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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2851:

  The main use of the balance sheet for creditors would be

  A. to forecast future cash flow needs.
  B. to review the short-term liquidity of the firm.
  C. to forecast cash collections.
  D. to forecast changes in fixed assets thereby assisting in the firm's profitability.
  E. to provide information about the nature of assets that the firm uses as debt collateral.
  E. to provide information about the nature of assets that the firm uses as debt collateral.

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  Explanation

  The balance sheet provides information about a firm's resources and obligations, including liquidity and solvency.

• Question 2852:

  If the decision in the hypothesis test of the population correlation is to reject the null hypothesis, what can we conclude about the population correlation?

  A. None of these answers is correct
  B. Is not zero
  C. Equals the computed sample correlation
  D. Is zero
  E. Could be zero
  B. Is not zero

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  Explanation

  The Ho is always stated as Ho: Population parameter=0. So if we reject Ho, we say that it is not zero.

• Question 2853:

  "Fractional Reserve Banking" refers to:

  A. The Federal Reserve System.
  B. All of these answers.
  C. The banking system where part of the reserves are derived in the form of loans from the Central Bank.
  D. The banking system where banks hold less than 100% reserves against deposits.
  D. The banking system where banks hold less than 100% reserves against deposits.

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  Explanation

  In a fractional reserve system, a bank can loan out almost all of the deposits it receives, maintaining only a small part as reserves to meet regular withdrawals and as a provision for loan defaults.

• Question 2854:

  At the end of a fiscal period, any revenue that has been earned but not received should be credited to an appropriate:

  A. expense account
  B. revenue account
  C. liability account
  D. asset account
  B. revenue account

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  Explanation

  Revenue should be recognized in the period in which it is earned and is credited to the appropriate revenue account.

• Question 2855:

  Which of the following is a current liability?

  A. Bonds
  B. Depreciation
  C. Preferred stock
  D. Accounts payable
  E. None of these answers
  D. Accounts payable

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  Explanation

  Only accounts payable would be a current liability. Current liabilities must be settled over the longer of one year or a firm's operating cycle; thus, the maximum time frame for settlement is one year. Preferred stock is generally not repaid, bonds are repaid over many years and depreciation is an expense not a liability.

• Question 2856:

  An analyst predicts that the return on Royal Company stock will be 15%. The analyst is provided with the following data for Royal and the broad market:

  Royal Company beta 1.5

  Risk-free rate 5%

  Expected market return 11 %

  From the data, determine if Royal Company stock is undervalued, overvalued, or correctly valued.

  A. Overvalued.
  B. Undervalued.
  C. Correctly valued.
  B. Undervalued.

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  Explanation

• Question 2857:

  ________ provide a relative measure for the riskiness of a strategy.

  A. Volatility measures
  B. Benchmarks
  C. Indexes
  D. Investor universes
  E. Disclosures
  B. Benchmarks

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  Explanation

  Benchmarks, including market indexes, manager universes and normal portfolios, provide a relative measure for the riskiness of a strategy.

• Question 2858:

  You have just received a sales brochure from a reputable investment firm which describes a financial investment vehicle which pays $300 at the end of year 1, $500 at the end of year 2 and $100 at the end of year 3. If you are looking for an annual return of 6%, what's the maximum amount you should be willing to purchase this investment certificate for?

  A. $797
  B. $827
  C. $900
  D. $812
  D. $812

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  Explanation

  The maximum amount you should pay equals the present value of the payments (you would like to pay less!). This equals 300/1.06 + 500/(1.06^2) + 100/(1.06^3) = $812.

• Question 2859:

  According to the AIMR-PPS for venture and private placements, ________ internal rate of return must be presented since inception of the fund and be net of fees, expenses and carry to the limited partner.

  A. limited
  B. extended
  C. cumulative
  D. general
  C. cumulative

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  Explanation

  Cumulative internal rate of return must be presented since inception of the fund and be net of fees, expenses and carry to the limited partner. Irr must be calculated based on cash-on-cash returns plus residual value.

• Question 2860:

  Accounting rules differentiate research and development activities from activities not considered research and development. Which one of the following is not considered a research and development activity?

  A. Periodic design changes to existing products.
  B. Testing in search of product processing alternatives.
  C. Modification of the design of a process.
  D. None of these answers.
  E. Laboratory research intended for the discovery of a new product.
  A. Periodic design changes to existing products.

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  Explanation

  RandD costs must be expensed as incurred. Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or process or in bringing a significant improvement in an existing product or process. Development is the translation of research findings into a plan or design. Seasonal or other periodic design changes in existing products do not meet either of these definitions.