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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2421:

  An analysis of the grades on the first test in History 101 revealed that they approximate a normal curve with a mean of 75 and a standard deviation of 8. The instructor wants to award the grade of A to the upper 10 percent of the test grades. What is the dividing point between an A and a B grade?

  A. 80
  B. 90
  C. 85
  D. 95
  E. None of these answers
  C. 85

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  Explanation

  First we need to find the z value for an area under the curve representing 40%. (This is because we are looking for the top 10%). From the table z = 1.282. Therefore using the z formula we have 1.282 = X-75/8. We find that x = 85. 25

• Question 2422:

  Firm A capitalized an expense and an otherwise identical Firm B expensed it. Then,

  A. A shows higher operating cash flow and investing cash flow.
  B. A shows higher operating cash flow and lower investing cash flow.
  C. A shows lower operating cash flow and investing cash flow.
  D. A shows lower operating cash flow and higher investing cash flow.
  B. A shows higher operating cash flow and lower investing cash flow.

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  Explanation

  Since the capitalized expense represents an investing cash outflow, the investing cash flow is lower for A. Firm B charges all the expenditure to operating cash flow and has a lower operating cash flow than A.

• Question 2423:

  The expected value of Y is 9 and the expected value of X is 3. If X and Y are uncorrelated and you run a regression of Y against X, the intercept term will equal ________.

  A. 9
  C. none of these answers
  D. 3
  A. 9

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  Explanation

  Since the correlation is given to be zero, the slope will be zero and hence, R-square will be zero i.e. the variance of the ranking of a trader in one year is not explained to any extent by his ranking in the previous year. Thus, regardless of his ranking in previous year, he is likely to be either "Great" or "Not- great" in this year. His expected score is then equal to 0.5*1 + 0.5*0 = 0.5. The expected value of the dependent variable is equal to the intercept term when slope equals zero (remember this!!)

• Question 2424:

  How many deposits of $450 a month, beginning next month, are needed before an account has $200,000 in it, assuming it had a balance of $0 at the beginning and that interest is 6% per year, compounded monthly?

  A. 166. 79
  B. 234. 6
  C. 119.48
  D. No solution/Error
  E. 444. 44
  B. 234. 6

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  Explanation

  One of the two dollar amounts must be entered as a negative number and the other as a positive number or an error will result. On the BAII Plus, press 6 divide 12 = I/Y, 0 PV, 450 PMT, 200000 +/- FV, CPT N. On the HP12C, press 6 ENTER 12 divide i, 0 PV, 450 PMT, 200000 CHS FV, n. Note that the HP12C returns a result of 235. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2425:

  According to the Prudent Investor Rule, the trustee must:

  -adhere to ________, impartiality and prudence

  -maintain overall portfolio risk at a reasonable level

  -provide for reasonable diversification of trust investments

  - act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents

  -

  be cost conscious when investing

  A. supervisors
  B. loyalty
  C. none of these answers
  D. commitment
  E. diversification
  B. loyalty

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  Explanation

  Modern Portfolio Theory dictates that trustees consider a portfolio in its entirety and not just on an investment-by-investment basis. As a fiduciary, therefore, the trustee must:

  - adhere to fundamental fiduciary duties of loyalty, impartiality and prudence.

  -maintain overall portfolio risk at a reasonable level

  - the trade-off between risk and return is the fiduciary's central concern.

  -provide for reasonable diversification of trust investments.

  - act with prudence in deciding whether and how to delegate authority to experts and in selecting and supervising agents.

  -be cost conscious when investing.

• Question 2426:

  Which of the following is the proper method of reporting the value of financial instruments on a firm's balance sheet?

  A. All of these answers
  B. Higher of cost or market
  C. None of these answers
  D. Cost
  E. Fair market value
  D. Cost

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  Explanation

  Company's are required by accounting regulations to record and report the value of financial instruments such as derivatives at cost.

• Question 2427:

  Disclosure of information about the extent, nature, and terms of financial instruments with off-balance- sheet credit or market risk and about concentrations of credit risk is required for all financial instruments. Which of the following is defined as a financial instrument?

  A. Merchandise inventory.
  B. A note payable in U.S. Treasury bonds.
  C. None of these answers.
  D. Deferred subscriptions revenue.
  E. A warranty payable.
  B. A note payable in U.S. Treasury bonds.

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  Explanation

  A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that both:

  1. imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange financial instruments on potentially unfavorable terms with the second entity, and

  2. conveys to that second entity a contractual right (A) to receive cash or another financial instrument from the first entity or (B) to exchange other financial instruments on potentially favorable terms with the first entity. Therefore, a note payable in U.S. Treasury bonds gives the holder the contractual right to receive and imposes on the issuer the contractual obligation to deliver bonds that are themselves financial instruments.

• Question 2428:

  Which of the following statements about the security market line (SML) is FALSE?

  A. Movement along the SML indicates a change in risk characteristics of the individual investment.
  B. The SML will rotate in response to changes in investor attitude toward risk.
  C. The SML intersects the y-axis at the real risk-free rate.
  D. Changes in market conditions will cause the SML to shift up or down in a parallel manner.
  C. The SML intersects the y-axis at the real risk-free rate.

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  Explanation

  The SML intersects the y-axis at the nominal risk-free rate. The other choices are true.

• Question 2429:

  An analyst with Churn Brothers Brokerage is attempting to value shares of Intelligent Semiconductor using the Multi-stage Dividend Discount Model. Intelligent Semiconductor is expected to grow at a rate of 35% per year for the next two years, grow at to 25% per year in years 3 and 4, and then grows at 12% per year forever. Similar investments have warranted a 14. 50% per year rate of return, and Intelligent Semiconductor paid a dividend of $0.70 at t0.

  Using the information provided, determine the value of Intelligent Semiconductor shares according to the Multi-stage Dividend Discount Model.

  A. $55. 98
  B. None of these answers is correct.
  C. $88.23
  D. The answer cannot be calculated from the information provided.
  E. $87. 83
  F. $91.87
  A. $55. 98

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  Explanation

  The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above-average, or "supernormal," rate ofgrowth, as well as the long-term rate of growth. Once these growth rates have been determined, they are used to calculate the dividends at various points in the future. In this example, you are provided with two supernormal growth rates, in addition to the long-term rate of growth. Since two supernormal growth rates exist for Intelligent Semiconductor, the calculation is somewhat more complex than a situation characterized by a single supernormal growth rate. Nonetheless, the multi-stage dividend discount model can be applied.

  The multi-stage dividend discount model is often referred to as the "two-stage dividend discount model," and these two titles should be considered interchangeable for all intents and purposes, i.e. the "two stage" dividend discount model can be used to determine the value of a company that has multiple growth rate changes.

  Incorporating the given information into the multi-stage dividend discount model will yield the following:

  P = {[$0.70 * 1.35) / 1.145] + [($0.945 * 1.35) / 1.31103] + [($1.276 * 1.25) / 1.50112] + [($1.595 * 1.25) / 1.71879] + [($1.994 * 1.12) / (.145 - .12]/1.71879} Which can further be developed into:

  P = {$0.82533 + $0.97309 + $1.06254 + $1.15998 + $51.96} = $55. 98

• Question 2430:

  ________ means that the present value of expected cash inflows exceeds the asset's market price.

  A. Expected value
  B. Extra value
  C. Excess present value
  D. Past value
  C. Excess present value

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  Explanation

  By definition: the amount the PV of expected cash flows exceeds the asset's market price is excess present value. This is also called excess economic value or excess economic returns.