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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2321:

  The National Center for Health Statistics reported that of every 883 deaths in recent years, 24 resulted from an automobile accident, 182 from cancer and 333 from heart disease. Using the relative frequency approach, what is the probability that a particular death is due to an automobile accident?

  A. 182/883 or 0.206
  B. None of these answers
  C. 24/883 or 0.027
  D. 24/333 or 0.072
  E. 539/883 or 0.610
  C. 24/883 or 0.027

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  Explanation

  The probability is the number of automobile deaths divided by the total number of deaths.

• Question 2322:

  Tamber Benz, CFA, recently joined Bay Area Investment Group as a personal financial planner. Today, she has a meeting with a client interested in equity index funds, with a particular interest in learning about the source and direction of biases. In preparation for this meeting, she makes some quick notes (relying on her memory). These notes are listed below. She then finds her well-worn CFA study notes and checks her memory. After reviewing her notes, which of the following choices does she determine is INCORRECT?

  A. The Dow Jones Industrial Index has a built-in downward bias.
  B. An index such as the Valueline Composite Average is constructed by purchasing an equal number of shares of each stock in the index, and will have a downward bias when geometric averaging is used to compute the return.
  C. One problem with an index such as the SandP 500 is that firms with greater market capitalization have more impact than other firms.
  D. A market value-weighted index, such as the New York Stock Exchange Index, accurately reflects the impact of price changes on wealth.
  B. An index such as the Valueline Composite Average is constructed by purchasing an equal number of shares of each stock in the index, and will have a downward bias when geometric averaging is used to compute the return.

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  Explanation

  Although the latter part of this statement is correct, the first part is incorrect. The Valueline Composite Average is an unweighted price indicator series, and is constructed by maintaining an equal dollar investment in each stock in the index. The return of an unweighted index is usually calculated using a geometric average. Assuming the existence of volatility, the geometric average will always be lower than the arithmetic average. The other statements are true. The Dow Jones Industrial Index is a price-weighted index and thus has a built-in downward bias because of the impact of stock splits. After a stock split, the denominator is adjusted downward to keep the index at the same level as before the split. Since high-growth companies tend to announce stock splits more frequently than low-growth companies, the larger, more successful firms lose influence on the index. The SandP 500 index is a market-value weighted index. One problem with market-value weighted indexes is that firms with greater market capitalization have more impact than other firms. If these firms also have higher returns, the firms can dominate the index.

• Question 2323:

  Consider the following three projects: Project A Initial cash outflow: $1,000,000 Cash inflows as follows t1: $500,000 t2: $450,000 t3: $150,000 t4: $150,000 t5: $150,000 Project B Initial cash outflow: $1,000,000 Cash inflows as follows t1: $150,000 t2: $150,000 t3: $150,000 t4: $450,000 t5: $500,000 Project C Initial cash outflow $1,000,000 Cash inflows as follows t1: $280,000 t2: $280,000 t3: $280,000 t4: $280,000 t5: $280,000 Assuming no taxes, an 8.5% cost of capital, along with a $0.00 salvage value at the end of the fifth year, what is the NPV of each project? Additionally, which of the three projects has the steepest NPV profile?

  A. Project A NPV: $276,837; Project B NPV: $40,334; Project C NPV: $103,380; Project A has a steepest NPV profile
  B. Project A NPV: $ 267,837; Project B NPV: $44,330, Project C NPV: $135,820; Project A has a steepest NPV profile
  C. Project A NPV: $168,513. 54 Project B NPV: $40,334; Project C NPV: $103,380; Project B has a steepest NPV profile
  D. Project A NPV: $168,531.54; Project B NPV: $40,334; Project C NPV: $103,380; Project C has a steepest NPV profile
  E. Project A NPV: $168,513. 54, Project B NPV: $14,550; Project C NPV: $103,380; Project B has the steepest NPV profile
  F. Project A NPV: $276,837; Project B NPV: $114,550; Project C NPV: $135,820; Project A has a steepest NPV profile
  C. Project A NPV: $168,513. 54 Project B NPV: $40,334; Project C NPV: $103,380; Project B has a steepest NPV profile

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  Explanation

  Due to the fact that project B is characterized by having the majority of its cash inflows occurring during later time periods, it is more sensitive to changes in the cost of capital. This fact is exemplified by a steeper NPV profile.

