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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2561:

  Which of the following is/are true about a standard normal distribution?

  I. It has zero skewness.

  II. It is characterized completely by exactly one parameter.

  III. It ranges from negative infinity to positive infinity.

  IV.

  It has a non-zero mean and variance.

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

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  Explanation

  A normal distribution is characterized by two parameters, the mean and the variance. The standard normal distribution, though, has a zero mean and a variance of 1 and hence, has no free parameters.

• Question 2562:

  Which of the following equations correctly illustrates the calculation of the cost of equity using the Dividend-Yield-plus-Growth-Rate approach?

  A. Annual dividend/current stock price * (1-tax rate)
  B. (Next annual dividend/current stock price) + expected growth rate
  C. (Retention rate)*(ROE)
  D. Risk-free rate of return + beta(expected return on the market - risk-free rate of return)
  E. Payout ratio * (ROE/[expected return-required rate of return])
  F. (Last annual dividend/[expected return - required return]) * expected growth rate
  C. (Retention rate)*(ROE)

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  Explanation

  The Dividend-Yield-plus-Growth-Rate approach calls for the following components: next annual dividend, current stock price, and expected growth rate. This approach, also known as the Discounted Cash Flow (DCF) method, is a flexible and very adept tool in the hands of the financial analyst, and is it is imperative that the CFA candidate fully understand both the applications and the methodology of this approach. The first choice illustrates the Capital Asset Pricing Model, while the second represents an approach for calculating sustainable growth rate. The remaining answers are somewhat fictitious.

• Question 2563:

  Keynesian analysis suggests that a planned budget surplus

  A. will affect aggregate demand only if the money supply decreases by the size of the surplus.
  B. is proper during periods of inflation but may increase unemployment if timed improperly.
  C. will stimulate output and employment.
  D. will stimulate both consumption and income.
  B. is proper during periods of inflation but may increase unemployment if timed improperly.

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  Explanation

  Keynesians support "counter-cyclical" polices: that is, under an inflationary/full capacity economy, the government should reduce spending (operate under a budget surplus) to contract aggregate demand and control economic growth so as to avoid high levels of inflation. Thus, a budget surplus is appropriate during periods of inflation. If such a policy is enacted when the economy is below full capacity, the proper counter-cyclical policy for the government is to deficit spend. Thus, if the government operates under a budget surplus in this situation, aggregate demand will further contract and unemployment will increase.

• Question 2564:

  Under the null hypothesis, Ho, x = y. Under the alternative hypothesis, x does not equal y. If the critical z-statistic for the desired significance level is 1.68 and you find the z-statistic to be -3. 2, you should:

  A. Reject the alternative hypothesis.
  B. Reject the null hypothesis.
  C. Fail to reject the null hypothesis.
  D. Accept the null hypothesis.
  B. Reject the null hypothesis.

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  Explanation

  Since the z-statistic is larger in magnitude than the critical value, you should reject the null hypothesis. Note that all the other alternatives loosely mean the same thing.

• Question 2565:

  The relationship of the total debt to the total equity of a firm is a measure of ________.

  A. liquidity
  B. creditor risk
  C. none of these answers
  D. profitability
  E. solvency
  B. creditor risk

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  Explanation

  The ratio of total debt to total equity is a measure of risk to creditors because it helps in evaluating a company's relative reliance on debt and equity financing.

• Question 2566:

  What is the major difference between venture capitalists and other types of portfolio managers?

  A. Venture capitalists only invest in start-up companies, while other types of portfolio managers do not.
  B. Portfolio managers do not become too involved with the companies they invest in, while venture capitalists do.
  C. Portfolio managers cannot exert control over a company in the way a venture capitalist can.
  D. There are no major differences between the two.
  E. Venture capitalists require a much higher rate of return over the life of the investment.
  B. Portfolio managers do not become too involved with the companies they invest in, while venture capitalists do.

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  Explanation

  The major difference between venture capitalists and other types of portfolio managers is that portfolio managers do not become too involved with the companies they invest in because they may have to liquidate positions quickly. This is the direct opposite of venture capitalists who must establish more personal relationships with the entrepreneurs in whom they invested over much longer time periods.

• Question 2567:

  Which of the following is a reason for why valuation of bonds is difficult?

  A. Uncertainty of the required rate of return
  B. Uncertainty of time pattern of returns
  C. Uncertainty of size of returns
  D. Uncertainty of the market interest rate
  A. Uncertainty of the required rate of return

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  Explanation

  The size and time pattern of returns is known with bonds. Payments follow a regular schedule. But the required rate of return, which is needed to value bonds, is generally not known.

• Question 2568:

  The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the:

  A. average price of beginning inventory plus purchases during the period
  B. average price per unit of ending inventory
  C. average price per unit of beginning inventory
  D. average price of ending inventory plus purchases during the period
  A. average price of beginning inventory plus purchases during the period

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  Explanation

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period).

• Question 2569:

  The results of the regressions using 200 observation on a variable Y against X are as follows:

  Coefficient Standard error intercept 3. 62. 1 slope 8.11.3

  R square = 49%

  The regression equation can be expressed as:

  A. Y = 3. 6 + 8.1 X + error
  B. X = 8.1 + 3. 6 Y + error
  C. Y = 8.1 + 3. 6 X + error
  D. X = 3. 6 + 8.1 Y + error
  A. Y = 3. 6 + 8.1 X + error

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  Explanation

  Note that Y is regressed against X, implying that Y is the dependent (left-hand side) variable and X is the independent (right-hand side) variable. The intercept in a regression equals the constant term and the slope coefficient is the multiplier on the independent variable.

• Question 2570:

  An investment of $100 grows in four years to $345. The investor observes that the annual arithmetic rate of return and the geometric rate of return were the same over this period. The annual arithmetic rate of return must be ________.

  A. 40.33%
  B. 33. 93%
  C. 34. 32%
  D. 37. 84%
  E. 36. 29%
  E. 36. 29%

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  Explanation

  If the annual geometric rate of return is r, then 100 * (1 + r)^4 = 345. This gives r = 36. 29%. Note that the only way the mean will be equal to the geometric mean if every year, the stock experienced a return of 36. 29% per year.