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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2311:

  Jamison is a junior research analyst with Howard and Howard, a brokerage and investment banking firm. Howard and Howard's mergers and acquisitions department has represented the Britland Company in all of its acquisitions for the past 20 years. Two of Howard and Howard's senior officers are directors of various Britland subsidiaries. Jamison has been asked to write a research report on Britland. What is the best course of action for her to follow?

  A. Jamison should not write the report because the two Howard officers are constructive insiders.
  B. Jamison may write the report but must refrain from expressing any opinions because of the special relationships between the two companies.
  C. Jamison may write the report if she discloses the special relationships with the company in the report.
  D. Jamison may write the report so long as the officers agree not to alter it.
  C. Jamison may write the report if she discloses the special relationships with the company in the report.

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  Explanation

  The question involves Standard IV (B.7), Disclosure of Conflicts to Clients and Prospects. There are two conflicts of interest that must be disclosed: (1) the company is a client of Jamison's employer, (2) two directors of the company are senior officers of her employer. As long as the relationship the analyst's employer has with the company is disclosed, the analyst is not prevented from writing a report. She can or not express opinions, which is irrelevant to her duty to disclose a conflict of interest, which is the relationship between the two companies.

• Question 2312:

  Ace Consulting, a multinational corporate finance consulting firm, is examining the data storage division of Intelligent Semiconductor Company. In order to evaluate the proposed expansion of this division, Ace Consulting is trying to determine its beta. In their analysis, Ace Consulting regresses the monthly return on assets for the data storage division against the average return on assets for the data storage index, a division of the SandP 100. Which of the following techniques most correctly describes this method of identifying individual project betas?

  A. Regression analysis
  B. Scenario analysis
  C. Pure-play method
  D. Situation analysis
  E. Monte Carlo simulation
  F. Accounting Beta method
  F. Accounting Beta method

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  Explanation

  In this example, Ace Consulting is employing the Accounting Beta method to determine the beta of the data storage division of Intelligent Semiconductor. This technique is often used when "pure play" firms cannot be found, or when a more empirical, "firm-specific" analysis is desired. "Monte Carlo simulation, situation analysis," and "scenario analysis" are all techniques for measuring stand-alone risk. While "regression analysis" is an attractive choice, it does not represent the best possible answer.

• Question 2313:

  Milton Samuel, a quantitative analyst with Middle Road Brokerage, is examining a data sample and has amassed the following information:

  Standard deviation of the sample: 12. 37 Number of observations: 100 Sample mean: 231

  Assume that Mr. Samuel formulates a null hypothesis stating that the population mean is equal to 212. Additionally, assume that the population standard deviation is unknown. Given this information, what is the standard error of the estimate? Further, what is the test statistic? Choose the best answer.

  A. 1.530; 10.19
  B. 1.250; 15. 20
  C. 1.250; 16. 91
  D. 1.237; 5. 40
  E. None of these answers is correct.
  F. 1.530; 12. 42
  G. 1.237; 15. 36
  G. 1.237; 15. 36

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  Explanation

  If the population standard deviation is unknown, as in this example, the standard error of the estimate is found by using the following equation:

  {Standard error = s / square root of n} where s = the sample standard deviation and n = the number of observations in the sample.

  In this example, all of the necessary information has been provided, and the determination of the standard error of the estimate is found as:

  {Standard error = [12. 37 / 10] = 1.237}

  Now that the standard error of the estimate has been calculated, the test statistic can be found by using the following equation:

  {Test statistic = [sample statistic - value of the population parameter under the null hypothesis] / standard error of the sample statistic].

  Again, all of the necessary information has been provided, and the calculation of the test statistic is found as follows:

  {Test statistic = [231 - 212] / 1.237 = 15. 360}

• Question 2314:

  What rate should be used to estimate the potential return on this bond?

  A. the YTM.
  B. 12. 00%.
  C. 10.34%.
  D. the YTC.
  D. the YTC.

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  Explanation

• Question 2315:

  In order to inform your employer that as a member of AIMR, you must abide by the code of ethics, you must:

  A. inform the legal department in writing.
  B. inform senior management in writing.
  C. inform your immediate supervisor in writing or by email.
  D. inform your supervisor in writing, by email or orally.
  C. inform your immediate supervisor in writing or by email.

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  Explanation

  Standard III (A)

• Question 2316:

  You are given a risk-free rate of 7% per year, a portfolio return of 19% per year, and a standard deviation of portfolio return of 12% per year. What is the Sharpe measure of risk-adjusted performance?

  A. 1.111. B. 0.583.
  C. 1.000.
  D. 1.583.
  C. 1.000.

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  Explanation

  The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. In our case, we have (19% - 7%) / 12% = 12/12 = 1.000.

• Question 2317:

  You are going to hold a stock for an infinite amount of time. The current dividend is $1 per share and is expected to grow at 9% a year. Your long run required return is 13%. Using the infinite period dividend discount model calculate the value of the stock.

  A. $27. 25
  B. none of these answers
  C. $28.04
  D. $26. 45
  A. $27. 25

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  Explanation

  First determine D1, which is the next period dividend. In this case it should be $1.09. Next use the formula V = D1/(k - g) or V = $1.09/(0.13 - 0.09) = $27. 25.

• Question 2318:

  Which of the following projects is likely to produce multiple Internal Rates of Return. Project A Initial investment outlay: ($1,000,000) t1: $0.00 t2: $0.00 t3: $0.00 t4: $0.00 t5: $0.00 t6: $10,000,000 Project B Initial investment outlay: ($1,000,000) t1: $500,000 t2: $500,000 t3: $500,000 t4: $0.01 Project C Initial investment outlay: ($1,000,000) t1: $800,000 t2: ($100,000) t3: $550,000 Project D Initial investment outlay: ($500,000) t1: $400,000 t2: ($1,000) t3: $230,000 t4: ($50,000)

  A. Project D
  B. Project A, C and D
  C. Project A
  D. Project B
  E. Project C and D
  F. Project C
  F. Project C

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  Explanation

  In evaluating projects with "non-normal cash flows" the Internal Rate of Return method will often produce multiple IRRs calculation which leads to an incorrect accept/reject decision. Non-normal cash flows are defined as cash flows in which the sign changes more than once. Projects C and D involve cash outflows superimposed within their cash inflows, resulting in a sign change from positive to negative and negative to positive. In examining projects such as this, it is advisable to use either the NPV or MIRR methods, which are not subject to the problem of multiple IRRs associated with the traditional IRR method. From observation alone, we can determine that project C and D are non-normal projects, and are thus likely to result in multiple IRRs. While project A is somewhat unusual in the fact that the first five periods produce no cash flows at all, there is only one sign change present in its cash flows, and thus is characterized as a "normal" project.

• Question 2319:

  A survey of 144 retail stores revealed that a particular brand and model of a VCR retails for $375 with a standard deviation of $20. What is the 95% confidence interval to estimate the true cost of the VCR?

  A. $328.40 to $421.60
  B. $323. 40 to $426. 60
  C. $335. 80 to $414. 20
  D. $335. 00 to $415. 00
  E. None of these answers
  C. $335. 80 to $414. 20

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  Explanation

  Interval estimates can be found from the empirical rule where 95% will lie between plus and minus 1.96 standard deviations of the mean.

• Question 2320:

  Which of the following statements about debt retirement features is TRUE?

  A. A bond issue must be retired in its entirety when exercising a call feature.
  B. A make-whole premium provision and call price are identical terms.
  C. A bond can be retired early even if it is nonrefundable.
  C. A bond can be retired early even if it is nonrefundable.

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  Explanation