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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2641:

  Which of the following is not an advantage of technical analysis?

  A. It does not involve adjusting for accounting problems.
  B. It tells when to buy and sell not why investors are buying and selling.
  C. It only incorporates economic reasoning.
  D. It is quick and easy.
  C. It only incorporates economic reasoning.

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  Explanation

  It incorporates economic and psychological reasoning.

• Question 2642:

  A firm using LIFO accounting has a LIFO reserve of 600, with a LIFO ending inventory of 4,900. It is currently in the 40% tax bracket. If it switches to FIFO accounting, it's equity ________.

  A. decreases by 240
  B. decreases by 360
  C. increases by 360
  D. increases by 240
  C. increases by 360

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  Explanation

  The presence of a LIFO reserve implies that by following LIFO, the firm has been able to deduct higher COGS from gross income than under FIFO (remember that LIFO reserve equals inventory value under FIFO minus inventory value under LIFO and this will be positive when the COGS under FIFO is lower than that under LIFO). thus, the retained earnings (and hence equity) is understated by LIFO Reserve*(1 - tax rate). Therefore, when the firm switches from LIFO to FIFO, the equity is increased by 600*(1 - 0.4) = 360.

• Question 2643:

  The mean of a normal probability distribution is 500 and the standard deviation is 10. About 95 percent of the observations lie between what two values?

  A. None of these answers
  B. 475 and 525
  C. 480 and 520
  D. 350 and 650
  E. 400 and 600
  C. 480 and 520

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  Explanation

  95% lie between plus and minus two standard deviations of the mean.

• Question 2644:

  An increase in the ratio of short sales by specialists to total short sales is interpreted by smart-money technicians as:

  A. a bullish signal.
  B. none of these answers.
  C. a hold signal.
  D. a bearish signal.
  D. a bearish signal.

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  Explanation

  As part of their market-making activities, specialists regular indulge in short-selling activity. However, since they have some discretionary authority over short selling, smart-money technicians (who track the behavior of "smart" investors) consider a low participation rate by specialists in the short-selling activity as a bullish signal. This participation rate is characterized by the ratio of specialist short sales to total short sales. When this ratio falls below 30%, smart money says it is a bullish signal and when it rises above 50%, it is considered a bearish signal.

• Question 2645:

  The marketing department of a nationally known cereal maker plans to conduct a national survey to find out whether or not consumers of flake cereals can distinguish one of their favorite flake cereals. To test the questionnaire and procedure to be used, eight persons were asked to cooperate in an experiment. Five very small bowls of flake cereals were placed in front of a person. The bowls were labeled A, B, C, D, and E. The person was informed that only one bowl contained his or her favorite flake cereal. Suppose that the eight persons in the experiment were unable to identify their favorite cereal and just guessed which bowl it was in. What is the probability that none of the eight guessed correctly?

  A. 0.168
  B. 0.788
  C. 0.125
  D. None of these answers
  E. 0.009
  A. 0.168

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 8, r = 0,p = 0.2 and q = 0.80. Therefore we have 8!(0.2^0)(0.8^8)/0!8! = 0.168.

• Question 2646:

  This measure of value-added is closely related to the NPV technique. The annual performance of management is evaluated by comparing the firm's net operating profit less adjusted taxes to the firm's total cost of capital in dollar terms, including the cost of equity. It is known as:

  A. None of these answers
  B. All of these answers
  C. Economic value-added
  D. Market value-added
  E. The Franchise Factor
  C. Economic value-added

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  Explanation

  In economic value-added (EVA) analysis, if the firm's net operating profit less adjusted taxes (NOPLAT) during a specific year exceeds its dollar cost of capital, it has a positive EVA for the year and has added value for its stockholders. If the EVA is negative, the firm has not earned enough during the year to cover its cost of capital and the value of the firm has declined.

• Question 2647:

  Which of the following marketable securities would provide the greatest liquidity and stability?

  A. None of these answers
  B. All of these answers
  C. AA corporate bonds that mature in 5 years
  D. Common stock of a publicly held firm
  E. U.S. treasury bills
  E. U.S. treasury bills

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  Explanation

  U.S. treasury bills would be the most liquid because the maximum maturity is 182 days (although most treasury bills purchased by firm's have a shorter maturity). In addition, the value of treasury bills would fluctuate less than the value of the common stock of another firm or long-term corporate bonds.

• Question 2648:

  A relative frequency distribution is

  A. all of these answers.
  B. a collection of relative frequency classes with the relative frequencies.
  C. a grouping of data into non-overlapping categories.
  D. an aggregation of raw data in the form of a probability distribution.
  A. all of these answers.

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  Explanation

  A relative frequency distribution is an aggregation of raw data in the form of a probability distribution, a collection of relative frequency classes with the relative frequencies, and a grouping of data into nonoverlapping categories.

• Question 2649:

  Greg Burns, CFA, manages a portfolio, P, with expected return equal to 10% and standard deviation equal to 20%. The risk-free rate is 5%. Burns advises Victoria Hull to invest 40% in portfolio P and the remainder in the risk-free asset. The standard deviation for Hull's overall investment will be:

  A. 7%.
  B. 8%.
  C. 12%.
  B. 8%.

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  Explanation

• Question 2650:

  Which of the following is not a stage in the industry life cycle?

  A. Mature growth
  B. Mezzanine stage
  C. Development
  D. Market maturity and decline
  E. Accelerating growth
  F. Growth deceleration and decline
  B. Mezzanine stage

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  Explanation

  The industry life cycle is divided into five distinct stages. Specifically, the industrial life cycle progresses from the development stage to an accelerating growth stage to a mature growth stage to a market maturation and stabilization stage. Finally, the fifth stage of the industrial life cycle is characterized by decelerating growth and sales decline.

  As an industry or company progresses through the industrial life cycle, sales begin to grow rapidly (accelerating growth) then slow considerably as the product or service begins to reach critical mass (mature growth). During the mature growth stage, the industry or company grows at a slower pace, until eventually growth begins to slow considerably (market maturity and stabilization) as the market for the industry or company's products becomes more completely defined. An industry or company typically reaches the fifth stage of the industrial life cycle, growth deceleration and decline, only after many years of stabilization. For example, the automobile industry made automobiles widely available in the early 20th century, and has experienced a period of stabilization for nearly 50 years. The market for automobiles has arguably not progressed to the growth deceleration and decline stage, as automobile sales are still experiencing single digit annual growth.