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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1681:

  In the Keynesian aggregate expenditure model, the larger the marginal propensity to consume,

  A. more consumption expands as the result of a decline in investment.
  B. greater the marginal propensity to save.
  C. the smaller the multiplier.
  D. greater the change in income derived from a given change in private investment.
  D. greater the change in income derived from a given change in private investment.

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  Explanation

  The expenditure multiplier is found by M = 1/(1-MPC). Thus, the larger the MPC the larger the multiplier. The multiplier magnifies changes in aggregate expenditure into larger changes in aggregate output. the larger the multiplier then, the greater the change in income derived from a given change in private investment.

• Question 1682:

  Ball-Bearing, Inc. produces ball bearings automatically on a Kronar BBX machine. For one of the ball bearings, the mean diameter is set at 20mm. the standard deviation of the production over a long period of time was computer to be 0.150 mm. What percent of the ball bearings will have a diameter of 20.27 mm or more?

  A. 41.00%
  B. 85. 00%
  C. 12. 62%
  D. None of these answers
  E. 3. 59%
  E. 3. 59%

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  Explanation

  z = (x-u)/sigma = 20.27 - 20/0.15 = 1.8. from the z-table, z = 1.8 is 0.4641. So 1.0 - 0.9641 = 0.0359.

• Question 1683:

  If the use of leverage is ________, the performance presented must include the effects of the leverage.

  A. mandatory
  B. nondiscretionary
  C. discretionary
  D. optional
  C. discretionary

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  Explanation

  If the use of leverage is nondiscretionary (i.e. mandated by the client), performance must be presented on an all-cash basis.

• Question 1684:

  A firm's accountant has mistakenly overstated depreciation by 50 and understated accounts receivables by 35. The firm's tax rate is 40%. Then, which of the following is/are true?

  I. Income is understated by 30.

  II. Income is understated by 50.

  III. Operating cash flow is overstated by 55.

  IV.

  Operating cash flow is overstated by 85.

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

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  Explanation

  If depreciation is overstated by 50, the income is actually understated by 50*(1-tax rate) = 30. The understatement of accounts receivables does not affect the income statement; it understates the reported current assets. It also affects the operating cash flow. Note that operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts Since income is understated by 30, non-cash expense (depreciation) is overstated by 50 and noncash revenue (accounts receivable) is understated by 35, operating cash flow is overstated by -30 + 50 - (-35) = 55.

• Question 1685:

  Which of the following is true with respect to extraordinary items?

  I. Extraordinary items are recorded net of tax in income statement.

  II. Extraordinary items, by definition, are probable and unusual in nature.

  III.

  By definition, gains and losses from strikes are always extraordinary.

  IV By definition, gains and losses from sale of plant property and equipment are never extraordinary.

  A. I and IV, gains and losses from strikes are always extraordinary. IV By definition, gains and losses from sale of plant property and equipment are never extraordinary.
  B. I, III and IV
  C. II and IV
  D. I, II and III
  A. I and IV, gains and losses from strikes are always extraordinary. IV By definition, gains and losses from sale of plant property and equipment are never extraordinary.

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  Explanation

  Extraordinary items are infrequent and unusual in nature. Strikes are not considered extraordinary.

• Question 1686:

  Gamma-Theta is a financial software firm with gross sales of 176,000 last year. Its cost of goods sold equaled 25,685. Gamma-Theta's corporate tax rate is 35%. If its net income after taxes was 70,279, its operating expenses were ________.

  A. 31,889
  B. 42,193
  C. 29,495
  D. 51,722
  B. 42,193

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  Explanation

  Gamma-Theta's pre-tax income equals 70,279/0.65 = 108,122. Now, pre-tax income = gross sales - cost of goods sold - operating expenses. Therefore, 108,122 = 176,000 - 25,685 - operating expenses. This gives operating expenses = 42,193.

• Question 1687:

  Assume the following series of financial transactions:

  t0: Purchase 1500 shares of Allcycles.com for $18,555. 00 t1: Purchase an additional 500 shares for $8,130.00 t2: Purchase an additional 1000 shares for $18,000.00 t3: Sell 1000 shares for $19,810 t4: Sell the remaining 2000 shares for $42,400

  Investments of this type have typically justified a 12. 50% rate of return. Assuming no taxes or transaction costs, what is the dollar-weighted rate of return for this series of investments?

  A. 11.15%
  B. 14. 60%
  C. 12. 89%
  D. The answer cannot be calculated from the information provided.
  E. None of these answers is correct.
  F. 12. 32%
  C. 12. 89%

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this nomenclature is commonly used within the field of investment management. So said, the required rate of return is not explicitly factored into the calculation of the dollar-weighted rate of return; rather what is being determined is the rate which equates the present value of the cash inflows to the present value of the cash outflows. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. In this example, the cash flows have been stated, and no preliminary calculation is necessary. The portfolio cash flows are illustrated as follows:

  t0: ($18,555. 00) t1: ($8,130.00) t2: ($18,000.00) t3: $19,810.00 t4: $42,400.00

  Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 12. 885% for this investment

• Question 1688:

  Fabrice Miro and Victoria Leete are studying for the Level 1 CFA examination. Miro wants to test Leete's understanding of the graph of the capital market line (CML) and the efficient frontier. He develops the following statements and asks her to identify the one that is FALSE. Assuming that Leete answers correctly, which statement does she select?

  A. The market portfolio lies on the CML and has only unsystematic risk.
  B. The CML is not always straight.
  C. Investors move up and down the CML by varying the weightings of the risk-free asset and portfolio M by either lending or borrowing the risk-free asset.
  D. One weakness of the CML graph is that it measures standard deviation against returns.
  A. The market portfolio lies on the CML and has only unsystematic risk.

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  Explanation

  The first part of this statement is true - the market portfolio does lie on the CML. However, the market portfolio is completely diversified and thus has no unsystematic risk. The risk that remains is market portfolio risk, or nondiversifiable, or

  systematic risk.

  The other choices are true. The CML will "kink" if the borrowing rate and lending rate are not equal. The CML does measure standard deviation (or total risk) against returns, and this is considered a weakness since systematic, or

  undiversifiable, risk is what investors are compensated for undertaking. The securitymarket line (SML) better represents this because it measures systematic, or beta, risk against expected returns.

• Question 1689:

  Which of the following is not an assumption of technical analysis?

  A. Securities markets are weak-form efficient.
  B. Changes in the market value of any good are determined solely by supply and demand fluctuations.
  C. Securities prices exhibit identifiable patterns.
  D. Supply and demand is governed by both rational and irrational factors.
  E. More than one of these answers is correct.
  F. Securities prices move in identifiable trends.
  A. Securities markets are weak-form efficient.

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  Explanation

  Technical analysis is primarily grounded on three major assumptions - (1.) the market value of any good is determined solely by supply and demand, (2. ) supply and demand fluctuations are caused by both rational and irrational factors, and (3. ) the prices of individual securities and securities markets move in trends, i.e. securities markets "price-in" information slowly. The third assumption of technical analysis negates any belief in the Weak Form Efficient Market Hypothesis, which assumes that past performance data cannot be used to predict securities prices, and that the securities markets "price-in" information instantly. This "incongruence" with all forms of the EMH is cited as the greatest criticism of technical analysis.

• Question 1690:

  Suppose the least squares regression equation is Y' = 1202 + 1,133X. When X=3, what does Y' equal?

  A. None of these answers
  B. 5,734
  C. 4,601
  D. 8,000
  E. 4,050
  C. 4,601

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  Explanation

  Y' = 1202 + 1133(3) = 4601.