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

• Question 3201:

  If you deposit $500 today into an account paying 8% per year, compounded quarterly, how much will be in the account after 60 months?

  A. $717.54

  B. $702.48

  C. $751.59

  D. $724.46

  E. $742.97

  Correct Answer: E

  There are 20 quarters in 60 months (60 divide 3 =). On the BAII Plus, press 20 N, 8 divide 4 = I/Y, 500 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 8 ENTER 4 divide i, 500 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3202:

  An experiment involves selecting a random sample of 256 middle managers at random for study. One item

  of interest is their mean annual income. The sample mean is computed to be $35,420 and the sample

  standard deviation is $2,050.

  What is the point estimate?

  A. $138.36

  B. None of these answers

  C. $2,050

  D. $34,520

  E. $35,420

  Correct Answer: E

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

• Question 3203:

  Which of the following statements is false in reference to confidence intervals and/or tests of significance? Choose the best answer.

  A. The three conventional level of confidence are 0.10, 0.05, and 0.01.

  B. All else equal, the confidence interval for a 1% significance level is larger than the confidence interval for a 5% significance level.

  C. The confidence level is typically equal to (1 - the probability of a Type II error).

  D. The significance level is denoted by the Greek letter alpha.

  E. The confidence level is equal to the significance level.

  F. More than one of these answers is incorrect.

  Correct Answer: F

  More than one of these answers is correct. First, the confidence level is not equal to the significance level. Rather the confidence level is equal to (1 - the significance level). Remember that the significance level of a test is used to quantify the probability of a Type I error, which is defined as the act of incorrectly rejecting the null hypothesis. For example, a confidence level of 95% implies a 5% probability of incorrectly rejecting the null hypothesis (i.e. a Type I error). For example, a hypothesis test associated with a 0.01 significance level indicates a 0.99 level of confidence. The second incorrect statement in this example is that the confidence level of a hypothesis test is found by (1 - alpha), where "alpha" is equal to the probability of a Type I error. Subtracting the probability of a Type II error from one will yield the power of the test. The remaining answers are all correct.

• Question 3204:

  What is the present value today of these annual cash flows: <$10,000>, $5,000, $4,000, $3,000, $2,000? Assume the first cash flow occurs today and an interest rate of 8% per year, compounded annually. (Note that the <> are used to indicate a negative number).

  A. $1,910.54

  B. $2,045.10

  C. $2,110.45

  D. $2,380.01

  E. $4,000.00

  Correct Answer: A

  You could solve this question using several different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 10000 +/ENTER DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 8 ENTER DownArrow CPT. On the HP12C, press these keys: 10000 CHS BlueShift CFo 5000 BlueShift CFj 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj. Then press 8 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.

• Question 3205:

  The number of work stoppages in a highly industrialized region for selected months are: 6, 0, 10, 14, 8 and

  0. What is the median number of stoppages?

  A. 7

  B. 8

  C. 0

  D. 6

  E. None of these answers

  Correct Answer: A

  Order the observations: 0,0,6,8,10,14. The median is (6 + 8)/2 = 7

• Question 3206:

  Which of the following is not one of the five steps in the hypothesis testing procedure?

  A. Identify the test statistic

  B. All of these answers are part of the five steps

  C. Select a level for beta

  D. State the null and alternate hypothesis

  E. Formulate a decision rule

  Correct Answer: C

  The beta is determined by our choice of the decision rule and significance level. It is not determine on the outset.

• Question 3207:

  How much must you deposit today if you wish to have $60,000 in 10 years, assuming that interest accumulates at 10%, compounded annually?

  A. $20,153.37

  B. $21,500.00

  C. $9,143.39

  D. $26,474.73

  E. $23,132.60

  Correct Answer: E

  On the BAII Plus, press 10 N, 10 I/Y, 0 PMT, 60000 FV, CPT PV. On the HP12C, press 10 n, 10 i, 0 PMT, 60000 FV, PV. Note that the answer is displayed as a negative number.

• Question 3208:

  The results of the regressions using 200 observation on a variable Y against X are as follows:

  Coefficient Standard error intercept 3.62.1 slope-8.11.3 R square = 49%

  The correlation coefficient between X and Y is ________.

  A. -0.49

  B. -0.70

  C. + 0.70

  D. -8.10

  Correct Answer: B

  In a univariate regression, the correlation coefficient between the dependent and the independent variables equals the square root of R-square. However, you should also be careful about the sign, which is not given by the R-square. Rather, you have to look at the sign of the slope coefficient. In this case, the slope coefficient is negative, implying that the dependent and the independent variables are negatively correlated and the correlation coefficient equals -sqrt(0.49) = -0.7.

• Question 3209:

  Sixty percent of the customers of a fast food chain order the Whopper, fries and a drink. If a random sample of 15 cash register receipts is selected, what is the probability that 10 or more will show that the above three food items were ordered?

  A. 0.186

  B. None of these answers

  C. 1,000

  D. 0.403

  E. 0.000

  Correct Answer: D

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r! (n-r)!. Therefore, we need to find out the probability of getting 10, 11,12,13,14,15 successes and add them up. Here n=15, p=0.6 and q=0.4. r changes from 10 to 15.

  P(10 successes) = 15!(0.6^10)(0.4^5)/10!(15-10)! = 0.1859 P(11 successes) = 15!(0.6^11)(0.4^4)/11!(15-11)! = 0.1268 P(12 successes) = 15!(0.6^12)(0.4^3)/12!(15-12)! = 0.0634 P(13 successes) = 15!(0.6^13)(0.4^2)/13!(15-13)! = 0.0219 P(14 successes) = 15!(0.6^14)(0.4^1)/14!(15-14)! = 0.0047 P(15 successes) = 15!(0.6^15)(0.4^0)/15!(15-15)! = 0.00047

  The sum of all the probabilities is 0.403.

• Question 3210:

  The semiannually compounded rate is 6% quoted on an annualized basis. The equivalent quarterly compounded rate is:

  A. 6.12%

  B. 5.91%

  C. 5.96%

  D. 5.76%

  Correct Answer: C

  To solve such problems, think about investing a dollar for 1 year. The final amount should be the same under both the quotations. Under quarterly compounded rate, r, $1 grows to (1+r/4)^4 in 1 year. Under semiannual compounding, it grows to (1+0.06/2)^2 = 1.0609. Since these two should be equal, we get (1 +r/4)^4 = 1.0609, giving r = 5.96%. Note that the quarterly compounded rate must be smaller than the semiannually compounded rate, ruling out 6.12 automatically.