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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 241:

  ________ accounting is mandatory for fixed-income securities.

  A. Accrual
  B. Cash
  C. Flexible
  D. Equal
  E. Risk-free
  F. Total
  A. Accrual

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  Explanation

  Accrual accounting must be used for fixed-income securities and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and numerator.

• Question 242:

  Suppose you have two assets, A and B. A has returns of 10%, 2%, and 15%, with probabilities 40%, 50%, and 10% respectively. B has returns of 5%, 10%, and -20%, with probabilities 40%, 50%, and 10% respectively. What is the return covariance between assets A and B?

  A. -50.23%%
  B. -60.65%%
  C. -10.78%%.
  D. -32. 45%%
  D. -32. 45%%

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  Explanation

  First we must find the expected returns for A and B. These are 6. 50% and 5. 00%, respectively. Second, we find the difference between each observation and the average: (10% - 6. 5%), (2% - 6. 5%), and (15% - 6. 5%) for A, and (5% - 5%), (10% - 5%), and (-20% - 5%) for B. Next, we take the probability weighted cross product of these differences and sum them. So we get 3. 5% * 0% * 40% + (-4. 5%) * 5% * 50% + 8.5% * (-25%) * 10% = -32. 45%%.

• Question 243:

  An AIMR member:

  I. must report any criminal activity to the appropriate legal or regulatory authority.

  II. may be held responsible for any illegal activity he associates himself with.

  III. may be held liable for violations by others when he is unaware of the facts giving rise to the violations.

  IV.

  can be held liable for violations if he does not take actions to dissociate himself from them.

  A. I, II, III and IV
  B. II and IV only
  C. I, II and IV only
  D. II, III and IV only
  B. II and IV only

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  Explanation

  Standard I does not require a member to report the illegal activity to the appropriate regulatory authorities, though it may be prudent to do so in many cases if it is evident that the activity is illegal.

• Question 244:

  William Henry, a quantitative analyst with Smith, Kleen and Beetchnutty Brokerage, is examining a data sample and has amassed the following information: Standard deviation of the sample: 0.97 Number of observations: 109 Degrees of freedom: 2 Sample mean: 11.03 Assume that Mr. Henry formulates a null hypothesis that states that the value of the population mean is equal to zero. 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. 0.0929; 10.90
  B. 0.0929; 118.73
  C. 0.0938; 117. 59
  D. None of these answers is correct.
  E. 0.1858; 59.36
  F. 0.1858; 11.41
  G. 0.0938; 58.80
  B. 0.0929; 118.73

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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 = [0.97 / 10.44] = 0.0929}

  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 = [11.03 - 0.00] / 0.0929 = 118.73}

  This is a very large value for the test statistic. In this example, the null hypothesis would likely be rejected unless a very low confidence level is assumed.

• Question 245:

  Which of the following disclosures must a firm make in order to be in compliance with AIMR-PPS?

  I. The effective date of firm compliance.

  II. A measure of the dispersion of individual component portfolio returns around the aggregate composite return.

  III.

  The existence of a minimum asset size below which portfolios are excluded from the composite.

  A. I, II and III
  B. I and III only
  C. I only
  D. I and II only
  A. I, II and III

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  Explanation

  All of these are mandatory disclosures under AIMR-PPS.

• Question 246:

  Which of the following is/are true?

  I. The mean of a sample represents its average value.

  II. The median can only be calculated if the sample contains an odd number of values.

  III. The mode is not affected by extreme outliers in the data.

  IV.

  For samples with an even number of data points, the mode is preferable to the median as a measure of central tendency.

  A. III only
  B. IV only
  C. II only
  D. I only
  E. I and II
  F. I, III and IV
  G. II and III
  H. I and III
  H. I and III

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  Explanation

  Note that the mode is not affected by outliers unless an extreme value occurs frequently. In such a case, it is likely that the observed data contain large errors and hence, it must be reexamined. The median of a set with odd number of

  observations equals the "middle" observation. If the number of observations is even, the median is the mean of the two middle observations. Thus, II is false.

