CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 3161:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$20,000>, Year 1: $15,000, Year 2: $5,000, Year 3: $7,500? (Note that the <> are used to indicate a negative number).

  A. 20.49%

  B. 21.17%

  C. 23.12%

  D. 18.32%

  E. 25.51%

  Correct Answer: B

  On the BAII Plus, press CF 2nd CLRWork 20000 +/- ENTER DownArrow 15000 ENTER DownArrow DownArrow 5000 ENTER DownArrow DownArrow 7500 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 20000 CHS BlueShift CFo 15000 BlueShift CFj 5000BlueShift CFj 7500 BlueShift CFj Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.

• Question 3162:

  Stock A is highly volatile while stock B has low volatility. The difference between the arithmetic and geometric rates of return will be:

  A. same for both stocks, since the difference is not dependent on volatility.

  B. larger for stock A or stock B, depending on their riskiness.

  C. larger for stock A.

  D. larger for stock B.

  Correct Answer: C

  The mean and the geometric mean are equal when volatility in the rate of return is zero. For a non- zero volatility, the mean exceeds the geometric mean and the difference is larger the higher the volatility.

• Question 3163:

  There are 10 rolls of film in a box and 3 are defective. Two rolls are to be selected, one after the other. What is the probability of selecting a defective roll followed by another defective roll?

  A. 1/120, or about 0.0083

  B. 1/15, or about 0.07

  C. None of these answers

  D. 1/4, or 0.25

  E. 1/2, or 0.50

  Correct Answer: B

  The probability of selecting a defective roll in the first selection is 3/10. The probability of choosing another defective roll is 2/9. So 3/10*2/9 = 6/90 = 1/15.

• Question 3164:

  Carlos Johanson, a quantitative analyst with Eastern Rhodium Institutional Brokerage, has been instructed to perform a regression analysis to test whether the proliferation of neural networks is positively related to the growth of domestic research grants. Mr. Johanson begins the process by formulating and stating a hypothesis. Now that the hypothesis has been explicitly stated, Mr. Johanson should proceed to which of the following steps? Choose the best answer.

  A. Specifying the significance level

  B. Stating the decision rule

  C. Collecting the data and performing the calculations

  D. Identifying the appropriate test statistic and probability distribution

  E. Performing an autocorrelation test

  Correct Answer: D

  Hypothesis testing involves a series of seven explicit steps: Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision. In this example, Carlos Johanson, a quantitative analyst, has been instructed to perform a regression analysis analyzing the relationship between two sets of variables. Mr. Johanson began his task with the appropriate first step - formulating and stating the hypothesis. The next step in the hypothesis testing process is to identify the appropriate test statistic and its probability distribution.

• Question 3165:

  What simple annual interest rate would cause a $120 deposit to grow to $125 in 6 months?

  A. 25%

  B. 7.89%

  C. 4.17%

  D. 3.14%

  E. 8.33%

  Correct Answer: E

  To solve this question, we have to rearrange the simple interest formula, I=PRT so that the R is by itself. Note that the I (interest) is equal to 5 (125 - 120). Note also that the time component T of the formula is 6/12. On the BAII Plus, press 5 divide 120 divide 6 x 12 = to see the answer. On the HP12C, press 5 ENTER 120 divide 6 divide 12 x to see the answer.

• Question 3166:

  Rhonda McLeavon, a quantitative analyst with Churn Brothers Brokerage, has been instructed to perform a statistical analysis to test whether increases in marketing expenses amongst drug companies is positively related to institutional buying of these same companies' common stock. Rhonda begins her analysis and performs the following steps, in succession:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule

  Now that these first four steps have been completed, Ms. McLeavon should proceed with which of the following? Choose the best answer.

  A. None of these answers is correct

  B. Collecting the data and performing the calculations

  C. Determining the z-statistic

  D. Determining the p-value

  E. Performing and autocorrelation test to identify any heterskedasticity problems

  F. Evaluating the goodness of fit

  Correct Answer: B

  Hypothesis testing involves a series of seven explicit steps:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision.

• Question 3167:

  As the size of the sample increases, what happens to the shape of the sampling mean?

  A. Negatively skewed

  B. Cannot be predicted in advance

  C. Positively skewed

  D. None of these answers

  E. Approaches a normal distribution

  Correct Answer: E

  The central limit theorem states that as the sample size gets larger, the sampling distribution of the sample means becomes approximately normal.

• Question 3168:

  The coefficient of variation (CV) for a set of annual incomes is 18%; the coefficient of variation for the length of service with the company is 29%. What does this indicate?

  A. More dispersion in the distribution of the incomes compared with the dispersion of their length of service

  B. Dispersions are equal

  C. Dispersions in the two distributions (income and service) cannot be compared using percents

  D. None of these answers

  E. More dispersion in the lengths of service compared with incomes

  Correct Answer: E

  The CV is the ratio of the standard deviation to the mean, express as a percent. The higher the coefficient, the greater the dispersion.

• Question 3169:

  The ages of all the patients in the isolation ward of the hospital are 38, 26, 13, 41 and 22. What is the population variance?

  A. 91.4

  B. 106.8

  C. None of these answers

  D. 240.3

  E. 42.4

  Correct Answer: B

  Population variance = (Sum of squared deviation from the mean)/N. the mean is 28. Population variance = (100 + 4 + 225 + 169 + 36)/5 = 534/5 = 106.8

  xx-mean(x-mean)^2 3810100 26-24 13-15225 4113169 22-636

• Question 3170:

  If you deposit $100 a month, beginning next month, for 20 years into an account paying 8% per year, compounded monthly, how much is in your account after that last deposit?

  A. $2,131.88

  B. $58,902.04

  C. $4,576.20

  D. $61,549.18

  E. $24,000.00

  Correct Answer: B

  On the BAII Plus, press 240 N, 8 divide 12 = I/Y, 0 PV, 100 PMT, CPT FV. On the HP12C, press 240 n, 8 ENTER 12 divide i, 0 PV, 100 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.