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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3231:

  Brown works for an investment counseling firm. Green, a new client of the firm, is meeting with Brown for the first time. Green used another counseling firm for financial advice for years, but she has switched her account to Brown's firm. After a few minutes of get-acquainted talk, Brown explained to Green that she has discovered a highly undervalued stock that offers large potential gains. She recommends that Green purchase the stock. Brown has committed a violation of the Standards. What should she have done differently?

  A. Brown should have determined Green's needs, objectives and tolerance for risk before making a recommendation for any type of security.
  B. Brown should have explained her qualifications, including her education, training, experience and the meaning of the CFA designation.
  C. Brown should have asked Green her reasons for changing counseling firms. If the discovery process indicated that Green had been treated unfairly at the other firm, Brown should have notified AIMR of any violation.
  D. Brown should have thoroughly explained the characteristics of the company to Green, including the characteristics of the industry in which the company operates.
  A. Brown should have determined Green's needs, objectives and tolerance for risk before making a recommendation for any type of security.

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  Explanation

  Brown has provided investment recommendation before making inquiries about the client's financial situation, investment experience or investment objectives. Brown is thus violating Standard IV (B.2), Portfolio Investment Recommendations and Actions. Why the client changed investment firms is not useful information to provide suitable recommendations. The other answers indicate information members should discuss with their clients at the outset of the relationship, but these answers do not constitute a complete list of those factors.

• Question 3232:

  Rebecca Dustin, a freelance research analyst, is currently working on a research study on the pharmaceutical industry for KLM Brokerage. She has been using KLM's research facilities in this endeavor. There has been no written agreement between Rebecca and KLM about the project, though there was a verbal agreement that KLM would provide reasonable support for the research. In return, KLM would pay for the final report in case she uncovers something worthwhile. Rebecca is now interviewing with Jacob and Associates, another brokerage firm, for a project and is considering submitting a rough draft of her KLM study to them. If she does this without KLM's permission, she would

  A. not be violating the AIMR code, because she is the owner of the study.
  B. be violating Standard III (B) - Duty to Employer - because KLM has property rights over the study.
  C. be violating Standard III (B) - Duty to Employer - because KLM has first rights over the study.
  D. not be violating the AIMR code, since she is not under any written obligation to KLM.
  C. be violating Standard III (B) - Duty to Employer - because KLM has first rights over the study.

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  Explanation

  Since Rebecca is acting as a freelance analyst under no written contractual agreement with KLM, the study does not belong to KLM. However, the verbal agreement and the support received from KLM make the first right to use the report a KLM property. Hence, Rebecca must allow KLM sufficient time to act upon her study before using it for any other purpose. Without KLM's permission, Rebecca cannot release the report without violating Standard III (B).

• Question 3233:

  According to monetarists, ________ is a primary source of economic instability:

  A. fluctuations in aggregate demand for money
  B. erratic monetary policy
  C. fluctuations in aggregate demand for money and fluctuations in aggregate consumption demands
  D. fluctuations in aggregate consumption demands
  B. erratic monetary policy

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  Explanation

  Monetarists believe that monetary policy has a powerful influence on the economy but also realize that there are lengthy and unpredictable time lags between the implementation of a monetary policy and the realization of its primary effects. Hence, they reject the active use of discretionary monetary policy for controlling the economy, prescribing a steady growth in money supply to track the real growth rate.

• Question 3234:

  One of the functions of secondary markets is that they:

  A. provide liquidity, and a financial futures contract is an example of a security trading on such a market.
  B. provide liquidity, and a private placement is an example of a security trading on such a market.
  C. provide fees, and a financial futures contract is an example of a security trading on such a market.
  A. provide liquidity, and a financial futures contract is an example of a security trading on such a market.

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  Explanation

• Question 3235:

  Which of the following is not involved in determining a company's profit margin?