  Finally, there is no reason for a rule like (IV) to hold.

• Question 247:

  Mary Hames has bought a long FRAwith a notional principal of $10 million. The agreement expires in 30 days, and is based on 90-day LIBOR. The FRA is based upon an initial rate of 4. 75%. Assume that at expiration, 90-day LIBOR is 5. 5%, and 60-day LIBOR is 5. 25%. Calculate the payoff at expiration.

  A. $12,338 paid to Hames.
  B. $18,496 paid to Hames.
  C. $19,008 paid to Hames.
  B. $18,496 paid to Hames.

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  Explanation

• Question 248:

  According to the AIMR-PPS, all actual fee-paying discretionary portfolios must be included in at least one composite defined according to

  A. managerial style of investment portfolio.
  B. similar strategy or investment objective.
  C. size of investment portfolio.
  D. date of portfolio inception.
  B. similar strategy or investment objective.

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  Explanation

  All fee-paying discretionary portfolios must be included in at least one composite defined according to similar strategy or investment objective. This is a requirement for creation and maintenance of composites.

• Question 249:

  To the extent that people eventually adjust to demand stimulus policies, persistent expansionary macropolicy will lead to

  A. lower money interest rates.
  B. a reduction in the long-run unemployment.
  C. inflation with no permanent reduction in unemployment.
  D. more rapid economic growth but no change in prices.
  C. inflation with no permanent reduction in unemployment.

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  Explanation

  Correctly anticipated inflation will result in persistent, though consistent, inflation with no effect on unemployment since there will be no effect on the real wage.

• Question 250:

  Andrea Anastasio heads the research wing at HiLo Funds, Ltd., an investment advisory and money management firm. Andrea was recently informed by one of her junior analysts, Marcus Cambus, that the investment recommendation on HotPots food chain stock needed an immediate downgrade from hold to sell. This was based on talks with HotPots' management whom revealed that HotPots would be launching an ill-advised expansion plan soon (this information has been discussed in the financial newspapers, too). Andrea checked Marcus' analysis and agreed with the conclusions. Deciding to include this in her research newsletter, Andrea informed a few of the portfolio managers about the change. She did warn them that no action on the news should be taken before the newsletter was out for at least 4 days. However, Cotler, one of her subordinates and an AIMR member, inadvertently and prematurely sold off a large chunk of the holdings of Hotpots stock in one of his larger accounts. A month-end review of accounts DID NOT catch the violation. Which of the following is/are true?

  I. Andrea has not violated any AIMR code but Cotler has violated Standard III (B) - Duty to Employer.

  II. Andrea has violated Standard III (E) - Responsibilities of Supervisors.

  III. Cotler has violated Standard V (A) - Prohibition against Use of Non-Public Information.

  IV.

  Cotler has violated Standard IV (B.3) - Fair Dealing.

  A. III and IV only
  B. II and IV only
  C. I only
  D. II, III and IV only
  B. II and IV only

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  Explanation

  Since the information has been discussed in the financial newspapers, it certainly is not non-public information and no violation of Standard V (A) - Prohibition against Use of Non-Public Information has occurred. However, by treating one of his larger accounts differently, Cotler has violated Standard IV (B.3) - Fair Dealing which requires him to treat all of his clients fairly, without bias. By ignoring Andrea's admonitions and committing these violations, he has potentially harmed his employer (this is in breach of Standard II (B) - Professional Misconduct, not Standard III (B) - Duty to Employer, which is quite specific about its scope of activities covered). Andrea, on the other hand, has been negligent in not carrying out her supervisory duties. She should have either not revealed the change in investment recommendation to her employees or if she deemed it necessary to do so, should have takenappropriate steps to ensure that violations of her instructions did not occur. Simple verbal or even written warnings are not good enough to absolve her of violating Standard III (E) - Responsibilities of Supervisors. Further, the fact that a month- end review of accounts did not detect Cotler's irresponsible actions implies that stricter or more efficient monitoring is required of Andrea.