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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 251:

  Standard III (B) is ________.

  A. None of these answers
  B. Disclosure of Additional Compensation Arrangements
  C. Responsibilities of Supervisors
  D. Disclosure of Conflicts to Employer
  E. Obligation to Inform Employer of Code and Standards
  F. Duty to Employer
  F. Duty to Employer

  ---

  Explanation

  Standard III (A) deals with the Obligation to Inform Employer of Code and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer. Standard III (D) deals with Disclosure of Additional Compensation Arrangements. Standard III (E) deals with Responsibilities of Supervisors.

• Question 252:

  There are 2,000 eligible voters in a precinct. Despite protests from knowledgeable persons that a sample size of 500 was too large in relation to the total, the 500 selected at random were asked to indicate whether they planned to vote for the Democratic incumbent or the Republican challenger. Of the 500 surveyed, 350 said they were going to vote for the Democratic incumbent. Using the 0.99 confidence coefficient, what is the confidence limits for the proportion who plan to vote for the Democratic incumbent?

  A. 0.060 and 0.700
  B. 0.826 and 0.926
  C. None of these answers
  D. 0.397 and 0.797
  E. 0.612 and 0.712
  C. None of these answers

  ---

  Explanation

  Interval estimate can be found from p +/- z[p(1-p)/n]^0.5. Here we have n = 500, p = 350/500 = 0.7 and z = 2. 58 (for 99%). Therefore 0.7 +/- 2. 58*0.02049 and we get 0.647 and 0.7529.

• Question 253:

  If senior managers are unwilling to permit dissemination of adverse opinions about a particular corporate client, according to Standard IV (A.3), you should attempt to put that corporate client on a ________.

  A. holding-pattern
  B. restricted list
  C. moratorium register
  D. none of these answers
  E. suspension roster
  F. captive list
  B. restricted list

  ---

  Explanation

  To avoid violations of Standard IV (A.3), one of the procedures members can enact is to create a restricted list. If senior managers are unwilling to permit dissemination of adverse opinions about a particular corporate client, then the firm should remove the controversial company from the research universe and put it on a restricted list so that the firm disseminates only factual information about the company.

• Question 254:

  A stock has a beta of 0.85 and the risk-free rate is 6. 95%. Its dividend growth rate is 5. 2% and its P/E ratio is 11.6. If the firm has a dividend payout ratio of 63%, the market risk premium equals ________.

  A. 5. 91%
  B. 6. 54%
  C. 5. 15%
  D. 4. 33%
  D. 4. 33%

  ---

  Explanation

  P0/E1 = dividend payout/(k - g) Therefore, 11.6 = 0.63/(k - 0.052), giving expected return = k = 10.63%. Now, the CAPM expected return on the stock is given by k = Rf + beta*(Rm - Rf). Therefore, 10.63% = 6. 95% + 0.85*market premium, giving market premium = (10.63 - 6. 95)%/0.85 = 4. 33%.

• Question 255:

  A firm issues debt to repurchase equity and at the same time, experiences an increase in its profit margin. All else equal, using the Dividend Discount Model, its stock price ________.

  A. is not affected
  B. increases
  C. decreases
  D. insufficient information given
  B. increases

  ---

  Explanation

  Intuitively, it should be clear that the stock price rises since the profit margin has gone up and at the same time, the percentage of equity holders has gone down. To see this mathematically, note that the duPont system gives ROE = Profit margin * Total Asset Turnover * Financial Leverage. In the present case, the ROE increases since profit margin and Financial Leverage have both increased. The dividend growth rate, g, equals ROE*(1 - payout ratio). Hence, as ROE increases, the dividend growth rate increases with a constant payout ratio. In the Dividend Discount Model, the stock price increases as the dividend growth rate increases, all else equal.

• Question 256:

  Standard IV (A.3) relates to two major components and is titled ________ and Objectivity.

  A. None of these answers
  B. Impartiality
  C. Justice
  D. Autonomy
  E. Independence
  E. Independence

  ---

  Explanation

  Standard IV (A.3) - Independence and Objectivity, states that members shall use reasonable care and judgment to achieve and maintain independence and objectivity in making investment recommendations or taking investment action.

• Question 257:

  The coefficient of variation of X is three times that of Y. If X and Y have the same means, the variance of Y is:

  A. none of these answers.
  B. same as that of X.
  C. three times that of X.
  D. one-third that of X.
  A. none of these answers.

  ---

  Explanation

  The coefficient of variation equals the ratio of the standard deviation to the mean. Hence, if X and Y have the same means, then the standard deviation of X must be 3 times the standard deviation of Y.

• Question 258:

  The following information applies to a company's preferred stock: Current price $105. 00 per share Par value $100.00 per share Annual dividend $5. 00 per share The company issued the preferred stock at par and incurred a 10% floatation cost. If the company's marginal corporate tax rate is 40%, what is the after-tax cost of preferred stock?

  A. 5. 0%
  B. 10.0%
  C. 3. 0%
  D. 4. 8%
  E. 5. 6%
  F. 2. 9%
  E. 5. 6%

  ---

  Explanation

  The cost of preferred stock is calculated as the preferred stock dividend divided by the net issuing price. The dividend for this preferred stock is $5. 00, and the net issuing price was $90.00. Thus the cost of preferred stock is 5 divided by 90 or 5. 6%. There are no tax savings associated with the use of preferred stock, therefore no tax adjustments are made when calculating the cost.

• Question 259:

  An increase in the expected future inflation rate will:

  A. Move the short-run supply curve to the left.
  B. Move the short-run supply curve to the right.
  C. Move the long-run supply curve to the right.
  D. Move the long-run supply curve to the left.
  A. Move the short-run supply curve to the left.

  ---

  Explanation

  An increase in the expected future inflation rate will have two impacts. First, sellers will have reduced incentive to sell at current prices; they would rather store the current production for future sales at higher prices. Secondly, resource suppliers, to the extent that they anticipate the higher inflation, will increase the resource prices in their contracts. Both these factors will serve to reduce the quantity the producers will be ready to supply at any given price, moving the short run supply curve to the left. The long-run supply curve will not be affected since over that period, all adjustments to the expected future conditions will have been made, restoring the equilibrium.

• Question 260:

  Carlos Johanson, a quantitative analyst with Eastern Rhodium Institutional Brokerage, has been instructed to perform a regression analysis to test whether the proliferation of neural networks is positively related to the growth of domestic research grants. Mr. Johanson begins the process by formulating and stating a hypothesis. Now that the hypothesis has been explicitly stated, Mr. Johanson should proceed to which of the following steps? Choose the best answer.

  A. Specifying the significance level
  B. Stating the decision rule
  C. Collecting the data and performing the calculations
  D. Identifying the appropriate test statistic and probability distribution
  E. Performing an autocorrelation test
  D. Identifying the appropriate test statistic and probability distribution

  ---

  Explanation

  Hypothesis testing involves a series of seven explicit steps: Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision. In this example, Carlos Johanson, a quantitative analyst, has been instructed to perform a regression analysis analyzing the relationship between two sets of variables. Mr. Johanson began his task with the appropriate first step - formulating and stating the hypothesis. The next step in the hypothesis testing process is to identify the appropriate test statistic and its probability distribution.