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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2831:

  Cavanaugh Inc. has a beta of 1.2. Next year you project the market will earn 12% and the risk free rate will be 5%. If you buy Cavanaugh you project your return will be 13%. Thus you think:

  A. Cavanaugh will underperformed the market on a risk-adjusted basis.
  B. Cavanaugh's performance will just matched the market return on a risk-adjusted basis.
  C. Cavanaugh will outperform the market on a risk-adjusted basis.
  D. Cavanaugh's performance has nothing to do with the market return.
  A. Cavanaugh will underperformed the market on a risk-adjusted basis.

  ---

  Explanation

  Rs = Rf + B(Rm - Rf)Rs = .05 + 1.2(.12-.05)Rs = .134 or 13. 4%You project Cavanaugh will out perform the market.

• Question 2832:

  "Statistical inference" refers to the process of:

  A. drawing conclusions about the entire population based on the statistical characteristics of a sample.
  B. drawing inferences about the characteristics of a distribution based on population data.
  C. predicting the statistical characteristics of a randomly drawn sample based on the knowledge about the entire population.
  D. selecting a probability sample and the statistical method used to analyze it.
  A. drawing conclusions about the entire population based on the statistical characteristics of a sample.

  ---

  Explanation

  Note that statistical inference is always carried out with sample data, since you never have access to the entire population (if you did, you would no longer call it "inference"!).

• Question 2833:

  Mr. Brown was in the habit of cashing his weekly paycheck and using this cash for his daily expenses. However, he now gets his paycheck direct deposited into his checking account and uses a debit card exclusively instead of cash. This represents an increase in which of the following types of money demand for Mr. Brown?

  A. transactions demand
  B. electronic demand
  C. speculative demand
  D. store-of-wealth demand
  E. all of these answers are correct
  F. none of these answers is correct
  F. none of these answers is correct

  ---

  Explanation

  Mr. Brown money demand has not changed. He is still using his weekly paycheck to satisfy normal expenses, or transactions demand. Although he is "storing" his cash in a checking account until it is to be used, this does not represent store-

  of-wealth demand. Store-of-wealth implies money that is either invested or accumulated for some future need.

  Note that although Mr. Brown's money spending habits have not changed, the way his money is measured by economists has changed. Previously his money was held entirely in currency, whereas now a portion of his money is held in

  reserve by his bank. Although effectively there has been no change in the use of money, certain monetary aggregates will change.

• Question 2834:

  The Income Summary account

  A. is used to facilitate the closing process
  B. all of these answers are correct
  C. is a temporary account
  D. should have a zero balance at period-end
  B. all of these answers are correct

  ---

  Explanation

  The Income Summary account is a temporary account created especially for the closing process and is used only for flowing adjustments and closing entries through.

• Question 2835:

  Consider the following preferred stock issued by Bluebook Pharmaceuticals:

  Price per share: $12. 65 Annual dividend per share: $1.30 Required rate of return: 9% per year

  Is the preferred stock realistically overvalued, undervalued, or correctly valued? Further, should this preferred stock be valued as a perpetuity or a finite series of cash flows?

  A. Undervalued; perpetuity
  B. Undervalued; finite series of cash flows
  C. Correctly valued; finite series of cash flows
  D. Correctly valued; perpetuity
  E. Overvalued; finite series of cash flows
  F. Overvalued; perpetuity
  A. Undervalued; perpetuity

  ---

  Explanation

  The preferred stock profiled in this example is trading above its theoretical value, which is found to be $14. 44.

  To determine the value of a preferred stock, use the following equation: {P0 = [d1 / k]}

  Where:P0 = the price of the preferred stock at time 0, d1 = the annual dividend at t = 1, and k = the required rate of return.

  In this example, the dividend is provided as an annual figure, so all of the necessary information has been given. The calculation of the value of this preferred stock is as follows:

  {P0 = [$1.30 / 0.09] = $14. 44

  Preferred stock is commonly valued as a perpetuity because there is no finite conclusion to the projected series of cash flows for a preferred stock. Unlike a bond, whose cash flows are characterized by a finite lifespan (i.e. the cash flows of a

  bond cease at maturity), the cash flows (dividends) produced by a preferred stock could theoretically last forever.

