the intent to eliminate, or at least to expose all conflicts of interest?

  A. The Investment Company Act
  B. The Congressional Investor's Protection Act
  C. The U.S. Investment Advisers Act
  D. The U.S. Fiduciary-Investor Act
  C. The U.S. Investment Advisers Act

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  Explanation

  The U.S. Investment Advisers Act of 1940 (Advisers Act) states "that advisors cannot employ any device or scheme to defraud any client or prospective client; engage in any transaction or course of business that may operate as a fraud or deceit upon any client or prospective client; engage in transactions as a principle or as an agent in a client's account without first disclosing the transaction to the client and receiving the client's consent; or engage in any act or course of business that is fraudulent, deceptive, or manipulative."

• Question 1672:

  Which of the following types of risk measures the variability of an asset's expected returns, assuming that the asset is not the only asset of the company in question while at the same time not taking into consideration the effects of shareholder diversification? Choose the best answer

  A. Beta coefficient
  B. Unsystematic risk
  C. Market risk
  D. More than one of these answers is correct
  E. Corporate risk
  F. Alpha risk
  E. Corporate risk

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  Explanation

  Corporate risk is defined as the variability of an assets expected returns without taking into consideration the effects of shareholder diversification. This is one step away from Stand-alone Risk, which measures the risk of an asset not only without taking into consideration the effect of shareholder diversification, but of Company diversification as well. Stand-alone risk assumes that the asset in question is the only asset of the firm and that the securities of the firm are the only assets in investors' portfolios. Corporate risk takes into consideration that firms will diversify their asset bases.

• Question 1673:

  Consider the following three investments with annual compounding:

  Present value years interest rate 1.$22,500 56% per year 2. $10,000 75% per year 3. $15,000 38% per year

  The future values of the 3 investments, at the ends of their investment periods, are:

  A. $26,454, $12,067, $17,181
  B. $23,850, $10,500, $16,200
  C. $30,110, $14,071, $18,896
  D. $16,813, $7,107, $11,907
  C. $30,110, $14,071, $18,896

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  Explanation

  Future value = Present value*(1+r)^N for annual compounding. Therefore,

  Present value years rate Future value 1.22,500 56% 22,500*(1.06)^5 = 30,110 2. 10,000 75% 10,000*(1.05)^7 = 14,071 3. 15,000 38% 15,000*(1.08)^3 = 18,896

  Note that the future value must always be greater than the present value.

• Question 1674:

  Which of the following does not affect a firm's cash flows:

  A. warranty expenses.
  B. sale of an "impaired" asset.
  C. purchase of a trademark financed by stock issuance.
  D. change of depreciation method.
  C. purchase of a trademark financed by stock issuance.

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  Explanation

  When the depreciation method is changed, the taxes paid are affected, thus affecting the cash flows indirectly. Sales or purchases of assets and expenses like warranty costs have a direct impact on cash flows. However, when stock is issued to finance an acquisition, there is no net cash involved in the transaction.

• Question 1675:

  Which of the following best describes an option that gives the owner the right to sell 100 shares of stock only on the expiration date three months from now at a strike price of $35, when the current stock price is $25? This option is an:

  A. out-of-the-money American put option.
  B. in-the-money European put option.
  C. out-of-the-raoney European put option.
  B. in-the-money European put option.

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  Explanation

• Question 1676:

  Marmella is a corporate associate with an investment banking firm, Corpfins. She recently put together a business proposal which would allow Corpfins to take on White Papers Inc., a producer of premium printing paper, as a business client for all its underwriting needs. In this proposal, Marmella has promised that her team will provide full research coverage for White Papers, with the clause that the team will not be the first on the street to release a "sell" recommendation. Marmella has

  A. violated Standard IV (A.3) - Independence and Objectivity.
  B. violated Standard IV (A.1) - Reasonable Basis and Representations.
  C. not violated the AIMR code of ethics.
  D. violated Standard II (B) - Professional Misconduct.
  A. violated Standard IV (A.3) - Independence and Objectivity.

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  Explanation

  By agreeing to a clause that prevents her from releasing an objective research report under all circumstances, Marmella has violated Standard IV (A.3) - Independence and Objectivity - because not only is there an appearance of impropriety and conflict of interest, but the contract clearly hinders Marmella's judgment.

• Question 1677:

  Which of the following statements about securities markets is FALSE?

  A. Characteristics of a well-functioning securities market include: many buyers and sellers willing to trade at below market price, low bid-ask spreads, timely information on price and volume of past transactions, and accurate information on supply and demand.
  B. Secondary markets, such as the over-the-counter (OTC) market, provide liquidity and price continuity.
  C. A limit buy order and a stop buy order are both placed below the current market price.
  D. When Conglomerate, Inc. trades directly with MultiNational, Ltd., it is using the fourth market.
  C. A limit buy order and a stop buy order are both placed below the current market price.

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  Explanation

  A limit buy is placed below the current market price, but a stop buy order is placed above the current market price (stop buy orders are often placed to protect a short sale from a rising market).

  The other choices are true. A well-functioning securities market includes the following characteristics:

  The fourth market is the direct exchange of securities (no intermediaries and no transaction costs).

• Question 1678:

  If you owe 3 debts ($800 due 3 months from now, $900 due 7 months from now, and $1,200 due 11 months from now), what single payment can you make today to settle them, if interest is assessed at 10% per year, compounded monthly?

  A. $2,387. 29
  B. $2,600.00
  C. $3,552. 39
  D. $2,724. 84
  E. $2,504. 88
  D. $2,724. 84

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  Explanation

  Find the answer to this question by solving 3 compound interest problems. On the BAII Plus, press 3 N, 10 divide 12 = I/Y, 0 PMT, 800 FV, CPT PV which yields $849.21. Then press STO 1. Then press 7 N, 900 FV, CPT PV, which yields $780.33. Then press + RCL 1 = STO 1. Then press 11 N, 1200 FV, CPT PV, which yields $1,095. 31. Press + RCL 1 = to see the answer. On the HP12C, press 3 n, 10 ENTER 12 divide i, 0 PMT, 800 FV, PV. Then press STO 1. Then press 7 n, 900 FV, PV. Then press RCL 1 + STO 1. Then press 11 n, 1200 FV, PV. Press RCL 1 + to see the answer. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1679:

  How will the dividend distribution and share prices react when a property's rent goes up in equity REIT?

  A. They will both stay the same.
  B. Dividend distribution will go down, share prices go up.
  C. They both will go up.
  D. They both will go down.
  E. Dividend distribution will go up, share prices go down.
  C. They both will go up.

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  Explanation

  With an equity REIT, when the property's rent goes up, so will the dividend distribution and normally the share prices as well.

• Question 1680:

  For a positively skewed, unimodal distribution, which of the following relationships holds?

  A. mean < mode
  B. mode < median
  C. mean > median
  D. mean < median
  C. mean > median

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  Explanation

  In a positively skewed distribution, very large values are more common than correspondingly small values. This skews the distribution to the right, moving the mean to the right of the median.