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

• Question 3301:

  A cola dispensing machine is set to dispense a mean of 2.02 liters into a container labeled 2 liters. Actual quantities dispensed vary and the amounts are normally distributed with a standard deviation of 0.015 liter. What is the probability a container will have less than 2 liters?

  A. 0.8741

  B. 0.0918

  C. 0.3413

  D. 0.1926

  E. None of these answers

  Correct Answer: B

  z = (x-u)/sigma = 2 - 2.02/0.015 = -1.33 (negative since it is below the mean). The area between - infinity and z = -1.33 is 0.0918.

• Question 3302:

  How long will it take for an initial deposit of $1,500 to grow to be $4,000, if the interest rate is 5% per year, compounded annually?

  A. 16.93 years

  B. 20.10 years

  C. 17.72 years

  D. 14.48 years

  E. 24.03 years

  Correct Answer: B

  Either the $1,500 or the $4,000 must be entered as a negative number - it won't matter which. On the BAII Plus, press 5 I/Y, 1500 PV, 0 PMT, 4000 +/- FV, CPT N. On the HP12C, press 5 i, 2500 PV, 0 PMT, 4000 CHS FV, n. Note that the HP12C will indicate 21 years for the answer. Make sure the BAII Plus has the P/ Y value set to 1.

• Question 3303:

  If you buy a computer for $950 and agree to pay for it with 24 payments of $35 with the first payment occurring next month, what is the size of the final payment needed at month 24 to completely pay off the computer? Assume the interest rate you are being charged is 16% per year, compounded monthly.

  A. $294.39

  B. $0.00

  C. $207.88

  D. $87.14

  E. $323.18

  Correct Answer: E

  This question describes a situation often called a balloon payment. On the BAII Plus, press 24 N, 16 divide 12 = I/Y, 950 PV, 35 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i, 950 PV, 35 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has the value of P/Y set to

  1.

• Question 3304:

  What annual interest rate, compounded annually, would cause a series of 30 deposits of $500 to accumulate to $50,000, if the first deposit is made one year from today?

  A. 9.04%

  B. 10.12%

  C. 7.32%

  D. 5.38%

  E. 10.09%

  Correct Answer: C

  On the BAII Plus, press 30 N, 0 PV, 500 PMT, 50000 +/- FV, CPT I/Y. On the HP12C, press 30 n, 0 PV, 500 PMT, 50000 CHS FV, i. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3305:

  A true-false test consists of six questions. If you guess the answer to each question, what is the probability of getting all six questions correct?

  A. None of these answers

  B. 0

  C. 0.06250

  D. 0.03125

  E. 0.0156

  Correct Answer: E

  This is binomial distribution with p = 0.5, q = 0.5, n = 6, r = 6. Therefore 6!(0.5^6)(0.5^0)/6!0! = 0.0156.

• Question 3306:

  If the decision in the hypothesis test of the population correlation is to reject the null hypothesis, what can we conclude about the population correlation?

  A. None of these answers is correct

  B. Is not zero

  C. Equals the computed sample correlation

  D. Is zero

  E. Could be zero

  Correct Answer: B

  The Ho is always stated as Ho: Population parameter=0. So if we reject Ho, we say that it is not zero.

• Question 3307:

  As the head of a trading desk at a major bank, it is your job to evaluate whether the superior performance of a trader is due to skill or luck. To test this, you set up the following hypothesis: Ho: Expected excess returns = 0 H1: Expected excess returns > 0 The excess returns are returns adjusted for risk using a proprietary factor model. In this set-up, which of the following is/are true?

  I. You must employ a one-tailed test.

  II. H1 is a directional alternative.

  III.

  Your critical z-statistics will be larger than the z-statistics in the case where the alternative is specified as H1: Excess returns are non-zero.

  A.

  I only

  B.

  II and III

  C.

  I and III

  D.

  I and II

  E.

  III only

  F.

  II only

  G.

  I, II and III

  Correct Answer: D

  The alternative hypothesis, H1, does not assign a specific value to the expected excess return but specifies a directional region. Since it specifies the region to the right of 0 as an alternative, he must employ a right-tailed test i.e. a one-sided test. Note that the critical z-statistics in one-tailed regressions are always lower than the z-statistics in the corresponding two-tailed test.

• Question 3308:

  An employee had the following percentage increases in salary over the last 5 years: 4%, 7%, 10%, 15%, 12%. The geometric mean of his salary increases equals ________.

  A. 9.60%

  B. 9.22%

  C. 9.53%

  D. 8.72%

  Correct Answer: D

  The straight geometric mean of the increases is (0.04*0.07*0.1*0.15*0.12)^(1/5) = 8.72%. Note that this is different from geometric rate of change, which in this case would be (1.04*1.07*1.1*1.15*1.12)^(1/5) - 1 = 9.53%. You should be very careful about this point since the Mason and Lind textbook is quite ambiguous on this point. Finally, note that the geometric mean may not be defined if some of the salary changes are negative.

• Question 3309:

  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? In other words, find P(AC).

  A. 3.5%.

  B. 11%.

  C. 10%.

  D. 1.0%.

  Correct Answer: C

  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%. Note that we did not state whether the other stocks, B and D, increased in value or not.

• Question 3310:

  A stock has the following returns over 3 years: +2%, +15%, +25%. The annual geometric rate of return over the three years is ________.

  A. 7.42%

  B. 19.36%

  C. 11.31%

  D. 9.34%

  E. 12.21%

  F. 10.15%

  G. 14.64%

  H. 13.61%

  Correct Answer: H

  The annual geometric rate of return equals [(1+2%)(1+15%)(1+25%)]^(1/3) - 1 = (1.02 * 1.15 * 1.25)^0.33 1 = 0.1361 = 13.61%