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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3461:

  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
  B. 0.0918

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  Explanation

  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 3462:

  Due to an impending recession in the industrial and high tech sectors, combined with dramatic mismanagement of U.S. fiscal policies, the U.S. economy is expected to slip into a significant recession.

  Given this shift, the U.S. inflation rate is expected to decrease significantly from its current level.

  Specifically, the inflation rate is expected to decrease from 4. 0% to a deflationary (2)% per year, and this decrease should be considered significantly large by historical standards. The current nominal interest rate in the U.S., as measured by

  the quoted rate on U.S. 10-year notes, is 8.25% per year. Further, the real inflation-free rate of interest is currently at 4. 25%, and this rate is not anticipated to change. Assuming this decrease in inflation has not been factored in, what is the

  appropriate value for the nominal risk-free rate?

  A. 2. 165% per year
  B. The answer cannot be calculated from the information given.
  C. (0.225)% per year
  D. None of these answers is correct.
  E. 2. 25% per year
  F. (2. 165)% per year
  A. 2. 165% per year

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  Explanation

  When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the calculation of the nominal risk-free rate differs from the equation used when these factors are significantly small. Specifically, the

  calculation of the nominal risk-free rate of interest when the inflation-free rate of interest and/or the inflation premium are significantly high, the calculation of the nominal risk-free rate is as follows:

  Nominal RFR = (1 + Real RFR)(1 + E(I)) - 1

  Where: Real RFR = the real inflation-free rate of interest and E(I) = the anticipated inflation rate.

  In this example, all of the necessary inputs have been provided. Imputing these values into the equation above will yield the following:

  Nominal risk-free interest rate = {[(1 + 0.0425)(1 - 0.02) - 1] * 100} = 2. 165%

  When the inflation-free rate of interest and/or the inflation premium are low, then the equation above can be simplified to the following:

  Nominal RFR = Real RFR + Inflation premium.

  If you chose 2. 25%, remember that when the real inflation-free rate of interest and/or the inflation premium are significantly large, the calculation of the nominal risk-free rate must involve a different equation than when these rates are small.

• Question 3463:

  A bar owner in Wisconsin has just won the Illinois Big Lotto jackpot that pays $200 million dollars in 25 equal installments paid annually. The bar owner can either accept the annual payments starting today or receive a lump sum today, using a discount rate of 9% per year. If the bar owner chooses to accept the lump sum, how much will he receive today?

  A. $85. 65 million
  B. $91.33 million
  C. $101.31 million
  D. $105. 13 million
  A. $85. 65 million

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  Explanation

  The annual lotto payments equal 200/25 = 8 million dollars per year. Since the payments start today, the cash stream equals a payment of 8 million dollars today and an ordinary annuity with 24 payments. Thus, the present value of the lotto equals 8 + 8/0.09*(1-1/(1.09^24)) = 85. 65 million dollars.

• Question 3464:

  Standard IV (B.3) - Fair Dealing requires AIMR members to treat all clients and prospects fairly when disseminating investment information or recommendation. Which of the following is/are implied by this?

  I. All clients and prospects must be treated equally i.e. the investment recommendation should be disseminated to all the clients without prejudice.

  II. Amongst the eligible clients, no favoritism should be shown i.e. small investors should be treated the same as large investors.

  III.

  All eligible clients must be informed about new opportunities simultaneously.

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

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  Explanation

  Standard IV (B.3) - Fair Dealing requires AIMR members to treat all clients and prospects fairly when disseminating investment information or recommendation. However, "fairly" does not mean "equally" for one major reason: each client has different investment needs. A recommendation, if not suitable for a particular client's risk-reward profile, should not be communicated to that client! So care must be taken while disseminating investment recommendations to individual clients to ensure suitability. Therefore, (I) is incorrect. Of the eligible clients, as long as there is no bias shown favoring one client over the other, the standard does not require that they be informed simultaneously; indeed this is almost impossible in most cases because of time lags in communication channels - mail, phone, fax, etc. So (III) is incorrect.

• Question 3465:

  Which of the following will lead to a decrease in the price of a stock, all else equal?

  I. An increase in the systematic risk of the stock.

  II. An increase in the total variance of the stock.

  III. A decrease in its covariance with the market.

  IV.

  An increase in the growth rate of its dividends.

  A. II only
  B. I only
  C. IV only
  D. III only
  E. I and III
  B. I only

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  Explanation

  An increase in the stock's expected rate of return decreases the price of the stock. This will happen if the stock's systematic risk increases so I is a correct choice. Note that the systematic risk decreases when the security's covariance with the market decreases. Hence, III is excluded.

  An increase in the variance of the stock does not necessarily change its expected return. Only if the systematic component of the stock's variance changes will the expected return change, causing a price change. Therefore II is not a correct choice.

  Finally, an increase in the growth rate of dividends will increase the stock price, so IV is also not a correct choice.

• Question 3466:

  A piece of equipment costs $250,000, has a useful life of 10 years and an estimated salvage value of $50,000. How much depreciation expense should the company recognize in year 7 if it is using the straight-line method of depreciation?

  A. $10,000
  B. $25,000
  C. $140,000
  D. $20,000
  D. $20,000

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  Explanation

  Using the straight line method an equal amount of the cost of the asset less the salvage value is charged to each year of the assets useful life. In this example the value of the equipment being used during its life is $200,000 divided evenly among 10 years.

• Question 3467:

  How long will it take money to double at 9.5% per year, compounded annually?

  A. 28.03 years
  B. 1.29 years
  C. 10.14 years
  D. 7. 64 years
  E. 4. 1 years
  D. 7. 64 years

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  Explanation

  To solve this question, choose a future value that is twice the size of the present value. The actual number will not matter. On the BAII Plus, press 9.5 I/Y, 1000 PV, 0 PMT, 2000 +/- FV, CPT N. On the HP12C, press 9.5 i, 1000 PV, 0 PMT, 2000 CHS FV, n. Note that the HP12C will show 8 for the answer. The answer will be the same as long as the FV is twice as large as the PV.

• Question 3468:

  A board of directors consists of eight men and four women. A four member search committee is to be chosen at random to recommend a new company president. What is the probability that all four members of the search committee will be women?

  A. None of these answers
  B. 1/16 or 0.0625
  C. 1/495 or 0.002
  D. 1/8 or 0.125
  E. 1/120 or 0.00083
  C. 1/495 or 0.002

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  Explanation

  4/12*3/11*2/10*1/9 = 1/495

• Question 3469:

  If a nation is running a "trade deficit," it is

  A. spending more on public services than it is raising in tax revenues.
  B. exporting more goods and services than it imports.
  C. importing more goods and services than it exports.
  D. encountering a balance of payments disequilibrium.
  E. worse off as the result of its trade with foreign countries.
  C. importing more goods and services than it exports.

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  Explanation

  A trade deficit implies that a country is importing more value in terms of goods and services than it is exporting to foreign countries.

• Question 3470:

  Which of the following statements about call options at expiration are true?

  A. The call buyer's maximum loss is the call option's premium.
  B. The profit potential to the buyer of the option is unlimited.
  C. The potential loss to the writer of the call option is unlimited.
  D. The greatest profit the writer of a call option can make is the stock price minus the premium.
  D. The greatest profit the writer of a call option can make is the stock price minus the premium.

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  Explanation