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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2691:

  Which one of the following statements about portfolio diversification is false?

  A. As more securities are added to a portfolio total risk falls, but at a decreasing rate.
  B. In a well diversified portfolio of over 25 stocks market risk will account for over 85% of the portfolio's total risk.
  C. The lower the correlation coefficient between the portfolio and a stock, the lower the diversification effect from adding that stock to the portfolio.
  D. International diversification can further reduce the total risk of a portfolio.
  C. The lower the correlation coefficient between the portfolio and a stock, the lower the diversification effect from adding that stock to the portfolio.

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  Explanation

• Question 2692:

  Changes in the unit labor cost are caused by changes in

  A. hours worked and worker productivity.
  B. wages per hour and worker productivity.
  C. hours worked.
  D. wages per hour, hours worked, and worker productivity.
  E. worker productivity.
  B. wages per hour and worker productivity.

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  Explanation

  Finkel and Tuttle found that the capacity utilization rate, unit labor costs, rate of inflation, and foreign competition were the four major variables that affected the aggregate profit margin. Per-unit labor cost is a function of the percentage change in hourly wages minus the percentage change in productivity during some period of time.

• Question 2693:

  You are going to invest in a closed-end mutual fund and are told that the net asset value of the fund is $20.40, and the share price is $18.20. What is the discount you would receive or the premium that you would pay?

  A. 0.1209.
  B. -0.1209.
  C. -0.1078.
  D. 0.1078.
  C. -0.1078.

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  Explanation

  

• Question 2694:

  What must you know to develop a binomial probability distribution?

  A. Probability of success
  B. Probability of success and number of trials
  C. Probability of success and number of successes
  D. Number of trials
  E. Number of successes
  B. Probability of success and number of trials

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  Explanation

  Binomial distribution: n!(p^r)(q^(n-r))/r!(n-r)!. We need to know n and p. q = 1-p. r is the number of successes which we determine ourselves.

• Question 2695:

  Ryan Williams, a professional money manager with Smith, Kleen and Associates, purchased 200 shares of Invertran Semiconductor at t0 for $42. At time t1, Invertran paid a $0.90 per-share dividend on the 200 shares owned and Mr. Williams purchased an additional 100 shares for $56. 87 per share. At t2, Invertran paid a dividend of $1.00 per share on the 300 shares and then Mr. Williams sold all 300 shares for $63. 15 per share. Similar investments have merited a 12. 25% discount rate. Calculate the dollar-weighted rate of return for this investment.

  A. None of these answers is correct.
  B. 22. 19%
  C. 14. 34%
  D. 9.64%
  E. 16. 96%
  F. 22. 10%
  F. 22. 10%

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. Further, the dollar-weighted rate of return is simply another name for the IRR equation. So said, the discount rate is not incorporated

  in the determination of the dollar-weighted rate of return, and has been included within this example largely as a distraction. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows

  for each period. This process is illustrated as follows:

  t0: {-[200 shares purchased * $42 per share] = ($8,400)

  t1: {-[100 shares purchased * $56. 87 per share] + [$0.90 per share dividend * 200 shares] = ($5,507)

  t2: {[300 shares sold * $63. 15 per share] + [$1.00 per share dividend * 300 shares]} = $19,245

  Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 22. 10% for this investment.

• Question 2696:

  A study of 200 stamping firms revealed these incomes after taxes:

  Income After Taxes Number of Firms Under $1 million 102 $1 million up to $20 million 61

  $20 million and more 37

  What is the probability that a particular firm selected has $1 million or more in income after taxes?

  A. 0.25
  B. 0.49
  C. 0.00
  D. 0.51
  E. None of these answers
  B. 0.49

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  Explanation

  There are 200 firms altogether. 98 firms have more than a million in income. So 98/200 = 0.49

• Question 2697:

  A financial analyst with Smith, Kleen, and Beetchnutty is examining shares of Clever Industries, for possible investment. Clever Industries is involved in textile manufacturing, and the firm has been growing at a steady rate for much of the last

  nine decades. The analyst is trying to determine the appropriate current price range for Clever shares, and has ascertained the following information:

  Expected annual dividend = $0.35

  Expected sustainable annual growth rate = 15%

  Investors required rate of return = 18.6%

  Given this information, what is the appropriate current price for Clever Industries common stock?

  A. $10.28
  B. The current price of Clever Industries cannot be determined from the given information.
  C. $1.88
  D. $2. 33
  E. $9.72
  E. $9.72

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  Explanation

  To calculate the appropriate stock price for Clever using the given information, the appropriate equation is as follows: {expected annual dividend/[investor's required rate of return - expected growth rate]}. Incorporating the given information into this equation yields a stock price of $9.722. Remember that this model to stock valuations is most appropriate for firms who are in the constant growth stage. Another important note to remember is that this model will yield realistic results only in those instances in which the investor's required rate of return exceeds the expected growth rate.

• Question 2698:

  If the money velocity is 5, the amount of money in circulation $200 million and real GDP $10 million, then prices are ________.

  A. 4
  B. 400
  C. 42
  D. 100
  D. 100

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  Explanation

  According to the equation of exchange which is defined as MV = PY we must solve for P in the following way: ($200 million x 5) = ($10 million x P). This implies that P=100.

• Question 2699:

  A stock paid a $10 per share dividend this year. Dividends are expected to grow at 5% per year, forever. What is the value of the stock if the appropriate discount rate is 9% per year?

  A. Not able to compute with the above data.
  B. $10.23
  C. $26. 30
  D. $262. 50
  D. $262. 50

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  Explanation

  Value = $10.5/(0.09-0.05)=$262. 50.

• Question 2700:

  A stock split will cause a change in the total dollar amounts shown in which of the following balance sheet accounts?

  A. Retained earnings
  B. Cash
  C. None of these will change
  D. Paid-in capital
  E. Common stock
  C. None of these will change

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  Explanation

  If a stock rises above a specific amount, management may declare, for example, a two-for-one stock split, where the number of shares outstanding doubles and the stock price is halved. Each stockholder would have more shares, but each share is worth less. Theoretically, a stock split should not affect the value of the firm. They are generally used after a sharp price run-up to produce a large price reduction.