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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2711:

  If you owe a debt of $3,000 today and also owe $5,000 in 24 months, what single payment could you make 15 months from today that would pay off both of these debts, if interest is assessed at 8% per year, compounded monthly?

  A. $8,024. 17
  B. $7,751.62
  C. $7,980.86
  D. $8,000.00
  E. $9,041.93
  A. $8,024. 17

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  Explanation

  To solve this question, set the problem up as the sum of two compound interest calculations. Move the $3,000 from today over to month 15 and add it to the $5,000 brought back from month 24 to month 15. On the BAII Plus, press 15 N, 8 divide 12 = I/Y, 3000 PV, 0 PMT, CPT FV, which yields $3,314. 41. Then press STO 1. Then press 9 N, 5000 FV, CPT PV, which yields $4,709.76. Finally press + RCL 1 = to see the answer. On the HP12C, press 15 n, 8 ENTER 12 divide i, 3000 PV, 0 PMT, FV. Then press STO 1. Then press 9 n, 5000 FV, PV. Finally press RCL 1 + to see the answer. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2712:

  If you deposit $2,000 today, how much will you have in 3 years, if interest is earned at a rate of 8% per year, compounded annually?

  A. $2,519.42
  B. $2,576. 14
  C. $2,400.00
  D. $3,121.88
  E. $2,614. 09
  A. $2,519.42

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  Explanation

  On the BAII Plus, press 3 N, 8 I/Y, 2000 PV, 0 PMT, CPT FV. On the HP12C, press 3 n, 8 i, 2000 PV, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2713:

  What annual interest rate, compounded annually, will cause an original deposit of $400 to grow to $725, after 7 years?

  A. 21.45%
  B. 9.14%
  C. 6. 94%
  D. 9.01%
  E. 8.87%
  E. 8.87%

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  Explanation

  On the BAII Plus, press 400 PV, 725 +/- FV, 0 PMT, 7 N, then CPT I/Y. On the HP12C, press 400 PV, 725 CHS FV, 0 PMT, 7 n, then press i. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2714:

  Consider the following series of cash flows for an institutional investment account:

  1st Quarter Ending portfolio value: $10,340,000 Total amount invested: $10,000,000

  2nd Quarter Ending portfolio value: $10,660,000 Total amount invested: $10,340,000 3rd Quarter Ending portfolio value: $11,110,000 Total amount invested: $10,660,000

  4th Quarter Ending portfolio value: $11,400,000 Total amount invested: $11,000,000

  Using this information, what is the annual time-weighted rate of return for this portfolio? Assume no taxes or transaction charges.

  A. None of these answers is correct.
  B. The time-weighted rate of return cannot be calculated from the information provided.
  C. 9.89% per year
  D. 18.13% per year
  E. 12. 67% per year
  F. 15. 14% per year
  F. 15. 14% per year

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  Explanation

  The time-weighted rate of return is the preferred method of return calculation in the investment management industry, primarily because this method is not sensitive to significant additions and withdrawals of funds from portfolios under

  examination. The calculation of the time-weighted rate of return involves three steps, which are illustrated as follows:

  Step 1:

  Price the portfolio immediately prior to any significant additions or withdrawals. Separate the portfolio into a series of subperiods based on the dates of cash inflows and outflows.

  Step 2:

  Calculate the holding period return for each subperiod.

  Step 3:

  Determine the annualized holding period return by linking or compounding the holding period return of each subperiod. If the investment is for more than one year, use the geometric mean of the annual returns as the time-weighted rate of

  return. If the investment is for less than one year, compound the subperiod returns to obtain an annualized measurement.

  To begin the process of determining the time-weighted rate of return, we would break the portfolio up into the following series of cash flows. However, in this example, the cash flows are already aggregated for us and we can move on to the

  next step: determining the holding period return for each subperiod. This process is detailed as follows:

  Quarter 1 holding period return = [($10,340,000 ending value - $10,000,000 invested) / $10,000,000 invested] = 3. 40%

  Quarter 2 holding period return = [($10,660,000 ending value - $10,340,000 invested) / $10,340,000 invested] = 3. 095%

  Quarter 3 holding period return = [($11,110,000 ending value - $10,660,000 invested) / $10,660,000 invested] = 4. 221%

  Quarter 4 holding period return = [($11,400,000 ending value - $11,000,000 invested) / $11,000,000 invested] = 3. 636%

  Now that the holding period return for each subperiod has been determined, we must annualize the return measure by taking the product of all four quarterly returns. This process is illustrated below:

  [(1 + .034) * (1 + .03095) * (1 + .04221) * (1 + .03636) - 1] = .015139 or 15. 139%

  When calculating the time-weighted rate of return, remember that the total amount invested is the relevant figure, not the beginning portfolio value. Notice that during the fourth quarter, the total amount invested does not equal the ending amount for quarter 3. This differential could be explained by numerous phenomena. Perhaps the difference is due to a cash withdrawal from the account. Maybe it was used to pay expenses or meet an outstanding margin call. What is important to note is the fact that this money (the difference between the beginning portfolio value and the amount invested) was not invested in securities, and should not be included in the holding period return for the fourth quarter. So said, whenever possible you should use the total amount invested rather than the beginning portfolio value in the calculation of the subperiod holding period return.

