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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2551:

  Which of the following projects is likely to have multiple Modified Internal Rates of Return. Assume a 14. 5% cost of capital. 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. More than one of these answers are correct
  C. None of these answers is correct
  D. Project A
  E. Project B
  F. Project C
  C. None of these answers is correct

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  Explanation

  Remember that the Modified Internal Rate of Return method will not produce multiple answers for nonnormal projects. The fact that MIRR will not produce multiple answers for non-normal projects is one of the reasons that this method should be considered as superior to the traditional Internal Rate of Return method.

• Question 2552:

  If 68% of the observations on a normal distribution fall between -20 and + 60, the mean and the standard deviation of the distribution are:

  A. 20,40
  B. 40,20
  C. 40,40
  D. 20,20
  A. 20,40

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  Explanation

  Since the normal distribution is symmetrical about the mean, the mean is equal to (-20 + 60)/2 = 20. Further, for a normal distribution, 68% of the observations lie within one standard deviation of the mean. Therefore, the standard deviation equals 60-20 = 40.

• Question 2553:

  The weights (in grams) of the contents of several small bottles are 4, 2, 5, 4, 5, 2 and 6. What is the sample variance?

  A. 6. 92
  B. None of these answers
  C. 1.96
  D. 2. 33
  E. 4. 80
  D. 2. 33

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  Explanation

  Sample variance is given by: (Sum of squared deviation from the mean)/(n-1). Mean is 4. Sample variance = 14/6 = 2. 33

  xx-mean(x-mean)^2 2-24 2-24

• Question 2554:

  Given the following distribution regarding the cost of textbooks:

  Cost of Textbooks Number $25 - $342 $35 - $445 $45 - $547 $55 - $6420 $65 - $7416

  What is the relative class frequency for the $25 - $34 class?

  A. 10%
  B. 2%
  C. 5%
  D. None of these answers
  E. 4%
  E. 4%

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  Explanation

  The relative frequency is given by 2/50 = 0.04 = 4%

• Question 2555:

  Which of the following statements about expected inflation are true?

  A. Interest rate volatility will increase
  B. Price increases will typically outpace increases in wages
  C. All of these answers are correct
  D. Lenders are not compensated for the loss of purchasing power when funds are repaid
  E. None of these answers is correct
  E. None of these answers is correct

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  Explanation

  Market participants will compensate for expected inflation. For example, when lenders make loans, they will price a certain inflation rate into the interest rate. If inflation is as expected, then the rate will adequately compensate the lender for lost purchasing power. Inflation is generally assumed to impact all prices, including wages, equally, therefore workers will demand wage increases in line with inflation.

• Question 2556:

  Advocates of the top-down, three-step approach believe that

  A. an underpriced stock can be found from technical analysis.
  B. political considerations are not relevant to stock values.
  C. the economy and industry have a significant effect on the returns of individual stocks.
  D. the economy and industry have little effect on the returns of individual stocks.
  C. the economy and industry have a significant effect on the returns of individual stocks.

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  Explanation

  Advocates of the top-down, three-step approach stress the importance of economy and industry-wide conditions on stock values and returns.

• Question 2557:

  The primary cause of frictional unemployment is

  A. the presence of legislated high minimum wages that price unskilled workers out of the market.
  B. discouraged workers who quit looking for a job after extended periods of unsuccessful job search.
  C. inaccurate and costly information about job opportunities.
  D. high unemployment benefits that reduce the incentive of unemployed workers to search for employment.
  C. inaccurate and costly information about job opportunities.

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  Explanation

  Frictional unemployment results from a scarcity of information and the search activities of both employers and employees for information that will help them make better employment choices.

• Question 2558:

  Which of the following represents a "smart money" technical indicator? Choose the best answer.

  A. Block Uptick/Downtick Ratio.
  B. Diffusion Index.
  C. More than one of these answers is correct.
  D. Breadth of market.
  E. Short sales by specialists.
  F. Percentage of futures traders bullish on stock index futures.
  E. Short sales by specialists.

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  Explanation

  Of the choices listed, only "short sales by specialists" represents a "smart money" technical indicator. Technical analysts view a large increase in short sales by specialists as a bearish near-term indicator. Conversely, a decline in the ratio of short sales by specialists is viewed as a near-term bullish indicator. Data for short sales by NYSE specialists is published weekly in Barron's. The normal ratio of short sales by specialists has been approximately 40%, and technicians view a decline to 30% or below as a bullish sign. Conversely, technicians would view a ratio of 50% or greater as a bearish signal.

  "Breadth of market" refers to the measure of advancing versus declining issues. The "Diffusion Index" is a measure of market breadth and is defined as the volume of advancing issues plus one-half of the volume of unchanged issues, divided by the total number of issues traded. Short interest measures the total volume of outstanding short positions, and the sentiment of futures traders is used by contrarian technical analysts, who take a contra approach. The "Block Uptick/ Downtick Ratio" is used to measure the near-term sentiment of institutions.

• Question 2559:

  Clay Industries, a large industrial firm, is in the process of developing a coal refining system which greatly increases the efficiency of coal as an energy source. However, the new system has been criticized as leading to a tremendous increase in emissions of CFTA, a dangerous carbon-based pollutant believed to be linked to thyroid cancer. While the firm is concerned about the possible risk to the public posed by the new system, the management of Clay Industries decides that the sales potential for the product outweighs both the risk to society and the liability exposure of the firm. Which of the following choices best describes this situation faced by Clay Industries?

  A. Opportunity cost problem
  B. Diminishing returns problem
  C. Cannibalization problem
  D. Positive externality
  E. Negative externality
  F. Principal/agent problem
  E. Negative externality

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  Explanation

  In this situation, a negative externality exists for Clay Industries and the development of the new coal refining system. A negative externality is some detrimental effect which is to result on stakeholders from the acceptance of a project. While often difficult to quantify, externalities are an important consideration in the accept/reject decision in capital projects. Externalities can be both positive and negative.

• Question 2560:

  Calculating COGS under a periodic inventory system relies on which of the following?

  A. a physical count of the ending inventory
  B. an analysis of the inventory value of each sale
  C. both of these answers are correct
  D. neither of these answers is correct
  A. a physical count of the ending inventory

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  Explanation

  Under the periodic inventory system, only the ending inventory is counted and priced. Cost of goods sold is determined by deducting the cost of the ending inventory from the cost of goods available for sale.