  A. Identifying and evaluating the firm's competitive strategy (low-cost-high-volume, differentiation).
  B. Evaluating the firm's dependency on the overall conditions prevailing in its industry.
  C. Identifying the firm's internal performance like past trends and potential future problems.
  D. Identifying and evaluating the risks involved in the company's cash flows.
  D. Identifying and evaluating the risks involved in the company's cash flows.

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  Explanation

  A company's profit margin is determined by many factors like its competitive strategy, the degree of monopoly it enjoys, the relative dependency on external factors versus internally generated performance, etc. However, while the risks involved in the cash flows are relevant considerations in determining the total level of earnings of a firm, they do not affect the percentage of the sales which translate into profits i.e. the profit margin. Of course, higher risks can and do lower the return on capital.

• Question 3236:

  In computing kurtosis, which of the following is true?

  I. It raises the deviation from the mean to the fourth power.

  II. The formula preserves the direction of the deviation.

  III.

  Kurtosis measures how clustered the values in a distribution are to the mean.

  A. I, II, and III
  B. None of these answers is correct.
  C. II and III
  D. I and III
  D. I and III

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  Explanation

  I is true. II is false because the fourth power of a negative number is not a negative number: -2 * -2 * -2 * -2 = +16. III is true.

• Question 3237:

  In a common-size balance-sheet statement, a firm's current assets are reported at 37% and the long- term liabilities are at 12%. The equity is shown to be 64%. The firm's current ratio equals ________.

  A. 1.12
  B. 1.54
  C. 0.65
  D. 1.37
  B. 1.54

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  Explanation

  In a common-size balance-sheet statement, all quantities are expressed as a fraction of the total assets. Therefore, since equity equals 64%, total liabilities equal 36%, of which 12% equals long-term liabilities. Thus, current liabilities equal 24%, giving the current ratio equal to 37%/24% = 1.54.

• Question 3238:

  Since World War II the labor force participation rate (LPR)

  A. of women has steadily decreased while the LPR for men has increased.
  B. of women has steadily increased while the LPR for men has declined.
  C. of both women and men has increased.
  D. of both women and men has decreased.
  B. of women has steadily increased while the LPR for men has declined.

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  Explanation

  Since 1948 the labor force participation rate for women has steadily increased while the rate for men has been declining. This suggests that the composition of work force participation within the family has changed substantially during the last five decades.

• Question 3239:

  The management of Intelligent Semiconductor is examining the asset structure of its superconductor division, and has ascertained the following annual financial information: Invoiced sales $6,850.000 EBITA $3,525,000 Interest expense $150,000 Amortization expense $245,000 Given this information, which of the following best characterizes the Degree of Financial Leverage for this division?

  A. 1.048
  B. None of these answers is correct.
  C. 1.044
  D. .0.488
  E. 2. 03
  A. 1.048

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  Explanation

  To calculate the DFL, the financial analyst needs to determine the EBIT and interest paid for a predetermined time period. To calculate the Degree of Financial Leverage, the following equation is used: {EBIT/[EBIT - interest paid]}. In this example, EBITA is provided rather than EBIT. Thankfully, however, a figure is given for amortization expense. To determine the EBIT, subtract the amortization expense from then EBITA figure, which gives a figure of $3,280,000 for the EBIT. The next step is to incorporate the given information into the DFL equation as follows: {EBIT $3,280,000 / [EBIT $3,280,000 - interest expense $150,000]}=1.048 The Degree of Financial Leverage measures the percentage change in EPS which results from a given percentage change in EBIT. Remember that any preferred stock dividends must be incorporated into the DFL calculation, and that the DFL can never be less than one.

• Question 3240:

  You are given a portfolio mean return of 15%, and a standard deviation of portfolio return is 20%, and a Sharpe ratio of 0.51. What is the risk-free rate?

  A. None of these answers is correct.
  B. 4. 0%.
  C. 5. 0%.
  D. 4. 2%.
  A. None of these answers is correct.

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  Explanation

  The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. In our case, we have (15% - x%) / 20% = 0.51. Solving for x, we obtain x = 0.15 - 0.51

  * 0.20 = 0.15 - 0.102 = 0.048 = 4. 8%.