• Question 2715:

  An economy is currently in equilibrium at full employment. If there is an anticipated governmental demand-stimulus policy and people correctly anticipate the effects, which of the following effects can be seen in the short run?

  I. The demand curve moves to the right.

  II. Real GDP increases.

  III. Prices increase.

  IV.

  The supply curve shifts to the left.

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

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  Explanation

  If the buyers and sellers in the resource market completely anticipate the effects of an increase in demand, then they will correctly forecast the higher future inflation. This will prompt buyers to try and buy the goods today, at lower prices. On the other hand, suppliers would prefer to sell in the future, at higher prices. Thence, the demand curve will quickly move to the right and the supply curve will move tothe left. An equilibrium will be reached at a higher price which leaves the real quantities unaffected, changing only the nominal variables.

• Question 2716:

  A researcher has a sample of 700 observations from a population whose standard deviation is known to be 1,235. 6. The mean of the sample is calculated to be 219.2. The null hypothesis is stated as Ho: mean = 150 and the alternative is non-directional. The p-value in this case equals ________.

  A. 10.16%
  B. 13. 88%
  C. 6. 94%
  D. 12. 82%
  B. 13. 88%

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  Explanation

  The z-statistic under the null equals (219.2 - 150)/(1235. 6/(700^.5)) = 1.48. Since the alternative is non-directional, you must use a two-tailed test and ask the question, "What is the probability of observing a z-statistic at least as large in magnitude as 1.48?" The answer to this will give you the p- value for this sample under the two-tailed test. The right-tailed probability of observing a z-statistic which is at least as big as 1.48 equals 1.0 - 0.9306 = 0.0694 = 6. 94%. The left-tailed probability of observing a z-statistic which is at least as small as - 1.48 also equals 6. 94% since the standard normal distribution is symmetrical about zero. Therefore, the p-value of this two-tailed test in this sample equals 6. 94%*2 = 13. 88%.

• Question 2717:

  O'Donnell Inc. has a cost of capital of 11.5 percent. The company has a project with the following cash flows: Year Cash flow 0-$200 1 235

  3 300

  What is the project's modified internal rate of return (MIRR)?

  A. 28.15%
  B. 39.87%
  C. 40.15%
  D. 32. 90%
  E. 36. 27%
  D. 32. 90%

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  Explanation

  Step 1 Find the PV of the outflows: CF(0) = -200 CF(1) = 0 CF(2) = -65 I = 11.5 Solve for NPV = -$252. 28. Step 2 Find the TV of the inflows by first finding their NPV and then finding the FV of the NPV: CF(0) = 0 N = 3 CF(1) = 235 I = 11.5 CF(2) = 0 PV = -427. 18 CF(3) = 300 PMT = 0 I = 11.5 Solve for FV = $592. 16. Solve for NPV = $427. 18. Step 3 Calculate the MIRR by equating the PV of the outflows with the TV of the inflows: N = 3 PV = -252. 28 PMT = 0 FV = 592. 16 Solve for I = 32. 90%.

• Question 2718:

  The stock of a closed-end investment company ________.

  A. trades through private brokerage firms
  B. trades on the regular secondary market
  C. trades via the investment management company
  D. trades only between existing stock-holders
  B. trades on the regular secondary market

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  Explanation

  A close-end investment company operates like any other public firm. Its stock trades on the regular secondary market and the market price is determined by supply and demand. Closed-end typically means the company offers no further shares, thus shares can only be bought over from existing shareholders.

• Question 2719:

  The lengths of time (in minutes) several underwriters took to review applications for similar insurance coverage are: 50, 230, 52 and 57. What is the median length of time required to review an application?

  A. 141.0
  B. 54. 5
  C. None of these answers
  D. 109.0
  E. 97. 25
  B. 54. 5

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  Explanation

  Order the numbers: 50,52,57,230. The median is (52 + 57)/2 = 54. 5

• Question 2720:

  The graph below combines the efficient frontier with the indifference curves for two different investors, X and Y.

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

  A. Investor X is less risk-averse than Investor Y.
  B. Investor X's return will always be less than that of Investor Y.
  C. The portfolios indicated by the points X and Y represent the optimal portfolio for each investor.
  D. The efficient frontier line represents the portfolios that provide the highest return at each risk level.
  A. Investor X is less risk-averse than Investor Y.

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  Explanation

  Investor X has a steep indifference curve, indicating that he is risk-averse. Flatter indifference curves, such as those for Investor Y, indicate a less risk-averse investor. The other choices are true. A more risk-averse investor will likely obtain lower returns than a less risk-averse investor.