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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1921:

  According to The Code of Ethics, members of AIMR shall: "Use reasonable care and exercise ________."

  A. each and every day
  B. none of these answers
  C. independent professional judgment
  D. optimal diversification
  E. open communications with clients
  C. independent professional judgment

  ---

  Explanation

  According to The Code of Ethics, members of AIMR shall: "Use reasonable care and exercise independent professional judgment."

• Question 1922:

  Contrarians interpret a high cash ratio in mutual funds at market lows as an indication that the mutual fund managers are:

  A. about to enter the market with more cash.
  B. aggressive.
  C. bullish.
  D. bearish.
  D. bearish.

  ---

  Explanation

  According to the contrarians, most market participants make wrong investment decisions as the market approaches the peak or trough in a cycle. One category of market participants they consider is mutual funds. The cash ratio of mutual funds is the fraction of total assets that mutual funds maintain in the form of cash. A high ratio (around 12-13%) at a market low is considered by contrarians as a signal that the funds are bearish and a low ratio (7-8%) at a market high is interpreted as an indication that the funds are bullish. The Contrarians then take exactly the opposite position

• Question 1923:

  An analyst would buy when this ratio approaches 13 percent and sell when it approaches 7 percent. This relates to:

  A. Odd-Lot, Short-Sales Theory
  B. Mutual Fund Cash Positions
  C. Block Uptick-Downtick Ratio
  D. Margin Debt
  B. Mutual Fund Cash Positions

  ---

  Explanation

  Mutual funds tend to keep a portion of the investment portfolio in cash, specifically in the region of 13 to 7 percent, buying and selling cash positions to keep the cash portion in this band.

• Question 1924:

  You can enter a derivative contract that will pay $100 at the end of a year if the price of oil exceeds $25 per barrel, or $50 if it is equal to $25 or lower. The probability that oil will exceed $25 by the end of one year is 60%. If interest is 4% for one year, what should the fair price of the contract be?

  A. $80.00
  B. $76. 92
  C. $60.00
  D. $83. 20
  B. $76. 92

  ---

  Explanation

  The expected payoff for the contract is $100 * 0.60 + $50 * 0.40 = $80. At 4% interest, the present value of the expected payoff is $80/1.04 = $76. 92. A deviation from this value would represent an example of the investment consequences of inconsistent probabilities.

• Question 1925:

  McCarver Inc. is considering the following mutually exclusive projects: Project A Project B TimeCash FlowCash Flow 0-$5,000-$5,000 1200 3,000 2800 3,000 33,000 800 45,000 200 At what cost of capital will the net present value of the two projects be the same?

  A. 16. 15%
  B. 17. 72%
  C. 17. 80%
  D. 15. 68%
  E. 16. 25%
  A. 16. 15%

  ---

  Explanation

  Find the differences between the two projects' respective cash flows as follows:

  (Project A CF - Project B CF).

  CF(0) = -5,000 - (-5,000) = 0.

  CF(1) = 200 - 3,000 = -2,800.

  CF(2) = -2,200.

  CF(3) = 2,200.

  CF(4) = 4,800.

  Enter these CFs and find the IRR = 16. 15% which is the crossover rate.

• Question 1926:

  One method management can "manipulate" earnings is by

  A. reporting a gain on the sale of subsidiary when the operating income of the firm is showing a loss.
  B. changing from LIFO to any other inventory valuation method.
  C. reporting the full amount of anticipated restructuring costs.
  D. changing from the percentage-of-completion method.
  E. reporting additional losses in bad years, assuming future reported profits will increase.
  E. reporting additional losses in bad years, assuming future reported profits will increase.

  ---

  Explanation

  Known as "Big Bath" accounting, by taking all available losses at one time, management believes it can clear all the losses from the profit and loss statement and begin to increase profits.

• Question 1927:

  Which of these funds typically charge a sales fee when the fund is sold?

  I. Funds with contingent, deferred sales loads

  II. Funds under 12b-1 plans

  III. Low-load funds

  IV.

  No-load funds

  V.

  Closed-end funds

  A. II only
  B. I, II and V
  C. I and III
  D. I only
  E. I, II and III
  F. III only
  D. I only

  ---

  Explanation

  Funds with contingent, deferred sales load charges sales fee if the shares are sold before a certain duration, low-funds charge a small sales fee. Not all funds under the 12b-1 plan do necessary charge sales fee. Closed-end funds trade at a discount usually to the NAV.

• Question 1928:

  The crowding-out model implies that a

  A. budget surplus will be highly effective against inflation.
  B. budget deficit is likely to stimulate aggregate demand and trigger a multiplier effect that will lead to inflation.
  C. budget deficit will increase the real interest rate and thereby retard private spending.
  D. budget surplus will retard aggregate demand and throw the economy into a downward spiral.
  C. budget deficit will increase the real interest rate and thereby retard private spending.

  ---

  Explanation

  The crowding out theory implies that government borrowing drives up real interest rates and thus crowds out" private investment. Private investment falls under higher interest rates because the cost of investment (the real interest rate) rises if the government borrows heavily. Under the usual law of supply and demand, the government causes the interest rate to rise under deficit spending because there is a limited supply of loanable funds. The government competes with the private sector for these resources and thus drives up the price (i.e., the interest rate).

• Question 1929:

  The Performance Presentation Standards maintain that composites should cover a minimum of ________ years, or present the entire record of the firm, if shorter.

  A. ten
  B. eight
  C. seven
  D. two
  E. five
  A. ten

  ---

  Explanation

  A 10 year performance record (or a record for the period since firm inception if inception is less than 10 years) must be presented.

• Question 1930:

  Which of the following statements is most correct?

  A. If it could be demonstrated that a clientele effect exists, this would suggest that firms could alter their dividend payment policies from year to year to take advantage of investment opportunities without having to worry about the effects of changing dividends on capital costs.
  B. Each of these statements are false.
  C. If a company raises its dividend by an unexpectedly large amount, the announcement of this new and higher dividend is generally accompanied by an increase in the stock price. This is consistent with the bird-in-the-hand theory, and Modigliani and Miller used these findings to support their position on dividend theory.
  D. If the dividend irrelevance theory (which is associated with the names Modigliani and Miller) were exactly correct, and if this theory could be tested with "clean" data, then we would find, in a regression of dividend yield and capital gains, a line with a slope of -1.0.
  E. The tax preference and bird-in-the-hand theories lead to identical conclusions as to the optimal dividend policy.
  D. If the dividend irrelevance theory (which is associated with the names Modigliani and Miller) were exactly correct, and if this theory could be tested with "clean" data, then we would find, in a regression of dividend yield and capital gains, a line with a slope of -1.0.

  ---

  Explanation

  The main conclusion of MM's irrelevance theory is that dividend policy does not affect the required rate of return on equity. MM theorized that k(s) is independent of dividend policy, implying that investors are indifferent between dividends and capital gains.