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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3371:

  A coefficient of skewness of +2. 48 indicates:

  A. all of these answers are correct
  B. the mean is larger than the median
  C. the tail of the distribution is to the right
  D. none of these answers are correct
  E. a large positive skewness
  A. all of these answers are correct

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  Explanation

  In a positively skewed distribution, the mean is greater than the median or mode. The coefficient of skewness (Sk) generally lies between -3 and +3, therefore an Sk of +2. 48 indicates significant positive skewness.

• Question 3372:

  Which of the following represents a "contrary opinion" technical indicator? Choose the best answer.

  A. Futures traders bullish on stock index futures.
  B. Investment Advisor Opinions.
  C. Diffusion Index.
  D. Confidence Index.
  B. Investment Advisor Opinions.

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  Explanation

  Contrarian technical analysts often examine the opinions of market participants, including investment advisors and futures speculators, for insight into the overall sentiment of securities professionals. Believing these individuals to be inaccurate in their forecasts, contrary opinion technical analysts assume the contra-side opinion. So said, a high degree of bullishness amongst investment advisors is viewed as bearish by contrary opinion technical analyst. Conversely, a high degree of bearishness amongst investment advisors is viewed as a bullish signal by contrary opinion technical analysts. In this same light, a high degree of bullishness amongst stock index futures traders is viewed as a bearish signal by contrarian technical analysts, and a low degree of bullishness amongst stock index futures traders is viewed as a bullish signal.

  The Confidence Index, a "smart money" technical indicator, is a measure of yield spreads between high-grade corporate bonds and the yields on average corporate bonds. The Diffusion Index measures the breadth of the market, and is found by taking the total volume of advancing shares plus one-half of the issues unchanged, divided by the total number of issues traded.

• Question 3373:

  A preferred stock has a $100 par value and a dividend payout of $8 per year. What is the value of the preferred stock?

  A. not enough information to calculate it
  B. $102. 61
  C. $93. 24
  D. $89.65
  A. not enough information to calculate it

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  Explanation

  The value of a preferred stock is the stated annual dividend divided by the required rate of return on preferred stock. The required rate of return in this case is not given.

• Question 3374:

  Which of the following represents a "contrary opinion" technical indicator? Choose the best answer.

  A. More than one of these answers are correct.
  B. The Diffusion Index
  C. T-Bill-Eurodollar Yield Spread
  D. Debit balances in brokerage accounts (margin debt)
  E. The Chicago Board Options Exchange (CBOE) Put/Call Ratio
  F. The Confidence Index
  E. The Chicago Board Options Exchange (CBOE) Put/Call Ratio

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  Explanation

  Of the choices listed, only the "CBOE Put/Call Ratio" represents a contrarian technical indicator. While "debit balances in brokerage accounts (margin debt)" appears to be an appealing choice, this indicator is actually a measure of "smart money" because investors who leverage their portfolios through margin loans are viewed by technical analysts as being sophisticated.

  Technical analysts often examine the opinions of market participants, including future and options traders, for indications of the overall sentiment of securities prices and the direction of impending market movements. Believing that the majority of these market participants will be inaccurate in their forecasts, particularly near market peaks and troughs, contrary opinion technical analysts will take a contra approach.

  When the ratio of puts to calls is high, indicating a high degree of bearishness amongst options traders, contrary opinion technical analysts would look for an upward move in securities prices. Conversely, contrary opinion technical analysts would view a low put/call ratio as a bearish signal.

  The Confidence Index, a "smart money" technical indicator, is a measure of yield spreads between highgrade corporate bonds and the yields on average corporate bonds. The Diffusion Index measures the breadth of the market, and is found by taking the total volume of advancing shares plus one-half of the issues unchanged, divided by the total number of issues traded. The T-Bill-Eurodollar Yield Spread is another example of a "smart money" technical indicator.

• Question 3375:

  It has been observed in the market that most of the increases in dividends are followed by an increase in the stock price and vice-versa. This implies that:

  I. at least one of the MandM assumptions must be false.

  II. there must be signaling effects involved.

  III.

  investors are behaving irrationally.

  A. II only
  B. III only
  C. I, II and III
  D. II and III
  E. I and II
  F. I only
  F. I only

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  Explanation

  If all of the MandM assumptions held, a change in dividend policy would not cause the stock price to change; dividend policy would be irrelevant. However, one does not necessarily need signaling effects to account for market behavior. Other theories like the Bird-in-the-Hand theories can also explain the phenomenon in the presence of transaction costs. In itself, then, the phenomenon does not imply that the market is behaving irrationally.

