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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2911:

  Which of the following statements is incorrect?

  A. NPV can be negative if the IRR is positive.
  B. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital.
  C. If IRR = k (the cost of capital), then NPV = 0.
  D. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
  E. The NPV method is not affected by the multiple IRR problem.
  B. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital.

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  Explanation

  NPV is positive if IRR is greater than the cost of capital.

• Question 2912:

  The significance level in hypothesis testing refers to the:

  A. probability of Type II error.
  B. 1-probability of Type I error.
  C. joint significance of the associated regression, indicated by the F-statistic.
  D. probability of Type I error.
  E. none of these answers.
  D. probability of Type I error.

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  Explanation

  Type I error refers to the event that we will reject the null when, in fact, it is true. The probability of this error is called the "significance level" of the test used to evaluate the hypothesis. Clearly, lower significance levels are better, all else equal.

• Question 2913:

  A stock has an expected dividend growth rate of 4. 9%. The firm has just paid a dividend of $2. 5 per share. With a required rate of return of 10%, the stock is trading at $42. 8. The stock is:

  A. overpriced.
  B. insufficient information.
  C. fairly priced.
  D. under-priced.
  D. under-priced.

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  Explanation

  The fair price of the stock with a required rate of return, r and a dividend growth rate, g, is given by P = D1/(r-g), where D1 = Do*(1-g) = dividend to be paid next year. In this case, the fair price of the stock equals 2. 5*1.049/(10% - 4. 9%) = $51.42. Thus, the stock is under-priced by $(51.42 - 42. 8) = $8.62.

• Question 2914:

  If an investment company issued 1 million shares for $20, and its portfolio of investments is now worth $38 million, what is its net asset value (NAV)?

  A. Not enough information
  B. $20 million
  C. $38
  D. $38 million
  E. $20
  C. $38

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  Explanation

  An investment company sells shares in itself, and uses the proceeds to invest in a portfolio of individual investments such as stocks and bonds. The NAV is equal to the net value of the investment company's assets divided by the number of its shares outstanding. In this question the NAV is equal to $38 million / 1 million = $38.

• Question 2915:

  What monthly deposit would you need to make, beginning one month from today, into an account paying 11% per year, compounded monthly, in order to have $500,000 in 30 years?

  A. $14,555. 70
  B. $178.28
  C. $218.67
  D. $129.83
  E. $314. 48
  B. $178.28

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  Explanation

  On the BAII Plus, press 360 N, 11 divide 12 = I/Y, 0 PV, 500000 FV, CPT PMT. On the HP12C, press 360 n, 11 ENTER 12 divide i, 0 PV, 500000 FV, PMT. Note that the answer will be displayed as a negative number. Make sure that the BAII Plus has the value of P/Y set to 1.

• Question 2916:

  Ian Lance, CFA, is discussing short selling with a client and states, "The short seller must pay any dividend of the issuer to the lender of the stock. In addition, the short seller must provide some collateral to the brokerage house." Is Lance correct about the short seller's obligations?

  A. Yes.
  B. Lance is correct about paying the dividend, and incorrect about providing collateral.
  C. Lance is incorrect about paying the dividend, and correct about providing collateral.
  A. Yes.

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  Explanation

• Question 2917:

  The domestic demand Q for a good X at a price P is given by Q = 400 - 2P while the supply function is given by 100 + 4P. The world price for good X is 45 in international markets. All quantities are in thousands of units. If the government imposes a tariff of 5% on imports, the imports will fall by:

  A. 9.75
  B. 13. 25
  C. 16. 5
  D. 19
  C. 16. 5

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  Explanation

  First note that without imports, the price prevailing in the domestic market will satisfy 400 - 2P = 100 + 4P, giving P = 50. The world price is 45 and with a 5% import tariff, it becomes 45 * 1.05 = 47. 25. Since this price is lower than 50, there will continue to be imports and the price prevailing in the domestic market after the tariffs will equal 47. 25.

  Before the tariffs, the producers supply a quantity equal to 100 + 4 * 45 = 280 and domestic consumers demand 400 - 2 * 45 = 310 units. Thus, imports without the tariffs equal 300 - 280 = 30 units. With the tariff in place, the producers produce 100 + 4 * 47. 25 = 289 units. The consumers demand 400 - 2 * 47. 25 = 305. 5 units. Thus, the imports now equal 305. 5 - 289 = 16. 5 units.

• Question 2918:

  A manager who pays a higher commission than would normally be paid to purchase the goods or services is said to be ________ services.

  A. exploiting
  B. undercharged for
  C. paying up for
  D. fee-bound for
  E. none of these answers
  C. paying up for

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  Explanation

  A manager who pays a higher commission than would normally be paid to purchase the goods or services is said to be paying up for services. This practice is a violation of fiduciary duties to the client. However, various countries' securities laws permit a manager to pay up for goods and services without violating the manager's fiduciary duty so long as the requirements of the law are followed.

• Question 2919:

  Two stocks, Rich Shaw Inc., and Melon Inc., have identical total risk. The Rich Shaw stock risk is comprised of 60% systematic risk and 40% unsystematic risk, while the Melon stock risk is comprised of 40% systematic risk and 60% unsystematic risk. Relative to the Melon stock, the Rich Shaw stock has:

  A. a higher required return.
  B. a lower required return.
  C. the same required return.
  A. a higher required return.

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  Explanation

• Question 2920:

  Suppose that events A, B, C, and D are independent, and have probabilities of 0.25, 0.50, 0.40, and 0.30, respectively. What is P(ABCD)?

  A. 1.0%.
  B. 15. 0%.
  C. 1.5%.
  D. 0.15.
  C. 1.5%.

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  Explanation

  If events are independent, then the joint probability of them occurring together is just the product of the individual probabilities. So P(ABCD) = 0.25 * 0.50 * 0.40 * 0.30 = 1.5%.