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

• Question 3371:

  Consider the following three investments with annual compounding:

  Present value years interest rate 1.$22,500 56% per year 2.$10,000 75% per year 3.$15,000 38% per year

  The future values of the 3 investments, at the ends of their investment periods, are:

  A. $26,454, $12,067, $17,181

  B. $23,850, $10,500, $16,200

  C. $30,110, $14,071, $18,896

  D. $16,813, $7,107, $11,907

  Correct Answer: C

  Future value = Present value*(1+r)^N for annual compounding. Therefore,

  Present value years rate Future value 1.22,500 56% 22,500*(1.06)^5 = 30,110 2.10,000 75% 10,000*(1.05)^7 = 14,071 3.15,000 38% 15,000*(1.08)^3 = 18,896

  Note that the future value must always be greater than the present value.

• Question 3372:

  Which of the following is/are true?

  I. Multiplying a variable by a positive constant will cause its standard deviation to be multiplied by the square of that constant.

  II. Multiplying a variable by a constant will cause its mean to be multiplied by that constant.

  III. Adding a constant leaves the mean of a variable unchanged.

  IV.

  Adding a positive constant to a variable causes the standard deviation of the variable to increase by the same amount.

  A.

  IV only

  B.

  I, II and IV

  C.

  II only

  D.

  I only

  E.

  I and II

  F.

  III only

  G.

  II only

  H.

  II and IV

  Correct Answer: C

  Adding a constant changes the mean by the same amount and leaves the variance and standard deviation unchanged. Multiplying with a constant causes the mean and the standard deviation to be multiplied by the same constant. The variance gets multiplied by the square of the constant.

• Question 3373:

  If the alternate hypothesis states that u (Mu) does not equal 4,000, what is the rejection region for the hypothesis test?

  A. Center

  B. None of these answers

  C. Lower or left tail

  D. Upper or right tail

  E. Both tails

  Correct Answer: E

  The alternate hypothesis says does not equal, which means it could be less or more than 4000. So we must consider both tails.

• Question 3374:

  An investor faces the following investment scenarios:

  Scenario Probability Return Bull market 60% 30% Neutral market 30% 7% Market crash 10% -25%

  The variance of the investor's rate of return is ________.

  A. 17.6%%

  B. 4.17%%

  C. 307.4%%

  D. 6.17%%

  Correct Answer: C

  The expected return equals 0.6 * 30% + 0.3 * 7% + 0.1*(-25%) = 17.6%. To calculate the variance, an

  easy way is to first calculate the second moment, which is the expected value of the square of the return.

  Thus, the second moment equals 0.6*[(30%)^2] + 0.3*[(7%)^2)] + 0.1*[(-25%)^2] = 617.2%%.

  The variance of a random variable equals the second moment minus the square of the mean. In this case,

  the variance equals 617.2%% - 17.6%^2 = 307.4%%

• Question 3375:

  You are examining a portfolio composed of 33% money-market investments, 9.5% bonds, and 57.5%

  stocks. Last year, the return on the money-market investments was 4%; the return on bonds was 9%, and

  the return on stocks was -11%.

  What is the contribution of stocks toward the portfolio weighted average return?

  A. -57.50%.

  B. -11.00%.

  C. -4.15%.

  D. -6.325%.

  Correct Answer: D

  The portfolio weighted-average mean return is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of the ith asset. The contribution of any asset will equal its weight in the portfolio times its return. Here, we get 0.575 * -0.11 = -6.325%.

• Question 3376:

  When comparing the riskiness of investments with different expected returns, one must use ________.

  A. none of these answers

  B. skewness

  C. the coefficient of variation

  D. the standard deviation

  E. kurtosis

  Correct Answer: C

  The coefficient of variation equals the ratio of the standard deviation to the mean. Thus, it standardizes the variation in the returns in terms of the expected values.

• Question 3377:

  What annual interest rate, compounded annually, would cause a series of 20 deposits of $500 to accumulate to $18,000, if the first deposit is made one year from today?

  A. 6.15%

  B. 4.94%

  C. 7.25%

  D. 2.78%

  E. 5.80%

  Correct Answer: E

  On the BAII Plus, press 20 N, 0 PV, 500 PMT, 18000 +/- FV, CPT I/Y. On the HP12C, press 20 n, 0 PV, 500 PMT, 18000 CHS FV, i.

• Question 3378:

  The heights of the five members in a family have been measured and found to be (in centimeters):

  146, 162, 165, 187, 152

  The range and the mean deviation of the heights are:

  A. 41, 46.9

  B. 41, 54.4

  C. 41, 10.9

  D. 49, 61.8

  Correct Answer: C

  range = maximum value - minimum value = 187 - 146 = 41 centimeters. To calculate the mean deviation, you have to first calculate the mean. The mean equals (146 + 162 + 165 + 187 + 152)/5 = 162.4. The total deviation is abs(146-162.4) + abs(162-162.4) + abs(165-162.4) + abs(187-162.4) + abs(152-162.4) = 16.4

  + 0.4 + 2.6 + 24.6 + 10.4 = 54.4. Therefore, MD = 54.4/5 = 10.88.

• Question 3379:

  How long will it take for an initial deposit of $2,500 to grow to be $4,000, if the interest rate is 5% per year, compounded annually?

  A. 32 years

  B. 9.63 years

  C. 7.72 years

  D. 6.93 years

  E. 14.48 years

  Correct Answer: B

  Either the $2,500 or the $4,000 must be entered as a negative number - it won't matter which. On the BAII Plus, press 5 I/Y, 2500 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 10 years for the answer.

• Question 3380:

  Past experience of a large manufacturing firm with administering a test to recent college graduates who had applied for a job revealed that the mean test score was 500, and the standard deviation was 50. The distribution of the test scores was normal. Based on this experience, management is considering placing a person whose scores is in the upper 6 percent of the distribution directly into a responsible position. What is the lowest score a college graduate must earn to qualify for a responsible position?

  A. None of these answers

  B. 460

  C. 625

  D. 578

  E. 50

  Correct Answer: D

  Find the z value representing 44% of the area under the curve. From the z tables, z = 1.55. Using z = (x-u)/ sigma. 1.55 = (x-500)/50. x = 577.5