• Question 2836:

  A high-growth firm is expected to have a dividend growth of 10% for the next 2 years. It is then expected to stabilize at 4%. The firm has just paid a dividend of $2 and investors require a rate of return of 14%. The market price of the firm's stock is:

  A. $17. 98
  B. $21.26
  C. $19.68
  D. $23. 46
  B. $21.26

  ---

  Explanation

  Since the dividends do not grow at a constant rate, you cannot directly apply the Dividend Discount Model valuation formula. However, note that 2 years from now, looking into the future, you will see a constant growth rate of 4% and the dividend 3 years from now will be $2 * 1.1^2 * 1.04 = $2. 517. Therefore, the stock price 2 years from now, using the required rate of return of 14%, will equal P = 2. 517/(14% - 4%) = $25. 17. Thus, the current stock price equals 1.1/1.14 + (1.1/1.14)^2 + 25. 17/1.14^2 = $21.26.

  Note that you must be very careful about the time line. In the Dividend Discount Model valuation formula, the price at time t uses the dividend paid at time (t+1). That's the reason we had to use the dividend paid in year 3 to calculate the price at the end of year 2.

• Question 2837:

  An overvalued stock is one whose:

  A. estimated return is more than the required return.
  B. return is expected to be less than the expected market return.
  C. estimated return is less than the required return.
  D. return is expected to be greater than the expected market return.
  C. estimated return is less than the required return.

  ---

  Explanation

• Question 2838:

  The annual commissions per salesperson employed by a manufacturer of light machinery averaged $40,000 with a standard deviation of $5,000. What percent of the sales persons earn between $32,000 and $42,000?

  A. 60.06%
  B. 34. 13%
  C. 39.94%
  D. None of these answers
  E. 81.66%
  A. 60.06%

  ---

  Explanation

  z = (x - u)/sigma. z1 = (32000 - 40000)/5000 = -1.6. z2 = (42000 - 40000)/5000 = 0.4. The area under the curve for the respective z values are 0.4452 and 0.1554. Since the earnings are on the opposite sides of the mean, we add them up 0.4452 + 0.1554 = 0.6006.

• Question 2839:

  Bronson provides investment advice to the board of trustees of a private university endowment fund. The trustees have provided Bronson with the fund's financial information, including planned expenditures. Bronson receives a phone call on Friday afternoon from Murdock, a prominent alumnus, requesting that Bronson fax him comprehensive financial information about the fund. According to Murdock, he has a potential contributor but needs the information that day to close the deal and cannot contact any of the trustees. Based on AIMR Standards, Bronson should:

  A. send Murdock the information because it is not material nonpublic information.
  B. not send Murdock the information to preserve confidentiality.
  C. send Murdock the information, provided Bronson promptly notifies the trustees.
  D. send Murdock the information because disclosure would benefit the client.
  B. not send Murdock the information to preserve confidentiality.

  ---

  Explanation

  This question deals with Standard IV (B.1), Fiduciary Duties and Standard IV (B.5), Preservation of Confidentiality. Bronson owes a fiduciary duty to the fund trustees. He cannot disclose confidential financial information to anyone without the permission of the fund, regardless of whether the disclosure may benefit the fund. The fund must be notified and permission obtained before the information is publicized. Even if the information were nonmaterial, the member cannot disclose it because it is confidential.

• Question 2840:

  What is the Net Present Value of this series of annual cash flows at an interest rate of 12% per year: Year 0: <$30,000>, Year 1: $5,000, Year 2: $8,000, Year 3: $11,000, Year 4 <> are used to indicate a negative number).

  A. $951.21
  C. $1,104. 37
  B

  ---

  Explanation

  On the BAII Plus, press CF 2nd CLRWork 30000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 8000 ENTER DownArrow DownArrow 11000 ENTER DownArrow DownArrow 15000 ENTER DownArrow DownArrow 2nd Quit.

  Then press NPV 12 ENTER DownArrow CPT. On the HP12C, press these keys: 30000 CHS BlueShift CFo 5000 BlueShift CFj 8000 BlueShift CFj 11000 BlueShift CFj 15000 BlueShift CFj. Then press 12 i, YellowShift NPV. The "DownArrow"

  represents

  the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.