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

• Question 3421:

  The probability that events A and B do not occur simultaneously equals 0.77. The probability of neither A nor B occurring equals 0.38. If P(A) equals 0.26, the probability of B occurring equals ________.

  A. 0.43

  B. 0.59

  C. 0.62

  D. 0.21

  Correct Answer: B

  The probability that events A and B do not occur simultaneously equals one minus the probability that events A and B occur simultaneously. Thus,

  P(A and B) = 1 - 0.77 = 0.23.

  The probability of neither A nor B occurring equals one minus the probability of either A or B occurring. Thus, P(A or B) = 1 - 0.38 = 0.62.

  Now, P(A or B) = P(A) + P(B) - P(A and B). Therefore, P(B) = P(A or B) - P(A) + P(A and B) = 0.62 - 0.26 +

  0.23 = 0.59.

• Question 3422:

  If an investor who has a required rate of return of 7% per year pays $1,000 for a five-year ordinary annuity, the annuity pays ________ per year.

  A. $244

  B. $256

  C. $271

  D. $263

  Correct Answer: A

  If the annuity pays C per year, we have 1,000 = C/0.07*(1-1/(1.07^5)) => C = 1,000*0.07/0.287 = 244.

• Question 3423:

  For a standard normal distribution what is the probability that z is greater than 1.75?

  A. 0.4599

  B. 0.0401

  C. None of these answers

  D. 0.9599

  E. 0.0459

  Correct Answer: B

  The area under the curve for z = 1.75 is 0.4599. Therefore, 0.4599*2 = 0.9198. We want z >1.75. So we want (1 - 0.9198)/2 = 0.0401.

• Question 3424:

  An automatic machine inserts mixed vegetables into a plastic bag. Past experience revealed that some packages were underweight and some were overweight, but most of them had satisfactory weight.

  Weight % of Total Underweight 2.5 Satisfactory 90.0 Overweight 7.5

  What is the probability of selecting and finding that all three of them are overweight?

  A. 0.0004218

  B. 0.0000156

  C. 0.075

  D. 0.0000001

  E. None of these answers

  Correct Answer: A

  P(all three overweight)=0.075*0.075*0.075 = 0.0004218.

• Question 3425:

  Variables X and Y are perfectly negatively correlated. Given only this information, if you run a regression of Y against X, which of the following is/are true?

  I. The intercept term is zero.

  II. The slope equals 1.

  III. R-square equals 1.

  IV.

  The percentage of unexplained variance equals 100%.

  A.

  I only

  B.

  III and IV

  C.

  IV only

  D.

  I and II

  E.

  III only

  F.

  I and III

  G.

  II only

  Correct Answer: E

  If Y = aX + b, then X and Y are perfectly negatively correlated for any value of b and any negative value of

  a. Hence, given the information in the question, the slope must be negative but not necessarily equal to 1 and the intercept term cannot be determined. Since the correlation coefficient is 1, R-square is also 1, as expected, since all the variation in Y can be explained by variation in X. Note that the percentage of unexplained variance equals zero.

• Question 3426:

  If you make an initial deposit $500 now into an account, an additional deposit of $800 in 2 years, and a final deposit of $300 in 4 years, how much is in your account in 5 years? Assume the account earns interest at 8% per year, compounded annually.

  A. $2,120.04

  B. $2,408.29

  C. $2,066.43

  D. $1,905.51

  E. $2,331.88

  Correct Answer: C

  Solve this question by working several compound interest problems, moving each dollar amount over to year 5. On the BAII Plus, press 5 N, 8 I/Y, 500 PV, 0 PMT, CPT FV, which yields $734.66. Then press STO 1, 3 N, 800 PV, CPT FV, which yields $1,007.77. Then press + RCL 1 = STO 1. Then press 1 N, 300 PV, CPT FV, which yields $324.00. Then press + RCL 1 = to see the answer. On the HP12C, press 5 n, 8 i, 500 PV, 0 PMT, FV. Then press STO 1, 3 n, 800 PV, FV. Then press RCL 1 + STO 1. Then press 1 n, 300 PV, FV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number. Also note that the value of "N" for each dollar amount is based on the distance from year 5. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3427:

  What simple annual interest rate would cause a $110 deposit to grow to $120 in 2 years?

  A. 4.55%

  B. 9.09%

  C. 8.33%

  D. 54.55%

  E. 4.17%

  Correct Answer: A

  To solve this question, we have to rearrange the simple interest formula, I=PRT so that the R is by itself. Note that the I (interest) is equal to 10 (120 - 100). On the BAII Plus, press 10 divide 110 divide 2 = to see the answer. On the HP12C, press 10 ENTER 110 divide 2 divide to see the answer.

• Question 3428:

  Which of the following is not true regarding the normal distribution?

  A. It is symmetrical

  B. It has a single peak

  C. None of these answers

  D. Mean, median and mode are all equal

  E. The points of the curve meet the X-axis at z = -3 and z = 3

  Correct Answer: E

  Nothing is stated about the points where the curve meets the X axis (does it meet at all?)

• Question 3429:

  You wish to count the number of ways in which n objects can be assigned to k different categories, with n_i members in the ith category. The counting method you should use is:

  A. The permutation rule.

  B. The binomial formula.

  C. None of these answers is correct.

  D. The multinomial formula.

  Correct Answer: D

  The number of ways that you can arrange n objects so that there are n_1 of one kind, n_2 of another kind, and so on, up to n_k of a kth kind, is found by using the multinomial formula: n! / [(n_1)! * (n_2)! * ... * (n_k)!].

• Question 3430:

  If you owe 3 debts ($800 due 3 months from now, $900 due 7 months from now, and $1,200 due 11 months from now), what single payment can you make today to settle them, if interest is assessed at 10% per year, compounded monthly?

  A. $2,387.29

  B. $2,600.00

  C. $3,552.39

  D. $2,724.84

  E. $2,504.88

  Correct Answer: D

  Find the answer to this question by solving 3 compound interest problems. On the BAII Plus, press 3 N, 10 divide 12 = I/Y, 0 PMT, 800 FV, CPT PV which yields $849.21. Then press STO 1. Then press 7 N, 900 FV, CPT PV, which yields $780.33. Then press + RCL 1 = STO 1. Then press 11 N, 1200 FV, CPT PV, which yields $1,095.31. Press + RCL 1 = to see the answer. On the HP12C, press 3 n, 10 ENTER 12 divide i, 0 PMT, 800 FV, PV. Then press STO 1. Then press 7 n, 900 FV, PV. Then press RCL 1 + STO 1. Then press 11 n, 1200 FV, PV. Press RCL 1 + to see the answer. Make sure the BAII Plus has the P/Y value set to 1.