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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 221:

  An investor purchases 500 shares of Microscam common stock for $58.74 per share at t0. At t1, dividends of $1.20 per share are received on the 500 shares owned and the investor purchases an additional 340 shares at $60.12 per share, At t2, dividends of $1.20 are received on the 840 shares owned and he purchases another 60 shares for $55. 14 per share. At t3, the investor sells 500 shares of Microscam for $61.25 per share and the other 400 shares for $62 per share. No dividend are received at t3. Assuming no taxes or commissions, what is the dollar-weighted rate of return for this investment?

  A. The answer cannot be calculated from the information provided.
  B. None of these answers is correct.
  C. 6. 03%
  D. 4. 55%
  E. 2. 94%
  F. 5. 23%
  E. 2. 94%

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this nomenclature is commonly used within the field of investment management. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. This process is illustrated as follows: t0: {-[500 shares purchased * $58.74 per share] = ($29,370.00) t1: {-[340 shares purchased * $60.12 per share] + [$1.20 per share dividend * 500 shares] = ($19,840.80) t2: {-[60 shares purchased * $55. 14 per share] + [$1.20 per share dividend * 840 shares]} = ($2,300.40) t3: {[500 shares sold * $61.25 per share] + [400 shares sold * $62 per share] = $55,425. 00

  Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 2. 94% for this investment.

• Question 222:

  According to the fundamental view of risk, an individual's required rate of return is determined at least in part by all of the following factors EXCEPT:

  A. the preference consumers have for current consumption.
  B. relative ease or tightness in the capital markets.
  C. business risk.
  D. beta risk.
  D. beta risk.

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  Explanation

  Beta risk, or the riskiness of the stock as viewed by a well-diversified stockholder, is used in the systematic view of risk. The fundamental view of risk views required return as (1 + real rate)(1 + expected inflation rate)(1 + risk premium) - 1. The risk premium is a function of total risk. (Total risk = business risk + financial risk + liquidity risk + exchange rate risk + country risk.) The preference consumers have for current consumption is a component of the real risk-free rate. The relative ease or tightness in the capital markets is a component of the inflation rate. Both the real-risk free rate and the inflation rate are components of the total return. Under the fundamental view of risk, business risk is part of the risk premium.

• Question 223:

  According to the Dow Theory, a typical bullish price pattern

  A. will have periodic sell-offs at high volume.
  B. will not have troughs.
  C. will have continuously increasing stock prices.
  D. may have troughs.
  D. may have troughs.

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  Explanation

  According to the Dow Theory, there should be a general upward price movement during a bull market, perhaps punctuated by occasional low-volume sell offs because of profit taking. Every recovery from a sell off should reach a higher peak than that resulting from the previous recovery.

• Question 224:

  The nominal risk-free rate of return is equal to

  A. the federal funds rate + last period's rate of inflation.
  B. (1 + the real risk-free rate of return) x (1 + the expected rate of inflation) - 1. C. (1 + the real risk-free rate of return) x (1 + the federal funds rate) - 1. D. the real risk-free rate of return + the expected rate of inflation.
  B. (1 + the real risk-free rate of return) x (1 + the expected rate of inflation) - 1. C. (1 + the real risk-free rate of return) x (1 + the federal funds rate) - 1. D. the real risk-free rate of return + the expected rate of inflation.

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  Explanation

  The nominal risk-free rate of return is simply the real risk-free rate adjusted for inflation. The real risk-free rate is the absolute minimum rate that any investor would require.

• Question 225:

  An experiment may have:

  A. Two or more results
  B. None of these answers
  C. Only two results
  D. Only one result
  A. Two or more results

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  Explanation

  Experiments may have many outcomes.

• Question 226:

  A 6% U.S. Treasury security maturing 9/30/10 is quoted at a price of 97. 625 on July 1. The bond pays interest semiannually on March 31 and September 30. On July 1, the clean price of this bond would be closest to:

  A. $976. 25
  B. $991.17
  C. $946. 41
  A. $976. 25

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  Explanation

• Question 227:

  The following data have been extracted from the financial statements of a firm for two years, 1995 and 1996:

  1995 1996 Assets 8,174 8,439 Net Sales 9,412 8,949 Receivables 1,135 986 Inventory 2,119 2,464 COGS 6,948 7,089

  The receivables turnover ratio and the average receivables collection period for 1996 equal ________.

  A. 8.44, 43. 25 days
  B. 9.07, 40.22 days
  C. 7. 88, 46. 29 days
  D. none of these answers
  A. 8.44, 43. 25 days

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  Explanation

  Receivables turnover ratio = Net annual sales/average receivables Average receivables collection period = 365/receivables turnover. For 1996, the average receivables equal (986+1135)/2 = 1061. Receivables turnover ratio = 8949/1061 =

  8.44. Average receivables collection period = 365/8.44 = 43. 25 days.

• Question 228:

  Given the following estimated financial results, value the stock of Magic Holdings, Inc. using the infinite period dividend discount model (DDM). Which of the following choices is closest to the value of Magic Holding Inc. stock? (Note: Carry calculations out to at least 3 decimals.)

  A. $44. 64.
  B. $23. 54.
  C. Unable to calculate stock value because ke < g.
  D. $109.27.
  D. $109.27.

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  Explanation

  Here, we are given all the inputs we need. Use the following steps to calculate the value of the stock:

  First, expand the infinite period DDM:

  DDMformula: P0= D1/ (ke?g)

  D1

  = (Earnings * Payout ratio) / average number of shares outstanding

  = ($200,000 * 0.625) / 50,000 = $2. 50.

  ke

  = nominal risk free rate + [beta * (expected market return ?nominal risk free rate)]

  Note: Nominal risk-free rate = (1 + real risk free rate) * (1 + expected inflation) ?1

  =(1.035)*(1.040) ?1 = 0.0764, or 7. 64%.

  ke

  = 7. 64% + [1.8 * (13. 0% - 7. 64%)] = 0.17288.

  g

  = (retention rate * ROE)

  Retention = (1 ?Payout) = 1 ?0.625 = 0.375.

  ROE = (net income/sales)*(sales/total assets)*(total assets/equity)

  = (200,000/1,000,000)*(1,000,000/750,000)*(750,000/500,000) = 0.40

  g

  = 0.375 * 0.40 = 0.15.

  Then, calculate:P0= D1/ (ke?g) = $2. 50 / (0.17288 - 0.15) = 109.27.

• Question 229:

  Derek Bonney, CFA, is writing an investment policy statement for one of his high net worth clients, Joey Rook. Rook is a retiree who receives Social Security benefits but because he was self-employed, has no pension income. Rook's social security benefits cover all but $1,000 of his monthly living expenses. He has a portfolio of SI.2 million, an effective tax rate of 30%, and recently purchased a vacation cabin with mortgage and maintenance expenses of $6,000 per month. After meeting with his client, Bonney writes the following policy statement: "The total return objective is to earn 7% after-tax. At no time should the principal amount decline in value by more than 15%." The most valid criticism of this return objective statement is that:

  A. it considers only the after-tax return.
  B. the return objective is too conservative.
  C. it fails to consider Rook's current income needs.
  C. it fails to consider Rook's current income needs.

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  Explanation

• Question 230:

  The inevitable consequence of price controls is:

  A. increased currency convertibility.
  B. none of these answers.
  C. the development of black markets.
  D. trade war.
  C. the development of black markets.

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  Explanation

  Since price controls, of which exchange rate control are a type, lead to shortages, black markets develop.