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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1811:

  Name the type of fee charged by a fund to cover distribution costs?

  A. management fees
  B. 12b-1
  C. commissions
  D. low-load
  E. deferred sales load
  F. no-load
  B. 12b-1

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  Explanation

  The 12b-1 plan allows a fund to deduct as much as 1.25 percent of average net assets per year to cover distribution costs such as advertising, brokers' commissions and marketing expenses.

• Question 1812:

  Joan, an investment counselor, states in her firm's written promotional material that she is a CFA candidate. She has indeed enrolled in the program, but failed Level I five years ago, has not taken any exams since and is not enrolled in the next exam. Which of the following statements is correct?

  A. Joan is in compliance with the correct use of the CFA designation because she states she is a candidate.
  B. Joan is not in compliance with the correct use of the CFA designation. To be in compliance she must state she is a Level I candidate.
  C. None of these answers.
  D. Joan is not in compliance with the correct use of the CFA designation. Because she is not registered for the next exam, she is not a candidate.
  D. Joan is not in compliance with the correct use of the CFA designation. Because she is not registered for the next exam, she is not a candidate.

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  Explanation

  Under Standard II (A) - Use of Professional Designation, a person must be registered to take the next scheduled CFA exam to be a "candidate" in the CFA Program. Therefore, because Joan is not scheduled to take the next exam, she is not a candidate. There is no designation for someone who has passed Level I, II, or III. However, candidates may state that they have completed Level I, II, or III, as the case may be.

• Question 1813:

  A financial auditor's report is required to:

  I. make sure that no fraudulent activity is occurring with the accounting systems.

  II. provide reasonable assurance that there are no material errors in the statements.

  III. attest to the fact that the auditor has performed adequate testing on the company's accounting system to ensure that the financial reporting is accurate.

  IV.

  state an opinion about the controls and checks present in the firm's reporting procedures.

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

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  Explanation

  IV is usually reported to management but not in the audit report. Also, a financial auditor, would, in the course of her audit, check for material misstatements but is not responsible for unearthing fraudulent activities.

• Question 1814:

  Common stocks that experience dividend growth than is consistently higher than their required rates of return

  A. are valued very highly using the infinite period Dividend Discount Model.
  B. cannot be valued using the infinite period Dividend Discount Model.
  C. are prime candidates for valuation using the infinite period Dividend Discount Model.
  D. tend to underperform the market.
  B. cannot be valued using the infinite period Dividend Discount Model.

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  Explanation

  The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. If the growth rate of dividends exceeds the required rate of return, the value of the stock is shown to be negative, which is impossible. The infinite period Dividend Discount Model cannot be used to value such stocks.

• Question 1815:

  When estimating an industry's risk premium, the following should be examined for the industry and compared to the aggregate market

  A. country risk
  B. business risk
  C. all of these are correct
  D. financial risk
  E. liquidity risk
  F. the industry required rate of return
  G. exchange rate risk
  C. all of these are correct

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  Explanation

  Alternatively, you can estimate the risk premium based on the CAPM, which implies that the risk premium is a function of the systematic risk of the asset.

• Question 1816:

  What annual interest rate, compounded annually, will cause an original deposit of $500 to grow to $625, after 3 years?

  A. 7. 27%
  B. 9.14%
  C. 6. 78%
  D. 7. 72%
  E. 2. 57%
  D. 7. 72%

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  Explanation

  On the BAII Plus, press 500 PV, 625 +/- FV, 0 PMT, 3 N, then CPT I/Y. On the HP12C, press 500 PV, 625 CHS FV, 0 PMT, 3 n, then press i.

• Question 1817:

  Contingent losses are generally recognized when they are ________.

  A. measurable
  B. probable and measurable
  C. measurable and realized
  D. probable
  B. probable and measurable

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  Explanation

  Contingent losses are generally recognized when they are both probable and measurable.

• Question 1818:

  A light bulb manufacturer would like to supply only those bulbs which have a life of 2,000 hours or more. Otherwise, it wants the bulbs to be rejected at the assembly line. The statistician hired by the bulb manufacturer is trying to frame the situation as a hypothesis testing problem. He should specify the null and alternate hypothesis as:

  A. Ho: average life < 2,000; H1: average life > 2,000
  B. Ho: average life = 2,000; H1: average life > 2,000
  C. Ho: average life = 2,000; H1: average life < 2,000
  D. Ho: average life >= 2,000; H1: average life < 2,000
  D. Ho: average life >= 2,000; H1: average life < 2,000

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  Explanation

  In any experiment, you have a natural candidate for a default hypothesis that is maintained to be true until there is sufficient evidence to reject it. This is the hypothesis that must be selected as the null. Inthe present example, the manufacturer is in the business of supplying bulbs which have an average life of more than 2000 hours. So it is logical to assume that the processes usually produce such bulbs and occasionally produce faulty bulbs which have a shorter average life. Hence, the null hypothesis must be that any given bulb has an average life of more than 2000 hours and the alternative hypothesis must be the complement (i.e. average life is less than 2000 hours).

• Question 1819:

  Calculate the earnings per share (EPS) for the plastic bead industry using the information below. The industry's EPS is closest to:

  A. $110.
  B. $22.
  C. $54.
  D. $40.
  D. $40.

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  Explanation

  The formula for the industry EPS is:

  EPSindustry= [(Per share Sales Estimate) * (EBITDA%) ?D ?I] * (1 - t)

  = [($250 * 0.60) - $50 - $20] * (1 ?0.5) = $40.00

• Question 1820:

  The monthly compounded rate is 15% quoted on an annualized basis. The equivalent quarterly compounded rate is:

  A. 15. 19%
  B. 15. 05%
  C. 15. 31%
  D. 14. 8%
  A. 15. 19%

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  Explanation

  To solve such problems, think about investing a dollar for 1 year. The final amount should be the same under both the quotations. Under quarterly compounded rate, r, $1 grows to (1+r/4)^4 in 1 year. Under monthly compounding, it grows to (1+0.15/12)^12 = 1.1608. Since these two should be equal, we get (1+r/4)^4 = 1.1608, giving r = 15. 19%. Note that the quarterly compounded rate must be larger than the monthly compounded rate, ruling out 14. 8% automatically.