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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2131:

  Technical analysts believe that

  A. prices adjust instantaneously to new information.
  B. prices adjust quickly to new information.
  C. prices adjust slowly to new information.
  D. prices never adjust to much new information.
  C. prices adjust slowly to new information.

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  Explanation

  Technical analysis, in contrast to the efficient market hypothesis and fundamental analysis, holds that past price and volume data can be used to discover market trends that can predict future market behavior. In order for the market to have these trends, prices must adjust slowly to new information, rather than quickly or instantaneously. Adjustment is slow because of different sources of information or because certain investors receive information before others.

• Question 2132:

  In a common size statement, a firm shows average receivables of 9.3%. Its receivables turnover equals 1.23. What's the average receivables collection period?

  A. 296. 8 days
  B. insufficient information
  C. 321.6 days
  D. 184. 3 days
  A. 296. 8 days

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  Explanation

  Average receivables collection period = 365/receivables turnover. In this case, the collection period = 365/1.23 = 296. 8 days.

• Question 2133:

  The interest expense on a discount bond _______ over time.

  A. decreases
  B. remains constant
  C. can increase or decrease, depending on interest rate movements
  D. increases
  D. increases

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  Explanation

  Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a discount, the discount amount is amortized over the life of the bond. The outstanding liability thus increases steadily toward the face value. The increasing liability increases the interest expense over time.

• Question 2134:

  Which of the following would be classified a cash inflow from investing activities?

  A. Proceeds from collecting the principal amount of loans.
  B. Proceeds from selling investments in the equity securities of other companies.
  C. All of these answers are correct.
  D. Proceeds from selling investments in the debt securities of other entities, except cash equivalents.
  C. All of these answers are correct.

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  Explanation

  All responses qualify as cash inflows from investing activities.

• Question 2135:

  What is the Net Present Value of this series of annual cash flows: Year 0: <$20,000>, Year 1: $15,000, Year 2: $5,000, Year 3: $7,500, using an interest rate of 10% per year? (Note that the <> are used to indicate a negative number).

  A. $2,851.93
  B. $3,512. 81
  C. $48.12
  D. $4,116. 55
  E. $3,403. 46
  E. $3,403. 46

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 20000 +/- ENTER DownArrow 15000 ENTER DownArrow DownArrow 5000 ENTER DownArrow DownArrow 7500 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 10 ENTER DownArrow CPT. On the HP12C, press these keys: 20000 CHS BlueShift CFo 15000 BlueShift CFj 5000 BlueShift CFj 7500 BlueShift CFj Then press 10 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.

• Question 2136:

  Consider the following transactional information for the investment account of an individual investor:

  1st Quarter Ending portfolio value: $100,000 Total amount invested: $95,000

  2nd Quarter Ending portfolio value: $110,000 Total amount invested: $90,000

  3rd Quarter Ending portfolio value: $114,000 Total amount invested: $100,000

  4th Quarter Ending portfolio value: $105,000 Total amount invested: $114,000

  Using this information, what is the annual time-weighted rate of return for this portfolio? Assume no taxes or transaction charges.

  A. 30.05% per year
  B. 26. 67% per year
  C. The time-weighted rate of return cannot be calculated from the information provided.
  D. 25. 22% per year
  E. None of these answers is correct.
  E. None of these answers is correct.

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  Explanation

  The time-weighted rate of return is the preferred method of return calculation in the investment management industry, primarily because this method is not sensitive to significant additions and withdrawals of funds from portfolios under

  examination. The calculation of the time-weighted rate of return involves three steps, which are illustrated as follows:

  Step 1:

  Price the portfolio immediately prior to any significant additions or withdrawals. Separate the portfolio into a series of subperiods based on the dates of cash inflows and outflows.

  Step 2:

  Calculate the holding period return for each subperiod.

  Step 3:

  Determine the annualized holding period return by linking or compounding the holding period return of each subperiod. If the investment is for more than one year, use the geometric mean of the annual returns as the time-weighted rate of

  return. If the investment is for less than one year, compound the subperiod returns to obtain an annualized measurement.

  To begin the process of determining the time-weighted rate of return, we would break the portfolio up into the following series of cash flows. However, in this example, the cash flows are already aggregated for us and we can move on to the

  next step: determining the holding period return for each subperiod. This process is detailed as follows:

  Quarter 1 holding period return = [($100,000 ending value - $95,000 invested) / $95,000 invested] = 5. 263%

  Quarter 2 holding period return = [($110,000 ending value - $90,000 invested) / $90,000 invested] = 22. 22%

  Quarter 3 holding period return = [($114,000 ending value - $100,000 invested) / $100,000 invested] = 14. 00%

  Quarter 4 holding period return = [($105,000 ending value - $114,000 invested) / $114,000 invested] = (7. 895%)

  Now that the holding period return for each subperiod has been determined, we must annualize the return measure by taking the product of all four quarterly returns. This process is illustrated below:

  [(1 + .0526) * (1 + .2222) * (1 + .14) * (1 - .07895) - 1] = .3508 or 35. 08 %. This is characterized by none of the answers provided.

  When calculating the time-weighted rate of return, remember that the total amount invested is the relevant figure, not the beginning portfolio value. Notice that during the third quarter, the total amount invested does not equal the ending

  amount for the second quarter. This differential could be explained by numerous phenomena. Perhaps the difference is due to a cash withdrawal from the account. Maybe it was used to pay expenses or meet an outstanding margin call. What

  is important to note is the fact that this money (the difference between the ending value of quarter 2 and the amount invested in quarter 3) was not invested, and should not be included in the holding period return for the third quarter. So said,

  whenever possible you should use the total amount invested rather than the beginning portfolio value in the calculation of the subperiod holding period return.

• Question 2137:

  An economist has forecast that the term structure of interest rates will remain perfectly flat. According to the liquidity preference theory, the economist's forecast implies that future short-term interest rates will:

  A. decrease over time
  B. increase over time
  C. equal current short-term interest rates
  A. decrease over time

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  Explanation

• Question 2138:

  What is the remaining balance on a $90,000 loan after making monthly payments of $660.39 for 10 years, if the interest rate is 8% per year, compounded monthly?

  A. $51,948.80
  B. $81,343. 92
  C. $0
  D. $76,204. 11
  E. $78,951.89
  E. $78,951.89

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  Explanation

  On the BAII Plus, press 120 N, 8 divide 12 = I/Y, 90000 PV, 660.39 +/- PMT, CPT FV. On the HP12C, press 120 n, 8 ENTER 12 divide i, 90000 PV, 660.39 CHS PMT, FV. The remaining balance will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2139:

  An analyst is interested in the relationship between the stock prices of two companies. After downloading a time series of stock prices for each company, the analyst concludes that Company A has a variance equal to 0.25 and Company B has a variance equal to 0.20, and the covariance between the two stocks is -0.10. Calculate the correlation coefficient between the two stocks.

  A. -0.45
  B. -0.50
  C. -1.00.
  A. -0.45

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  Explanation

• Question 2140:

  A financial analyst should conduct himself with ________, competence and dignity and act in an ethical manner in his dealings with the public, clients, customers, employers, employees and fellow analysts.

  A. integrity
  B. morality
  C. none of these answers
  D. honor
  E. principal
  A. integrity

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  Explanation

  The Code of Ethics: "Members of AIMR shall act with integrity, competence, dignity and in an ethical manner when dealing with the public, clients, prospects, employers, employees and fellow members."