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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2501:

  Chan and Chung are two of the five Managing Directors of Alfalfa, a mid-size hedge fund. In a recent court case involving a securities lawsuit, Chan was called on to testify as an expert on securities research. During his testimony, Chan had to invoke several results from a proprietary research carried out by his staff at Alfalfa. He did so without specifically attributing the results to them. At around the same time, Chung had to meet with a few prospective clients for a business presentation. During this presentation, he showed them some of the results obtained by Chan's team, without specifically acknowledging the research team. Instead, he referred to them with phrases like, "our studies indicate that..." In this set of events, as it relates to Standard II(C) - Prohibition against Plagiarism,

  A. neither Chan nor Chung has violated the standard.
  B. Chan has not violated the standard while Chung has.
  C. both Chan and Chung have violated the standard.
  D. Chan has violated the standard while Chung has not.
  D. Chan has violated the standard while Chung has not.

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  Explanation

  In the interactions with clients, senior management members represent the firm and as such, do not have to give specific attribution to research results obtained by employees of the firm. Hence, Chung has committed no violation. On the other hand, in the capacity of an expert, Chan is not representing the firm but himself. In such a case, he has to properly acknowledge the sources of all results he quotes. Refer to Standard II(C).

• Question 2502:

  Mark Davidson and James Case are bond traders at a large fixed-income investment firm. Both Davidson and Case have developed bond valuation models for bonds with embedded options. Using their respective valuation models, the traders have calculated the price of BMC Corp.'s callable and putable bonds. Davidson uses a yield volatility assumption of 23%, while Case uses an assumption of 31%. Other than the volatility assumption, the traders use identical inputs for the valuation models. Which of the following best summarizes the output of the two valuation models?

  A. Davidson's model will calculate a lower value for the call option and a lower value for the putable bond.
  B. Case's model will calculate a higher value for the call option and a lower value for the putable bond.
  C. Davidson's model will calculate a lower value for the put option and a lower value for the callable bond.
  A. Davidson's model will calculate a lower value for the call option and a lower value for the putable bond.

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  Explanation

• Question 2503:

  Which measure of central tendency is found by arranging the data from low to high and selecting the middle value?

  A. Geometric mean
  B. Median
  C. None of these answers
  D. Mean
  E. Mode
  B. Median

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  Explanation

  This is exactly how the median is found. Make sure you know how to find the median in a frequency distribution also.

• Question 2504:

  Which measure of central tendency is used to determine the average annual percent increase?

  A. Mode
  B. Mean
  C. Weighted mean
  D. Median
  E. Geometric mean
  E. Geometric mean

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  Explanation

  The formulaic presentation of the geometric mean is suited for calculating percentage changes. The geometric mean of a set of n positive numbers and is defined as the nth root of the product of the n numbers The two main uses of the geometric mean (GM) are:

  1. To average percents, indexes, and relatives, and

  2. To determine the average percent increase in sales, production or other business or economic series from one time period to another.

• Question 2505:

  A portfolio manager with Churn Brothers Brokerage is examining shares of a large industrial firm and has gathered the following information:

  Market discount rate: 13. 75% per year Observed Price/Earnings ratio: 15. 43

  Given this information, what is the Franchise Price/Earnings ratio for this large industrial firm?

  A. The answer cannot be calculated from the information provided
  B. 8.16
  C. 22. 70
  D. 17. 89
  E. 13. 56
  B. 8.16

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  Explanation

  The Franchise Factor method of value measurement is in many respects similar to EVA and MVA calculations. When examining a company using the franchise value approach, the observed price-to-earnings ratio is broken down into its two components - (1) the "base P/E," which is based on the Company's ongoing performance, and (2) a "franchise P/E" that is based on the expected value of new and profitable business opportunities. This relationship is illustrated as follows:

  Franchise P/E = Observed P/E - Base P/E

  where the Base P/E equals the reciprocal of the market discount rate. For example, if the market discount rate is 13. 75%, the base P/E would be equal to 7. 27273 In this example, all the necessary information has been provided, and the calculation of the Franchise P/E is as follows:

  Franchise P/E = (15. 43 - 7. 27273) = 8.15727

• Question 2506:

  The ________ approach derives specific estimates for the earnings multiplier based on a range of estimates for the dividend payout, required rate of return and dividend growth rate.

  A. Gauss-Markowitz
  B. market driven
  C. specific estimate
  D. direction of change
  C. specific estimate

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  Explanation

  There are two ways to estimate the earnings multiplier: (1) Direction of change approach and (2) Specific estimate approach. The first focuses on change and change direction, while the other focuses on scenario-based estimates.

• Question 2507:

  Which best describes venture capitalists?

  A. They typically exert control over a firm so it will generate required returns.
  B. They usually will fire the management team of the entrepreneurial firm and replace with their own management team.
  C. They are typically passive investors and invest in a company because they like the management team.
  D. They will only invest in a firm that will provide a return of 100%+ when they cash out.
  E. They will structure financing to the liking of the entrepreneur so that the company has a better opportunity to grow.
  C. They are typically passive investors and invest in a company because they like the management team.

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  Explanation

  Most venture capitalists, however, have no desire to control a venture. The main reason they invest in a company in the first place is because they like the management team. Venture capitalists are typically passive investors and experts in financing companies, structuring deals and advising management on important long-term decisions.

• Question 2508:

  When formulating an investment policy for a client, all of the following fall under "investor constraints," except ________.

  A. expected cash flows
  B. type and nature of clients
  C. regulatory and legal circumstances
  D. investor preferences, circumstances and unique needs
  E. liquidity needs
  F. none of these answers
  G. proxy voting
  H. investable funds
  B. type and nature of clients

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  Explanation

  Type and nature of clients is considered under the "client identification" category.

• Question 2509:

  Which of the following is/are assumptions of a linear regression?

  I. For every given value of the independent variable, the dependent variable is normally distributed.

  II. The error terms are normally distributed with mean zero.

  III.

  The error terms are statistically uncorrelated.

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

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  Explanation

  For every given value of the independent variable, the dependent variable is normally distributed, the error terms are normally distributed with mean zero, and the error terms are statistically uncorrelated.

• Question 2510:

  Argus is a large-accounts money manager with a high-profile hedge fund. He manages all his accounts in a very efficient manner and all his clients are satisfied with his performance. Argus has one character flaw, though. He is given to making sexually inappropriate comments in mixed company, touching female employees in inappropriate ways and cracking adult jokes loudly. This makes many of the other employees uncomfortable in his presence. Argus

  A. none of these answers.
  B. has violated AIMR standard on professional incompetence.
  C. has violated AIMR standard on professional conduct.
  D. has not violated any AIMR standard since he has kept his clients satisfied and the professional misbehavior is an internal matter to be handled by his superiors.
  C. has violated AIMR standard on professional conduct.

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  Explanation

  Standard II (B) is designed to address professional behavior and personal integrity. The behavior should not put the firm at risk in any way or reflect adversely on the profession. Argus's behavior leaves his firm open to sexual harassment lawsuits and in general, reduces the productivity and comfort zone of female employees. Hence, he is in violation of Standard II (B) - Professional Misconduct.