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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3031:

  You are examining a portfolio composed of 1/3 money-market investments, 1/3 bonds, and 1/3 stocks. Last year, the return on the money-market investments was 5%; the return on bonds was 15%, and the return on stocks was -2%. What is the portfolio's weighted-average return?

  A. 6. 66%.
  B. 6. 33%.
  C. 7. 00%.
  D. 6. 00%.
  D. 6. 00%.

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  Explanation

  The portfolio weighted-average return is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of the ith asset. Here, we get a weighted mean of 1/3 * 0.05 + 1/3 * 0.15 + 1/3 * -0.02 = 6. 00%. Note that because of the equal weighting, this is the same as the arithmetic return: (5% + 15% - 2%) / 3 = 18% / 3 = 6%.

• Question 3032:

  Market efficiency is NOT based on which of the following assumptions?

  A. A large number of profit maximizing participants are analyzing securities independently.
  B. All of these choices are correct.
  C. Market participants always correctly adjust prices when new information is received.
  D. The expected returns implicitly include risk in the price of a security.
  C. Market participants always correctly adjust prices when new information is received.

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  Explanation

  Market efficiency does not assume that market participants correctly adjust prices, just that their price adjustments are unbiased.

• Question 3033:

  Which of the following represents a "contrary opinion" technical indicator? Choose the best answer.

  A. The Confidence Index
  B. More than one of these answers is correct.
  C. T-Bill-Eurodollar yield spread
  D. The Diffusion Index
  E. Debit balances in brokerage accounts
  F. OTC versus NYSE volume
  F. OTC versus NYSE volume

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  Explanation

  Of all the choices listed, only "OTC versus NYSE volume" represents a contrarian technical indicator. While "debit balances in brokerage accounts (margin debt)" appears to be an appealing choice, this indicator is actually a measure of "smart money" because investors who leverage their portfolios through margin loans are viewed by technical analysts as being sophisticated.

  The measure of OTC to NYSE volume is used by contrarian technical analysts as a measure of speculation in the U.S. securities markets. A high degree of OTC volume is viewed as a bearish signal to contrarian technical analysts, who believe this is indicative of abounding speculation. Prior to the collapse of the NASDAQ in 2000, the OTC to NYSE volume experienced a marked spike, and many contrarian technical analysts were vocal in their opinion that the degree of speculation in the securities markets was rampant. While for years the explicit level of OTC to NYSE volume was used, recently it has been decided that the proper method is to examine trends in the OTC to NYSE volume, rather than static figures.

  The Confidence Index, a "smart money" technical indicator, is a measure of yield spreads between highgrade corporate bonds and the yields on average corporate bonds. The Diffusion Index measures the breadth of the market, and is found by taking the total volume of advancing shares plus one-half of the issues unchanged, divided by the total number of issues traded. The T-Bill-Eurodollar Yield Spread is another example of a "smart money" technical indicator.

• Question 3034:

  The Congress Company has identified two methods for producing playing cards. One method involves using a machine having a fixed cost of $10,000 and variable costs of $1.00 per deck of cards. The other method would use a less expensive machine (fixed cost = $5,000), but it would require greater variable costs ($1.50 per deck of cards). If the selling price per deck of cards will be the same under each method, at what level of output will the two methods produce the same net operating income?

  A. 15,000 decks
  B. 20,000 decks
  C. 25,000 decks
  D. 10,000 decks
  E. 5,000 decks
  D. 10,000 decks

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  Explanation

  Total cost(Method 1) = $1.00(Q) + $10,000.

  Total cost(Method 2) = $1.50(Q) + $5,000.

  Set equal and solve for Q: Q + $10,000 = $1.50(Q) + $5,000

  $5,000 = $0.5(Q)

  10,000 = Q.

• Question 3035:

  A bottling company offers three kinds of delivery services-instant, same day and within five days. The profit per delivery varies according to the kind of delivery. The profit for an instant delivery is less than the other kinds because the driver has to go directly to a grocery store with a small load and return to the bottling plan. To find out what effect each type of delivery has on the profit picture, the company has made the following tabulation based on deliveries for the previous quarter.

  Type of Number of Deliveries Profit per Delivery Delivery During the Quarter Instant 100 $70 Same day 60 $100 Within five days 40 $160

  What is the weighted mean profit per delivery?

  A. $97
  B. $72
  C. $142
  D. None of these answers
  E. $100
  A. $97

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  Explanation

  (100*70)+(60*100)+(40*160) = 1940. Mean is 1940/200 = 97

• Question 3036:

  Which of the following is/are true about depreciation?

  I. Depreciation allocates non-cash expenses to period in which long-lived assets are used.

  II. Depreciation provides funds for the replacement of an asset.

  III.

  Depreciation charges arise due to an adherence to accrual method of accounting.

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

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  Explanation

  Depreciation is the accounting device which facilitates a charging of the costs incurred in prior periods on assets that have been used for productive activities in the current period. Note that this is a non- cash expense since the cash left the firm's coffers at the time the asset was purchased (either in part or in full). Remember, however, that depreciation has cash flow consequences indirectly through its effect on taxes. Depreciation expense owes its existence to the accrual method of revenue recognition whichrequires that expenses be matched with the revenues generated. No depreciation charges would exist under Cash accounting, which would allocate expenses as and when cash was used to make payments on asset purchases. Clearly, depreciation does not provide funds for anything for it is an accounting entry.

• Question 3037:

  ________ = (1 + Real Growth) (1 + Expected Inflation) - 1. A. Break-even rate

  B. Nominal risk-free rate

  C. Projected discount rate, PDR

  D. Real risk-free rate

  Correct Answer. B
  B

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  Explanation

  By definition: Nominal risk-free rate = (1 + Real Growth) (1 + Expected Inflation) - 1.

• Question 3038:

  Suppose that stocks A, B, C, and D are independent with respect to their price movement, and have probabilities of increasing of 0.25, 0.50, 0.40, and 0.30. What is the probability that stocks A and C will increase in price, while stocks B and D fail to increase?

  A. 11%.
  B. 2. 5%.
  C. 3. 5%.
  D. 10%.
  C. 3. 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(AC) = 0.25 * 0.40 = 10%. To this, we multiply the probabilities of B and D failing to increase: 10% * (1 - 0.50)* (1 - 0.30) = 3. 5%.

• Question 3039:

  If the estimated life of a long-term asset is increased, which of the following is true?

  I. The depreciation expense increases

  II. Taxes decrease

  III. Income increases

  IV.

  Cashflow decreases

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

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  Explanation

  The increase in the asset's life estimate decreases the depreciation expense. Hence, income increases, taxes increase and cashflow decreases (due to higher taxes).

• Question 3040:

  ERISA fiduciaries must adhere to the following prudent procedures:

  -establish a ________ investment policy for the plan

  -diversify plan assets

  - make investment decisions with the skill and care of a prudent expert

  -monitor investment performance

  -control investment expenses

  -

  avoid prohibited transactions

  A. supervisory
  B. none of these answers
  C. written
  D. diversified
  C. written

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  Explanation

  These procedures are stipulated under the detailing of ERISA fiduciary duties, to ensure that the fiduciary complies with the duty to act with prudence.