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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1951:

  Which of the following is not one of the three main determinants of the required rate of return on an asset?

  A. The risk premium on the asset
  B. The expected rate of inflation during the holding period
  C. The economy's real risk-free rate of return
  D. The Markowitz efficient frontier
  D. The Markowitz efficient frontier

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  Explanation

  Although the Markowitz efficient frontier may be used in the process of deriving the risk premium on the asset, it is not in itself one of the three main determinants of the required rate of return on an asset. All investments are affected by the real risk-free rate of return and the expected rate of inflation, because those two factors determine the nominal risk-free rate of return. The nominal risk-free rate of return plus the risk premium on the asset is equal to the asset's required rate of return.

• Question 1952:

  Which of the following are considered basic characteristics of a security and must be included in research reports?

  A. business risk
  B. degree of uncertainty
  C. annual expected income
  D. yield-to-maturity
  E. all of these answers
  F. both degree of liquidity and yield-to-maturity
  G. expected annual rate of return
  E. all of these answers

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  Explanation

  Members should include the following information in research reports:

  -expected annual rate of return

  -annual amount of income expected (current and future)

  -current rate of income return of yield to maturity

  -

  degree of uncertainty associated with cash flows

  -

  degree of marketability/liquidity

  -business, financial, political, sovereign and market risks

• Question 1953:

  Which one of the following will most likely reduce aggregate supply?

  A. a technological advance that reduces the cost of energy
  B. an increase in the nation's net investment rate
  C. an increase in the labor force participation rate
  D. regulatory action that generates more benefits than costs
  E. a substantial increase in the minimum wage
  E. a substantial increase in the minimum wage

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  Explanation

  An increase in the minimum wage reflects and increase in the cost of a resource, labor. This implies that the SRAS will shift inward because the costs of production are now higher. If the change is permanent, then LRAS will also shift inward.

• Question 1954:

  A(n) ________ in a nation's currency in the foreign exchange market compensates for the nation's high ________ rate.

  A. depreciation; exchange
  B. appreciation; exchange
  C. depreciation; inflation
  D. appreciation; inflation
  E. none of these answers
  C. depreciation; inflation

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  Explanation

  Exchange rate adjustments permit nations with even high rates of inflation to engage in trade with countries experiencing relatively stable prices. A depreciation in a nation's currency in the exchange market compensates for the nation's inflation rate.

• Question 1955:

  An improvement in technology would shift which of the following curves?

  A. aggregate demand and long-run aggregate supply
  B. short-run and long-run aggregate supply
  C. only short-run aggregate supply
  D. aggregate demand and short-run aggregate supply
  E. only aggregate demand
  B. short-run and long-run aggregate supply

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  Explanation

  Improvements in technology permit the economy to squeeze a larger output from a specific resource supply. Thus, such improvements enhance productivity and thereby shift the LRAS curve to the right.Before such technology shifts the long run aggregate supply however, the short run aggregate supply is affected. Thus, both the SRAS and LRAS curves shift outward under a technology improvement.

• Question 1956:

  Charlice is a portfolio manager who manages (with the help of four analysts) the pension plan assets of Gordon Industries. Charlice received this account four years ago from Gordon Industries Vice President, Michael Burnbaum, who is also in charge of investment oversight. To whom does Charlice owe fiduciary duties?

  I. Michael Burnbaum, in his capacity as Gordon Industries' Investment Officer.

  II. The employees of Gordon Industries.

  III.

  The pension beneficiaries at Gordon Industries.

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

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  Explanation

  A portfolio manager owes fiduciary responsibility to the beneficiaries of the portfolio he is managing. In case of pension plans, the loyalty is not owed to the person who hired the manager or to the entity that set up the fund. Rather, the responsibility lies toward the ultimate plan beneficiaries; in the case of Gordon Industries, it is the pension plan beneficiaries (though not all employees are pension recipients so II is not a valid choice). Standard IV (B.1) - Fiduciary Duties and the Topical Study, "Fiduciary Duty."

• Question 1957:

  Using the microanalysis approach to estimating a company's earnings multiplier, the multiplier is based on:

  I. the dividend payout ratio

  II. the required rate of return

  III. the company's relationship to the industry

  IV.

  the rate of growth

  V.

  the estimated earnings per share

  VI.

  the company's relationship to the market

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

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  Explanation

  The earnings multiplier, under the microanalysis approach, is estimated based on its three components: the dividend payout ratio, the required rate of return, and the rate of growth. Under the Macroanalysis approach, it is estimated from the relationships among the firm, its industry and the market. The estimates derived from each approach are resolved to settle on one estimate.

• Question 1958:

  Which of the following is true regarding probability?

  I. 0 < P(E) < 1: the probability of an event E is a number between 0 and 1, exclusive.

  II. The sum of the probabilities of any group of mutually exclusive events equals 1. III.

  0 <= P(E) <= 1: the probability of an event E is a number between 0 and 1, inclusive.

  A. III only.
  B. I and II.
  C. None of these answers is correct.
  D. II and III.
  A. III only.

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  Explanation

  III only is true: 0 <= P(E) <= 1: the probability of an event E is a number between 0 and 1, inclusive. A probability can equal 1 or 0; thus, statement I is false. Statement II would only be true if it read: The sum of the probabilities of any group of mutually exclusive and exhaustive events equals 1. Throwing a 6-sided die can lead to 6 different outcomes, each of which has probability of 1/6. However, If your group of mutually exclusive outcomes only included results 1 and 2, then the sum of those probabilities is not 1. Such a group would not be exhaustive because it excludes the outcomes 3, 4, 5, 6.

• Question 1959:

  When an investment manager uses client brokerage to purchase research services that benefit the investment manager; this is known as ________.

  A. under-the-table agreements
  B. soft dollars
  C. through-research agreements
  D. bartering arrangements
  E. shifting agreements
  B. soft dollars

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  Explanation

  An investment manager often has discretion over the selection of brokers executing transactions. Conflicts arise when an investment manager uses client brokerage to purchase research services that benefit the investment manager, which is commonly called "soft dollars," "soft pounds," or "soft commissions." Whenever a manager uses such client brokerage to purchase services that benefit him, as a fiduciary, he must disclose to clients the methods or policies followed to address the potential conflict.

• Question 1960:

  Which of the following statements is correct regarding Standard II (A) Use of Professional Designation?

  A. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write "Joe Martin, CFA II."
  B. All of these answers are correct.
  C. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write, "I am a Level III candidate in the CFA program."
  D. Joe Martin passed Level I and Level II of the CFA exams, but is not scheduled for the next Level III exam. He may write, "I am a Level III Candidate in the CFA program."
  C. Joe Martin passed Level I and Level II of the CFA exams and is scheduled for the next Level III exam. He may write, "I am a Level III candidate in the CFA program."

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  Explanation

  "Joe Martin, CFA II" is a misrepresentation and a violation of Standard II (A). There is no designation for someone who has passed Level I, Level II, or Level III. He may not state he is a candidate unless he is registered for the next exam.