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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2631:

  Jim Williams, a security analyst with Smith, Kleen and Beetchnutty, identifies promising investments by first evaluating the global macroeconomic environment, then identifying the prospects of individual regions and companies. Once promising areas have been identified, Mr. Williams then determines which industries are expected to flourish within these areas. Finally, individual companies are examined within the aforementioned industries. Which of the following best describes the process used by Mr. Williams?

  A. None of these answers is correct.
  B. Macroeconomic Cycle Approach
  C. Sensitivity Analysis Approach to security evaluation
  D. Top down Approach
  E. Bottom up Approach
  D. Top down Approach

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  Explanation

  The approach illustrated within this example is the Top Down, or "Macro" approach. When using this method, an analyst first begins by evaluating the macroeconomic environment, and then moves on to specific regions and countries. Next, individual industries are examined in an attempt to determine their fundamentals. The final step in the Top Down Approach is to examine individual companies.

  The Top Down Approach is contrasted with the Bottom Up Approach, which begins by evaluating the fundamentals of individual companies.

• Question 2632:

  Simone Girau holds a callable bond and Chi Rigazio holds a putable bond. Which of the following statements about the two investors is TRUE?

  A. As the yield volatility increases, the value of both Girau's bond and the underlying option increases.
  B. Both investors calculate the value of the bond held by adding the value of the option to the value of a similar straight bond.
  C. Girau's bond has less potential for price appreciation.
  D. If yield volatility increases, the value of Rigazio's option will decrease.
  C. Girau's bond has less potential for price appreciation.

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  Explanation

  When a bond has a call provision, the potential for price appreciation is reduced, because the call caps the price of the bond near the call price. Even if interest rates fall considerably, it is unlikely that investors would pay a price that exceeds the call price. The other statements are false. To calculate the value of a putable bond, it is correct to add the option value to the value of a similar straight bond. However, to calculate the callable bond value, subtract the option value from that of a similar straight bond. As a result, when yield volatility increases (thus increasing the option value), the value of a callable bond decreases and the value of a putable bond increases. A call option does benefit the issuer, but a put option benefits the holder. Embedded options (puts and calls) increase in value when volatility increases.

• Question 2633:

  Which of the following is/are true?

  I. Type I error is the event in which we reject the null when it is false.

  II. Type II error occurs when we accept the null when it is false

  III. Type I error occurs if we accept the alternative when it is false.

  IV.

  Type II error is the event where we reject the alternative when it is true.

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

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  Explanation

  Type I error is the event in which we reject the null when it is true. This is the same as accepting the alternative when it is false. Type II error is the event in which we fail to reject the null when it is false. This is the same as rejecting the alternative when it is true.

• Question 2634:

  The graph below combines the efficient frontier with the indifference curves for two different investors, X and Y (represented by U(X) and U(Y)). The letters A, B, C, and D represent four distinct portfolios.

  Which of the following statements about the above graph is CORRECT?

  A. The backward bend in the efficient frontier is due to less than perfect correlation between portfolio assets.
  B. Investor X would be better off moving to indifference curve U(X)1 and Portfolio C because of the higher return on that portfolio.
  C. Investor X is less risk-averse than Investor Y.
  D. Portfolio B is an optimal portfolio, Portfolio A is suboptimal.
  A. The backward bend in the efficient frontier is due to less than perfect correlation between portfolio assets.

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  Explanation

  This statement is true. Markowitz was the first person to recognize that there are no perfectly positively correlated assets or perfectly negatively correlated assets. Thus, the efficient frontier has the shape noted above. The other choices are incorrect. The optimal portfolio for each investor is on the highest indifference curve that is tangent to the efficient frontier. Thus, portfolios A and B are both optimal portfolios, but for different investors. In addition, any portfolio on the efficient frontier is superior to one that is not. Thus, Investor X would not be better off with Portfolio C (this portfolio is on a lower indifference curve and has more risk.) Investor X has a steep indifference curve, indicating that he is risk-averse. Flatter curves, such as those for investor Y, indicate a less risk-averse investor.

• Question 2635:

  Which of the following represents an investing activity in the statement of cash flows ________.

  A. stock dividend
  B. purchase of inventory
  C. depreciation of plant assets
  D. sale of plant assets at a loss
  D. sale of plant assets at a loss

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  Explanation

  The sale of a fixed asset at a loss is classified under investing activities.

• Question 2636:

  In a pension plan, the duty of a fiduciary is to the ________.

  A. Board of Directors
  B. none of these answers
  C. plan sponsor
  D. immediate supervisor
  E. plan participants and their beneficiaries
  E. plan participants and their beneficiaries

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  Explanation

  In a pension plan, the duty of the fiduciary is to the plan participants and their beneficiaries rather than to the plan sponsor that has the power to hire and fire the investment manager. If urged to make investments that might be of direct benefit to a sponsoring community or to the community at large, the manager must ensure that such investments are legal and do not impair the integrity of the funds in question or the financial security of the participants/beneficiaries.

• Question 2637:

  Based on the following information, what is the net asset value (NAV) per share. There are currently no expenses and no load. Cap Stock Sold $109,000 Price per share $10

  

  A. $13. 26.
  B. $27. 03.
  C. $15. 96.
  D. $27. 03.
  C. $15. 96.

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  Explanation

  

• Question 2638:

  Which of the following is/are true about insider trading laws?

  I. Corporations cannot discriminate amongst recipients without risking insider trading liability.

  II. Information provided to a group of analysts remains non-public till it is made available to investors in general.

  III.

  If a member receives inside information that he deems material, the member must disseminate the information to the public as soon as possible and not trade on it to avoid insider trading charges.

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

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  Explanation

  If a member receives inside information that he deems material, the member must: a. refrain from making decisions based on the information. b. encourage the firm to make the information publicly available. However, because the information is confidential, the member cannot unilaterally choose to broadcast it to the public. Indeed, he has an obligation not to personally disclose the information to an outsider.

• Question 2639:

  Jack Saunders is analyzing Barco Incorporated, an industrial conglomerate company. Saunders is estimating the intrinsic value for Barco Incorporated by forecasting the company's earnings per share and earnings multiplier. Which of the following attributes of Barco is least likely to increase the company's earnings multiplier?

  A. Barco Incorporated has never had a restructuring charge in its history.
  B. Barco Incorporated^ earnings move in tandem with overall economic growth.
  C. Barco Incorporated's dividend has been increasing for the last 30 years.
  B. Barco Incorporated^ earnings move in tandem with overall economic growth.

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  Explanation

• Question 2640:

  The mean amount spent by a family of four on food per month is $500 with a standard deviation of $75. Assuming that the food costs are normally distributed, what is the probability that a family spends less than $410 per month?

  A. 0.1151
  B. 0.0362
  C. None of these answers
  D. 0.2158
  E. 0.8750
  A. 0.1151

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  Explanation

  z = (X - u)/sigma = (410 - 500)/75=-1.2. z = 1.2 is 0.3849. Since 410 is below the mean, 1.0 - 0.8849 = 0.1151.