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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2871:

  Suppose a research firm conducted a survey to determine the average amount of money steady smokers spend on cigarettes during a week. A sample of 500 steady smokers revealed that the sample mean is $20 and the sample standard deviation is $5. What is the point estimate?

  A. $20
  B. None of these answers
  C. $25
  D. $0.04
  E. $5
  A. $20

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  Explanation

  The sample mean is a good estimate for the population mean.

• Question 2872:

  An empirical finance professor estimates the following regression between the return on a stock, R, and the return on SandP 500 index, Rsp:

  R = 5% + 1.1 Rsp + error term

  If the regression R-square is 0.25, estimate the change in the return on the stock when the return on the SandP 500 index changes from 12% to 15%.

  A. 19.5%
  B. 8.8%
  C. 18.2%
  D. 3. 3%
  D. 3. 3%

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  Explanation

  With the given regression, the change in the return on the stock when the return on the SandP 500 index changes by one unit equals the slope coefficient, 1.1. Hence, when the return on the SandP 500 index changes by 3% from 12% to 15%, the return on the stock will change by 1.1*3% = 3. 3%

• Question 2873:

  Which of the following statements is correct?

  A. Only if one attempts to calculate MIRRs does one have to worry about multiple IRRs.
  B. The discounted payback is generally shorter than the regular payback.
  C. The NPV and IRR methods can lead to conflicting accept/reject decisions only if (1) mutually exclusive projects are being evaluated and (2) if the projects' NPV profiles cross at a rate less than the firm's cost of capital.
  D. The NPV and IRR methods can lead to conflicting accept/reject decisions only if (1) mutually exclusive projects are being evaluated and (2) if the projects' NPV profiles cross at a rate greater than the firm's cost of capital.
  E. Any type of project might have multiple rates of return if the IRR is sufficiently high.
  C. The NPV and IRR methods can lead to conflicting accept/reject decisions only if (1) mutually exclusive projects are being evaluated and (2) if the projects' NPV profiles cross at a rate less than the firm's cost of capital.

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  Explanation

  The two conditions which can cause NPV profiles to cross, and thus conflicts to arise between NPV and IRR: 1) when project size differences exists, or 2) when timing differences exist.

• Question 2874:

  Chris Renburg owns the following portfolio of option-free bonds:

  

  Calculate the duration of Renburg's bond portfolio.

  A. 6. 682
  B. 6. 753
  C. 7. 082
  B. 6. 753

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  Explanation

• Question 2875:

  Maxime Rivela, CFA, is interviewing for a portfolio manager position with a medium-sized investment firm. At the interview, the hiring manager provides the following list of actions taken by the former portfolio manager. The hiring manager asks Rivela to identify which action most likely was the reason that the previous portfolio manager was asked to resign. The former portfolio manager likely:

  A. managed a 40 year old attorney's portfolio with a strategy of a long time horizon and moderate risk.
  B. used the following four-step portfolio management process - write a policy statement, develop the investment strategy, implement the plan, and monitor and update (rebalance) as needed.
  C. set the objectives for a well-funded, local private college's endowment fund as total return focused primarily in long-term, taxable investments.
  D. focused on timing and security selection when constructing a client investment strategy.
  D. focused on timing and security selection when constructing a client investment strategy.

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  Explanation

  Even though these two investment decisions (timing and individual security selection) add value to the portfolio, the real foundation of returns comes from the original asset allocation policy decisions (determining allowable asset classes and weighting these classes). Empirical studies have shown that 85 percent to 95 percent of a portfolio's total return comes from the asset allocation policy decision. The other choices describe appropriate actions. The 40 year old attorney is most likely in the consolidation phase of the investing life cycle, and a long time horizon and moderate risk strategy are appropriate. The steps in the four-step portfolio management process are correct and are listed in the correct order. The objective and investments for the endowment fund appear appropriate given the information in the question. Since endowments are tax-exempt, it would not necessarily benefit from tax-exempt securities.

• Question 2876:

  What do we call the conditions under which the null hypothesis is not rejected?

  A. Critical value
  B. Decision rule
  C. Alternate hypothesis
  D. None of these answers
  E. Test statistic
  B. Decision rule

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  Explanation

  The decision rule lays out the conditions under which we may compare the z values and decide whether or not to reject the hypothesis.

• Question 2877:

  The seasonal output of a new experimental strain of pepper plants was carefully weighed. The mean weight per plant is 15. 0 pounds, and the standard deviation of the normally distributed weights is 1.75 pounds. Of the 200 plants in the experiment, how many produced peppers weighing between 13 and 16 pounds?

  A. 100
  B. None of these answers
  C. 118
  D. 53
  E. 197
  C. 118

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  Explanation

  z = (x-u)/sigma. z1 = 13 - 15/1.75 = -1.1429 and z2 = 16 - 15/1.75 = 0.5714. The respective areas for those z-values are 0.3729 and 0.2157. Since they are on opposite sides of the mean, we add them up to find the area in between which is 0.5886. Therefore, 0.5886*200 = 118.

• Question 2878:

  Under accrual accounting, which of the following is/are Incorrect?

  I. Revenues are recognized when cash is received.

  II. The reported income is a good indicator of the firm's current performance.

  III. Expenses do not always involve cash flows.

  IV.

  Revenues and the related costs are matched in the same period.

  A. I only
  B. II and III
  C. III only
  D. All of these answers are correct
  A. I only

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  Explanation

  Under accrual accounting, revenues are recognized when the earnings process behind the revenues is complete and expenses are recognized in the period the goods and services are used for generating income. Therefore, revenues and expenses do not always involve actual cash flows, though revenues and costs that are related do get matched in the same period whenever such an identification is possible.

• Question 2879:

  When formulating an investment policy for a client, which of the following falls under the category "client identification?"

  A. risk tolerance
  B. time horizon
  C. expected cash flows
  D. the existence of separate beneficiaries
  E. none of these answers
  D. the existence of separate beneficiaries

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  Explanation

  "Client identification" requires that the existence of separate beneficiaries be considered. Risk tolerance is considered under "investor objectives." Time horizon is considered under "investor constraints."

• Question 2880:

  If the U.S. is viewed by foreigners as a great nation in which to invest, generating a large inflow of foreign investment, this will cause the U.S. to run a

  A. deficit on the official reserve account.
  B. deficit on the capital account.
  C. deficit on the current account.
  D. surplus on the current account.
  C. deficit on the current account.

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  Explanation

  If foreigners invest often in the U.S. the U.S. will tend to run a capital account surplus. By definition of the balance of payments, the U.S. must also tend to run a current account deficit since these two accounts must counteract each other and sum to zero.