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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3091:

  The statement of cash flows cannot be used to

  A. consider the interrelationship between cash flow components over time.
  B. examine the trend of different cash flow components over time.
  C. examine the cash flow components and their relationship to related income statement items.
  D. review individual cash flow items for analytic significance.
  E. examine the firm's ability to realize assets and settle liabilities.
  E. examine the firm's ability to realize assets and settle liabilities.

  ---

  Explanation

  Income statement and balance sheet data must be combined with cash flows for insights into the firm's ability to realize assets based on reported revenues and settle liabilities resulting from accrued expenses.

• Question 3092:

  If you are going to invest in a closed-end mutual fund and were told that the net asset value of the fund is $11.20, and the share price was $11.80. What is the discount you would receive or the premium that you would pay?

  A. -0.0508.
  B. 0.0508.
  C. 0.0536.
  D. -0.0536.
  C. 0.0536.

  ---

  Explanation

  (SP-NAV)/NAV= (11.80-11.20)/11.20=0.05357

• Question 3093:

  The return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project is known as which of the following terms?

  A. Sunk Cost
  B. Cannibalization
  C. Opportunity Cost
  D. Externality
  E. Incremental Cash Flow
  C. Opportunity Cost

  ---

  Explanation

  Opportunity cost is defined as the return on the best alternative use of an asset, or the highest return that will not be earned if funds are invested in a particular project

• Question 3094:

  ERISA fiduciaries must adhere to the following prudent procedures:

  -

  establish a written 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 ________ transactions

  A. insider
  B. diversification
  C. prohibited
  D. none of these answers
  E. commitment
  C. prohibited

  ---

  Explanation

  These procedures are stipulated under the detailing of ERISA fiduciary duties, to ensure that fiduciary complies with the duty to act with prudence. Although the ERISA fiduciary duty allows for a fairly broad range of investments, it does prohibit certain transactions. An ERISA fiduciary can never: - deal with plan assets in his or her own interest or for his or her own account (self-dealing); - act in a transaction involving the plan on behalf of a party with interest adverse to the plan (conflict of interest); - receive any compensation for his or her own personal account from any party dealing with the plan in connection with a transaction involving plan assets (kickbacks).

• Question 3095:

  Standard III (F) is ________.

  A. Responsibilities of Supervisors
  B. Disclosure of Conflicts to Employer
  C. Obligation to Inform Employer of Code and Standards
  D. Disclosure of Additional Compensation Arrangements
  E. None of these answers F. Duty to Employer
  E. None of these answers F. Duty to Employer

  ---

  Explanation

  There is no Standard III (F).

• Question 3096:

  An end-of-period adjustment for depreciation of fixed assets is necessary:

  A. to recognize the expense of using fixed assets
  B. all of these answers
  C. proper statement of net income
  D. to be consistent with the matching principle
  B. all of these answers

  ---

  Explanation

  An adjustment for depreciation expense matches expenses with revenues for the period, thus contributing to correct statement of net income for the period.

• Question 3097:

  Which of the following is/are true about the MACRS?

  I. MACRS does not use economic life of an asset while calculating depreciation.

  II. Under the MACRS system, the depreciation expense is larger in the early years, leading to lower taxes.

  III.

  Depreciation under MACRS must be calculated using the accelerated depreciation method.

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

  ---

  Explanation

  MACRS classifies assets into several classes based on a pre-determined length of time called the "recovery period." The recovery period, while positively correlated with actual economic life, does not track the economic lives of individual assets precisely. In particular, recovery periods are shorter than actual economic lives, leading to higher depreciation expenses and lower taxes. For long-recovery period classes (>27 years), straight-line depreciation must be used while accelerated methods may be used for shorter life assets.

• Question 3098:

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

  A. risk tolerance
  B. none of these answers
  C. type and nature of clients
  D. expected cash flows
  E. investable funds
  C. type and nature of clients

  ---

  Explanation

  "Client identification" requires that the type and nature of clients be considered. Risk tolerance is considered under "investor objectives." Investable funds and expected cash flows are considered under "investor constraints."

• Question 3099:

  You have a portfolio of two assets, X and Y. The returns of X and Y follow a joint probability function as follows: There is a 25% chance that X will return 16% and Y will return 10%; there is a 60% chance that X will return 9% and Y will return 7%; and there is a 15% chance that Y will return 15% and X will return 5%. Find the covariance of X and Y.

  A. 3. 46%%
  B. 1.79%%
  C. -3. 46%%
  D. -1.79%%
  D. -1.79%%

  ---

  Explanation

  For a joint probability function, the covariance of X and Y is given by the formula: double summation (over all X, and over all Y) of P(X,Y)*[X - E(X)]*[Y - E(Y)]. E(X) will be 25% * 16% + 60% * 9% + 15% * 5% = 4% + 5. 4% + 0.75% = 10.15%. Similarly, we will find that E(Y) = 8.95%. Next, we plug these values into our formula and obtain 25% * (16% - 10.15%) *(10% - 8.95%) + 60% (9% - 10.15%) * (7% - 8.95%) + 15% (5% - 10.15%) * (15% - 8.95%) = -1.79%%.

• Question 3100:

  Of 900 consumers surveyed, 414 said they were very enthusiastic about a new home decor scheme. What is the 99% confidence interval for the population proportion (in percent)?

  A. 42 and 50
  B. None of these answers
  C. 30 and 40
  D. 30 and 60
  E. 31 and 51
  A. 42 and 50

  ---

  Explanation

  Interval estimate can be found from p +/- z[p(1-p)/n]^0.5. Here we have n = 900, p = 414/900 = 0.46 and z = 2. 58 (for 99%). Therefore 0.46 +/- 2. 58*0.01661 and we get 0.42 and 0.50.