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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2071:

  Eileen Hart, CFA, is a fixed income portfolio manager for MTY Investment Management. Hart's portfolio includes US agency mortgage-backed securities. Which of the following statements about U.S. agency mortgage-backed securities is least accurate?

  A. Cash flows from mortgage loans include prepayments, which could affect the future performance of Hart's portfolio.
  B. Pass-through securities issued by Ginnie Mae guarantee the timely payment of interest and principal.
  C. Collateralized mortgage obligations (CMO) redirect cash flows from the underlying mortgage pool to eliminate prepayment risk.
  C. Collateralized mortgage obligations (CMO) redirect cash flows from the underlying mortgage pool to eliminate prepayment risk.

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  Explanation

• Question 2072:

  The larger the critical value on the z-statistic,

  A. all of these answers can happen, depending on the R-square.
  B. the harder it is to reject the null hypothesis.
  C. the easier it is to accept the null hypothesis.
  D. the easier it is to reject the null hypothesis.
  E. none of these answers.
  B. the harder it is to reject the null hypothesis.

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  Explanation

  To reject a null hypothesis, the z-statistic must be larger in magnitude than the critical value for a given level of significance.

• Question 2073:

  Capital account transactions include:

  A. direct investments by Americans in real assets abroad and loans from foreigners.
  B. direct investments by Americans in real domestic assets and loans to and from foreigners.
  C. unilateral transfers to and from foreigners and direct investments by Americans in real assets abroad.
  D. direct investments by Americans in real assets abroad and loans to and from foreigners.
  E. unilateral transfers to and from foreigners and loans to and from foreigners.
  D. direct investments by Americans in real assets abroad and loans to and from foreigners.

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  Explanation

  Capital account transactions are composed of direct investment by Americans in real assets abroad (or by foreigners in the U.S.) and loans to and from foreigners.

• Question 2074:

  What is the future value of $750 per year for 6 years, with the first cash flow occurring today, rather than 1 year from now? Assume interest is 7% per year, compounded annually.

  A. $5,364. 97
  B. $4,500.00
  C. $5,740.52
  D. $6,209.48
  E. $5,293. 55
  C. $5,740.52

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  Explanation

  Recognize that this question is an annuity due situation, since the first cash flow occurs immediately or at the beginning of each period. Annuities where the first payment occurs 1 period from today (or at the end of each period) are called "ordinary" annuities. This requires placing the calculator into "Begin" mode prior to solving the question. NOTE: Be sure to place the calculator OUT OF annuity due mode after this question before going on to subsequent questions, or you will get the wrong answers! On the BAII Plus, press 2nd BGN. If the display shows END, then press 2nd SET and then 2nd Quit. This will place the BAII Plus into annuity due mode (you can tell this because the BAII Plus will display BGN in small letters). Now press 6 N, 7 I/Y, 0 PV, 750 PMT, CPT FV. Place the calculator back into End mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press 2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press BlueShift END, which is the blue function on the front of the 8 digit key. This places the HP12C into Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then press 6 n, 7 i, 0 PV, 750 PMT, FV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG (the blue function written on the front of the 7 digit key). Note that the answer is displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2075:

  The covariance of the market's returns with the stock's returns is .008. The standard deviation of the market's returns is .1 and the standard deviation of the stock's returns is .2. What is the correlation coefficient between the stock and market returns?

  A. .4
  B. .91
  C. 1.0
  D. 1.25
  A. .4

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  Explanation

  Covariance = (standard deviation 1)(standard deviation 2)(correlation coefficient 1,2) Correlation coefficient = cov/(st'd1)(st'd2) = .008/(.1)(.2) = .4

• Question 2076:

  The required rate of return on a security is determined by

  A. three factors: the real risk-free rate of return, the expected rate of inflation, and the risk premium. The real risk-free rate of return and the expected rate of inflation are used to arrive at the nominal risk-free rate. The risk premium of a security is a function of its variance, and may well fluctuate over time.
  B. two factors: the real risk-free rate of return and the risk premium. The risk-free rate of return may be influenced in the short-term by tightness or ease in the capital markets. The risk premium of a security is a function of its variance, and tends to be stable over time.
  C. two factors: the real risk-free rate of return, and the risk premium. The risk-free rate of return should depend on the real growth rate of the economy because capital should grow at least as fast as the economy. The risk premium of a security is a function of its risk relative to the market, and tends to be stable over time.
  D. three factors: the real risk-free rate of return, the expected rate of inflation, and the risk premium. The risk-free rate of return (which along with inflation determines the nominal risk-free rate) may be influenced in the short-term by tightness or ease in the capital markets. The risk premium of a security is a function of its risk relative to the market, and may well fluctuate over time.
  D. three factors: the real risk-free rate of return, the expected rate of inflation, and the risk premium. The risk-free rate of return (which along with inflation determines the nominal risk-free rate) may be influenced in the short-term by tightness or ease in the capital markets. The risk premium of a security is a function of its risk relative to the market, and may well fluctuate over time.

