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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1801:

  Which of the following statements is/are correct under the Code and Standards?

  I. AIMR members are prohibited from undertaking independent practice in competition with their employer.

  II. Written consent from the employer is necessary to permit independent practice that could result in compensation or other benefit in competition with a member's employer.

  III. Written consent from the outside prospective client is necessary to permit independent practice that could result in compensation or other benefit in competition with a member's employer.

  IV.

  Members are prohibited from making arrangements or preparations to go into a competitive business before terminating their relationship with their employer.

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

  ---

  Explanation

  This question pertains to Standard III (B), which states that members may undertake independent practice that may result in compensation or other benefit in competition with a member's employer, so long as they obtain written consent from both their employer and those for whom they undertake the independent practice. Statements II and III are consistent with this Standard. Statement I is incorrect because the Standards do not completely prohibit independent practice. Also, Statement IV is incorrect because the Standards allow members to make arrangements or preparations to go into competitive business so long as those arrangements do not interfere with their duty to their current employer.

• Question 1802:

  A bell-shaped, symmetrical frequency distribution has a mean of 45. If 95% of the observations on the variable fall between 30 and 60, the standard deviation of the variable is:

  A. 5. 00
  B. 7. 50
  C. Insufficient information
  D. 15. 0
  B. 7. 50

  ---

  Explanation

  95% of the observations in a bell-shaped, symmetrical frequency distribution lie within approximately 2 standard deviations of the mean. The standard deviation is then (45-30)/2 = 7. 50.

• Question 1803:

  Calculate the cost of debt for the following firm:

  Borrowing Rate 9.5%

  Historical Beta .97

  Marginal Tax Rate 40%

  Credit Rating BB+

  Owner's Equity 15%

  Quick Ratio 1.7

  EPS $1.70

  P/E ratio 12

  Estimated Dividends $.30

  A. 8.075%
  B. 6. 27%
  C. 1.43%
  D. 5. 7%
  E. 1.5%
  F. 9.5%
  D. 5. 7%

  ---

  Explanation

  The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 9.5%(1 - .4) = 9.5%(.6) = 5. 7%.

• Question 1804:

  Given that the risk-free rate of return is 6%, what is the value of a riskless zero-coupon bond with which the principal payment is $10,000 in 15 years?

  A. $5,733
  B. $4,173
  C. $5,929
  D. $6,841
  E. $7,126
  F. Not enough information
  B. $4,173

  ---

  Explanation

  The value of a zero-coupon bond is equal to the present value of its principal payment. The required rate of return on a riskless bond is the risk-free rate of return. Usingappendix C in the book by Reilly and Brown, the present value of the bond is $10,000 x0.4173 = $4,173, or $10,000/(1.06^15).

• Question 1805:

  A firm wants to decrease its debt-to-asset ratio without affecting its current ratio. Which of the following actions can it undertake?

  I. Retire some of its outstanding bonds by using proceeds from the sale of old assets.

  II. Increase sales on credit.

  III. Pay off a part of the "salaries payable" account using cash.

  IV.

  Issue new stocks and invest the proceeds to purchase a production plant.

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

  ---

  Explanation

  Both "accounts receivable," which represents sales on credit and "salaries payable" are current accounts. Therefore, if you do not want to affect current ratio, II and III are not acceptable strategies. When old assets are sold and the proceeds used to retire outstanding bonds, the debt-to-asset ratio decreases. This is because debt/asset ratio is almost always less than 1 (we will ignore abnormal cases where book equity can go negative; e.g. the case where the firm keeps borrowing and paying out the proceeds as dividends). Hence, when both numerator and denominator are decreased, the ratio decreases. However, the current portion of the long-term debt also gets retired, increasing the current ratio. So I is also not an acceptable strategy, though at first glance it appears so. With IV, debt is unaffected but assets increase, decreasing the debt/asset ratio.

• Question 1806:

  The two primary qualities of accounting information to make it useful for decision-making are ________.

  A. materiality and comparability
  B. full disclosure and relevance
  C. reliability and comparability
  D. relevance and reliability
  D. relevance and reliability

  ---

  Explanation

  The financial information used to make decisions should be both reliable and relevant.

• Question 1807:

  What degree of relationship do values of the correlation coefficient (r) with magnitudes close to 1.00 indicate?

  A. Weak
  B. Strong
  C. Moderate
  D. None
  B. Strong

  ---

  Explanation

  The closer to 1, the stronger the relationship.

• Question 1808:

  Which of the following must be estimated to determine the value of a stock that is to be held for one year?

  A. all of these answers
  B. required rate of return
  C. dividends
  D. expected sale price
  A. all of these answers

  ---

  Explanation

  In order to determine the value of a stock that is to be held for one year, dividends, the required rate of return and the expected sale price must be estimated.

• Question 1809:

  Which of the following cannot be eliminated through diversification?

  I. Stand-alone risk

  II. Unsystematic risk

  III. Systematic risk

  IV.

  Market risk

  V.

  Beta risk

  VI. Corporate risk

  VII. Alpha risk

  VIII.

  Gamma risk

  A. I, II, V, VII, VIII
  B. I, III, IV, VI, VII, VIII
  C. I, II, V, VI
  D. II, III, VI
  E. III, IV, V
  E. III, IV, V

  ---

  Explanation

  Of the various components of asset risk, only systematic risk cannot be diversified away. Systematic risk measures that part of asset risk that is inherent regardless of the level of diversification, and is measured by the Beta coefficient. Systematic risk is also referred to as "market risk" and "beta risk." Corporate risk is defined as the variability of an asset's 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. Stand-alone risk is defined as the variability of an asset's expected returns if it were the only asset of a firm and the stock of that firm was the only security in an investor's portfolio. This type of risk is definitively reduced through diversification, and is commonly referred to as "unsystematic risk."

• Question 1810:

  Miller heads the research department of a large brokerage firm. The firm has many analysts, some of whom are subject to the Code and Standards. If Miller delegates some supervisory duties, which statement best describes her responsibilities under the Code and Standards?

  A. Miller's supervisory responsibilities do not apply to those subordinates who are not subject to the Codes and Standards.
  B. Miller no longer has supervisory responsibility for those duties delegated to her subordinates.
  C. Miller retains supervisory responsibility for those duties despite her delegation of some duties.
  D. AIMR's Standards prevent Miller from delegating supervisory duties to subordinates.
  C. Miller retains supervisory responsibility for those duties despite her delegation of some duties.

  ---

  Explanation

  Under Standard III (E), Responsibilities of Supervisors, members may delegate supervisory duties to subordinates but such delegation does not relieve members of their supervisory responsibilities. Moreover, whether or not Miller's subordinates are subject to AIMR's Code and Standards is irrelevant to her supervisory responsibilities. Thus, Miller still retains supervisory responsibilities.