• Question 2324:

  Which of the following statements is most correct?

  A. The MIRR method will always arrive at the same conclusion as the NPV method.
  B. All of the statements are correct.
  C. The MIRR method can overcome the multiple IRR problem, while the NPV method cannot.
  D. None of the statements are correct.
  E. The MIRR method uses a more reasonable assumption about reinvestment rates than the IRR method.
  E. The MIRR method uses a more reasonable assumption about reinvestment rates than the IRR method.

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  Explanation

  MIRR and NPV can conflict for mutually exclusive projects if the projects differ in size. NPV does not suffer from the multiple IRR problem.

• Question 2325:

  How should the effect of a change in accounting estimate be accounted for?

  A. None of these answers.
  B. By reporting pro forma amounts for prior periods.
  C. In the period of change and future periods if the change affects both.
  D. By restating amounts reported in financial statements of prior periods.
  E. As prior-period adjustments to beginning retained earnings.
  C. In the period of change and future periods if the change affects both.

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  Explanation

  The effect of a change in accounting estimate must be accounted for as a component of income from continuing operations in the period of change and in future periods.

• Question 2326:

  Standard II (B) - Professional Misconduct, states which of the following is a violation?

  A. Adding inappropriate expenses to expense reports over an extended period, although never criminally convicted.
  B. Using material prepared by another, in the same form as the original, without acknowledging and identifying the author, publisher or source of such material.
  C. All of these answers.
  D. Intoxication at work, which reflects poorly on the profession, raises questions about competence and affects investment decisions.
  D. Intoxication at work, which reflects poorly on the profession, raises questions about competence and affects investment decisions.

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  Explanation

  Standard II (B) addresses personal integrity and prohibits individual behavior that reflects adversely on the entire profession. Intoxicated behavior falls under Standard II (B) because it reflects poorly on the member, his employer and the investment industry. Plagiarizing of material falls under Standard II (C) - Prohibition against Plagiarism.

• Question 2327:

  What single deposit could you make today in order to have $1,000,000 in 30 years, assuming it earns interest at 11% per year, compounded monthly?

  A. $403,512. 59
  B. $115,024. 60
  C. $9,523. 23
  D. $43,682. 82
  E. $37,441.83
  E. $37,441.83

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  Explanation

  On the BAII Plus, press 360 N, 11 divide 12 = I/Y, 0 PMT, 1000000 FV, CPT PV. On the HP12C, press 360 n, 11 ENTER 12 divide i, 0 PMT, 1000000 FV, PV. 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 2328:

  If a stock has an expected dividend payout of 50 percent, a required rate of return of 14 percent and an expected dividend growth rate of 9 percent, what is the P/E ratio?

  A. 12. 5
  B. None of these answers
  C. 8.5
  D. 10
  D. 10

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  Explanation

  The price/earnings ratio can be computed by dividing the expected dividend payout ratio (dividends divided by earnings) by the required rate of return (k) minus the expected growth rate of dividends (g). In this case, P/E = .50/(.14-.09) = 10

• Question 2329:

  David Garcia, CFA, is analyzing two bonds. Bond X is an option tree corporate security with a 7% annual coupon and ten years to maturity. Bond Y is a mortgage backed security that also matures in ten years. Garcia is considering two possible interest rate scenarios--one in which rates are flat over the entire 10-year horizon, and one in which the yield curve is sloped steeply upwards. For each bond, Garcia has calculated the nominal spread over the 10-year U.S. Treasury issue as well as the zero-volatility spread. The zero-volatility spread would differ the most from the nominal spread:

  A. for Bond X, when the yield curve is sloped steeply upwards
  B. for Bond Y, when the yield curve is sloped steeply upwards
  C. for Bond X, when the yield curve is flat
  B. for Bond Y, when the yield curve is sloped steeply upwards

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  Explanation

• Question 2330:

  The AIMR Performance Presentation Standards are

  A. voluntary standards for the industry.
  B. mandatory for CFA Charterholders and Candidates.
  C. voluntary standards for the industry, but mandatory standards for AIMR members.
  D. mandatory standards for the industry.
  A. voluntary standards for the industry.

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  Explanation

  The AIMR-PPS are voluntary standards for the industry. Firms are not required to comply with the Standards when presenting performance, but the Standards are widely recognized as the most effective guidelines for fair and accurate reporting of investment performance.