• Question 3376:

  A fund that invests exclusively in Russian securities would be

  A. a global fund. Like most international and global funds, this one would probably be a load open-end fund.
  B. a global fund. Like most international or global funds, this one would probably be a load open-end fund. There has, however, been a recent increase in the number of international funds that closed-end.
  C. an international fund. Like most single country and emerging market funds, this one would probably be a closed-end fund. Most international and global funds, however, are load open-end funds.
  D. an international fund. Like most international and global funds, this one would probably be a no-load open-end fund. There has, however, been a recent increase in the number of international funds that are closed-end.
  E. an international fund. Like most single country and emerging market funds, this one would probably be a closed-end fund. Most international and global funds, however, are no-load open-end funds.
  F. an international fund. Like most international and global funds, this one would probably be a load open-end fund. There has, however, been a recent increase in the number of international funds that are closed-end.
  G. a global fund. Like most international or global funds, this one would probably be a closed-end fund.
  E. an international fund. Like most single country and emerging market funds, this one would probably be a closed-end fund. Most international and global funds, however, are no-load open-end funds.

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  Explanation

  Funds that invest in non-U.S. securities are referred to as foreign funds. Foreign funds can be divided into two categories: (1) international funds, which invest only in non-U.S. stocks, (2) and global funds, which invest in both U.S. and non-

  U.S. securities. Most global and international funds are no-load open-end funds, although there are still a significant number of closed-end funds. Closed-end funds have the advantage of not being subject to major investor liquidations that would require the sale of stocks on an illiquid foreign stock exchange.

• Question 3377:

  Standard V (B) deals with ________.

  A. None of these answers
  B. Priority of Transactions
  C. Preservation of Confidentiality
  D. Performance Presentation
  E. Prohibition against Use of Material Nonpublic Information
  F. Disclosure of Conflicts to Clients and Prospects
  G. Prohibition against Misrepresentation
  H. Disclosure of Referral Fees
  D. Performance Presentation

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  Explanation

  Standard V (B) - Performance Presentation - states that members shall not make any statements that misrepresent the investment performance that they or their firm have accomplished or can expect to achieve.

• Question 3378:

  A portfolio manager is in the process of forecasting an earnings multiplier for the specialty software industry. In his analysis, this portfolio manager examines the historical payout ratio, required rate of return, and growth forecasts for the software industry, and then compares these figures to those of the overall market. Which of the following best characterizes this method of forecasting an industry earnings multiple?

  A. Microsimulation
  B. Microanalysis
  C. Monte Carlo simulation
  D. Macroanalysis
  E. Macrosimulation
  F. Porter Method
  B. Microanalysis

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  Explanation

  The method profiled in this example is "microanalysis," which is one of two methods for estimating the earnings multiplier of an industry. Microanalysis involves examining the variables underlying the earnings multiplier - the required rate of return, the growth forecast, and the dividend payout ratio. In microanalysis, these variables are examined for the industry and then compared with the values of these variables for the entire market.

  The microanalysis method is contrasted by the macroanalysis method, which involves examining the historical relationship between the earnings multiplier of an industry with that of the overall market. Macroanalysis forecasts often use a time series.

  The "Porter Method" is used to examine the level of competition within an industry, and "Monte Carlo simulation" is a method of measuring stand-alone risk. "Microsimulation," and "macrosimulation" are largely fictitious terms.

• Question 3379:

  Denver Savin, CFA, is an analyst for an investment boutique. Savin is considering investing in one of the following two companies. Savin's evaluation is based on his estimation of price to cash flow. Bell United is a producer of aluminum. The company earned record profits in the latest year. Delmar is a major supplier to the worldwide auto industry. U.S. auto industry problems have reduced Delmar's earnings in the latest year.

  

  Based on the price to cash flow multiple, state whether Delmar or Bell United is more attractive for purchase

  A. Delmar is more attractive.
  B. Bell United is more attractive.
  C. Delmar and Bell United are equally attractive.
  A. Delmar is more attractive.

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  Explanation

• Question 3380:

  Eternal Life Insurance has a policy that will pay $50,000 per year starting 20 years from now, to you and all your progeny. If the appropriate discount rate is 10% per year and you have to pay premiums every year for the next 15 years starting at the end of this year, what's the annual premium payment that you and your heirs must make for this to be a fair deal?

  A. $10,749
  B. $14,495
  C. $9,771
  D. $12,189
  A. $10,749

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  Explanation

  You are entitled to a perpetuity which start paying 20 years from now. Therefore, at the end of year 19, you will have an asset worth $50,000/0.1 = $500,000. The present value of this equals $500,000/1.1^19 = $81,754. Your premium payments are a 15-year annuity. If the annual premium is P, then this annuity has a present value of P/0.1*[1 - 1/1.1^15] = 7. 606P. This must equal the value of the perpetuity for this to be a fair deal. This gives P = $81,754/7. 606 = $10,749.