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  Explanation

  Although the long-term risk-free rate of return should depend on the real growth rate of the economy, it may be influenced in the short-term by tightness or ease in the capital markets. The nominal risk-free rate is equal to (1 + real risk-free rate) x (1 + inflation rate) - 1. The risk premium is the extra yield that a security requires over the nominal risk-free rate to be attractive to investors.

• Question 2077:

  David's gasoline station offers 4 cents off per gallon if the customer pays in cash and does not use a credit card. Past evidence indicates that 40% of all customers pay in cash. During a one hour period twenty-five customers buy gasoline at

  this station.

  What is the probability that more than ten and less than fifteen customers pay in cash?

  A. .401
  B. .562
  C. .541
  D. None of these answers
  E. .380
  E. .380

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  Explanation

  Binomial distribution: n!(p^r)(q^(n-r))/r!(n-r)!. n = 25, r = 10, p = 0.4 q = 0.6 P(11) = 25!(0.4^11)(0.6^14)/11!14! = 0.1465 P(12) = 25!(0.4^12)(0.6^13)/12!13! = 0.1140 P(13) = 25!(0.4^13)(0.6^12)/13!12! = 0.0760 P(14) = 25!(0.4^14)(0.6^11)/14!11! = 0.0434 Summing up: 0.3799.

• Question 2078:

  Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

  Cash $725,000 Accounts receivable (net) $1,640,000 Inventories $2,945,000 Total current assets $5,310,000 Accounts payable $1,236,000 Accrued liabilities $831,000 Total current liabilities $2,067,000

  Cash $725,000 Accounts receivable (net) $1,640,000 Inventories $2,945,000 Total current assets $5,310,000 Accounts payable $1,236,000 Accrued liabilities $831,000 Total current liabilities $2,067,000

  The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997. Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's current liabilities would have been

  A. unchanged by either the dividend declaration or the dividend distribution.
  B. unchanged by the dividend declaration and decreased by the dividend distribution.
  C. decreased by the dividend declaration and increased by the dividend distribution.
  D. increased by the dividend declaration and decreased by the dividend distribution.
  E. increased by the dividend declaration and unchanged by the dividend distribution.
  A. unchanged by either the dividend declaration or the dividend distribution.

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  Explanation

  The declaration and distribution of a stock dividend involves transferring an amount from retained earnings to common stock. However, there is no impact on current liabilities as there is no future obligation created to distribute cash.

• Question 2079:

  Which of the following is/are true?

  I. A sample is a subset of the population.

  II. The population mean is used to estimate the sample mean.

  III. The population mean equals the sum of all the available observations divided by the number of observations.

  IV.

  A sample has a unique mean.

  A. I, II, III and IV
  B. I, III and IV
  C. IV only
  D. I only
  E. I and III
  F. I and IV
  G. II only
  H. III only
  F. I and IV

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  Explanation

  The sample mean is used to estimate the population mean, not the other way around. The sum of all the available observations divided by the number of observations is the sample mean, not the population mean (unless the observation set equals the entire population, which is almost never the case).

• Question 2080:

  Within the simple Keynesian model, when an economy operates below its long-run, full employment output constraint, an increase in aggregate demand will lead to an

  A. increase in unemployment.
  B. increase in prices.
  C. increase in interest rates and money income, but employment and real income will remain constant.
  D. increase in employment, output and real income.
  D. increase in employment, output and real income.

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  Explanation

  Since according to the Keynesian model aggregate demand determines the level of output in the economy, an increase in the demand will cause output to increase. Since output is equivalent to income, real income also increases. The increase in output stimulates increases in labor demand and thus unemployment declines. Increases in aggregate demand below the full employment capacity of the economy has no effect on prices.