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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 351:

  A histogram is best described as:

  A. a collection of frequency classes in which the raw data are arranged.
  B. a bar chart of relative frequencies.
  C. a scatter plot of the raw data on the X-Y plane.
  D. a visual representation of a frequency distribution.
  D. a visual representation of a frequency distribution.

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  Explanation

  A histogram is best described as a visual representation of a frequency distribution.

• Question 352:

  Keenan Omarik, a portfolio manager in the private banking division of GSK Bank, is trying to convince a conservative client to diversify using international bonds and equities. Currently, the client holds only U.S. investments (but is well diversified) and is reluctant to change his allocation. All of the following statements support Omarik's recommendation for international diversification EXCEPT:

  A. By replacing domestic investments with foreign investments in a portfolio, investors can reduce the portfolio risk while holding the number of investments constant.
  B. Foreign securities usually have low correlations with U.S. investments and offer more diversification opportunities than domestic investments alone.
  C. Historically, non-U.S. securities have outperformed U.S. investments on a return basis, at least in part because the non-U.S. economies have experienced higher growth rates.
  D. By diversifying both domestically and internationally, investors eliminate the risk from worldwide systematic risk factors.
  D. By diversifying both domestically and internationally, investors eliminate the risk from worldwide systematic risk factors.

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  Explanation

  This statement should read, "By diversifying both domestically and internationally, investors limit risk to worldwide systematic risk factors only." (Much like domestic diversification reduces unsystematic risk from individual investments, but systematic risk still exists.) The other choices are valid arguments for international diversification.

• Question 353:

  Kendra Jackson, CFA, is given the following information on two stocks, Rockaway and Bridgeport.

  Assuming that Jackson must construct a portfolio using only these two stocks, which of the following combinations will result in the minimum variance portfolio?

  A. 100% in Rockaway.
  B. 50% in Bridgeport, 50% in Rockaway.
  C. 80% in Bridgeport, 20% in Rockaway.
  D. 100% in Bridgeport.
  D. 100% in Bridgeport.

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  Explanation

  First, calculate the correlation coefficient to check whether diversification will provide any benefit.

  rBridgeport, Rockaway= covBridgeport, Rockaway/ [ ( Bridgeport) * ( Rockaway) ] = 0.0325 / (0.13 * 0.25) = 1.00

  Since the stocks are perfectly positively correlated, there are no diversification benefits and we select the stock with the lowest risk (as measured by variance or standard deviation), which is Bridgeport.

• Question 354:

  Carlson Jewelers permits the return of their diamond wedding rings, provided the return occurs within two weeks of the purchase date. Their records reveal that 10 percent of the diamond wedding rinds are returned. Five rings are bought by five different customers. What is the probability that none will be returned?

  A. 0.372
  B. 0.590
  C. 0.500
  D. 0.073
  E. 0.250
  B. 0.590

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 5, r = 0,p =

  0.10 and q = 0.90. Therefore we have 5!(0.1^0)(0.9^5)/0!5! = 0.590.

• Question 355:

  An analyst has been researching a possible investment in collateralized debt obligations (CDOs). Identify the statement which is most likely correct.

  A. The underlying securities for a CDO are typically issued only by U.S.-based entities.
  B. A CDO with corporate bonds as the underlying security is known as a collateralized loan obligation (CLO).
  C. A CDO is typically structured into tranches, similar to a collateralized mortgage obligation (CMO).
  C. A CDO is typically structured into tranches, similar to a collateralized mortgage obligation (CMO).

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  Explanation

• Question 356:

  Supplementary reserves in the form of accounting entries maintained with the IMF by various governments are known as:

  A. Official Reserve Accounts.
  B. BOP funds.
  C. Special Depository Receipts.
  D. Special Drawing Rights.
  D. Special Drawing Rights.

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  Explanation

  Special Drawing Rights are accounting entries established with the International Monetary Fund which can be used to satisfy debits or credits on the BOP account. Of course, these are simply accounting devices used to keep track of the

  assets or debts of the different nations arising from international exchange. Ultimately, the entries must come to fruition through a supply of goods, services or unrequited transfers. So if country A uses the SDR to make a short-term payment

  to country B on its BOP account, it is not considered to be in default but must ultimately extinguish this debt by supplying goods or services to the B.

  The SDRs are more significant for economies trying to artificially maintain a fixed exchange rate system.

  For floating currencies, the BOPs can be at least partially offset through changes in exchange rates.

• Question 357:

  Felix Asterix is a shrewd industry analyst working for Obelix, Inc., a brokerage firm of some repute. Asterix had invested about $50,000 in a few stocks trading on the Australian exchange a year ago. Obelix itself is not active outside the US and Asterix's transactions do not represent any violations of the company policies. One of the Australian firms whose shares Asterix holds recently applied for a dual listing on the NYSE and will begin trading in the US in a month. Asterix has advised in his recent research reports that investors would be well-off investing in this dual-listed stock. He does not reveal his holdings in the Australian stock. Felix has:

  I. not violated the AIMR standard since his transactions took place long before the dual listing and he is not obligated to reveal his personal holdings.

  II. violated Standard III (C) - Disclosure of Conflicts to Employer.

  III. violated Standard IV (A.3) - Independence and Objectivity.

  IV.

  violated Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects.

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

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  Explanation

  This is a classic case of potential conflict and appearance of conflict of interests. Indeed, this kind of situation is so common that it is covered by multiple AIMR standards of ethics. Asterix, as an investment advisor and analyst, should be extremely careful about any potential conflicts of interest that might be perceived as affecting the objectivity of his judgment. Clearly, his substantial Australian holdings, while not in violation of company policies when purchased, are a source of bias now that the stock is trading in the US. Felix must discuss the situation with the Compliance Department at Obelix, Inc. and if he receives the permission to continue holding the stock, should reveal his vested interests to all his potential clients. This ensures that there is no perception of unfair bias and lack of objectivity in his investment recommendations.

• Question 358:

  If you deposit $2,345 into an account paying 6. 5% per year simple interest, how much interest will be earned after 8 months?

  A. $101.62
  B. $14. 09
  C. $309.68
  D. $94. 64
  E. $122. 65
  A. $101.62

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  Explanation

  The question only asks for the earned interest, not the total amount in the account. On the BAII Plus, press 2345 x 0.065 x 8 divide 12 = to see the answer. On the HP12C, press 2345 ENTER 0.065 x 8 x 12 divide to see the answer.

• Question 359:

  The opinion paragraph of an independent auditor's report begins, "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position..." This language states ________.

  A. an unqualified opinion
  B. a disclaimer of opinion
  C. none of these answers
  D. a qualified opinion
  E. an "except for" opinion
  A. an unqualified opinion

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  Explanation

  These references do not constitute a disclaimer or a qualified or adverse opinion, therefore, the language refers to an unqualified opinion.

• Question 360:

  Which of the following statements about portfolio management is TRUE?

  A. As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches negative one.
  B. The security market line (SML) measures systematic and unsystematic risk versus expected return; the CML measures total risk.
  C. Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in.
  D. The expected return on a 0 beta security is the expected market return.
  C. Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in.

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  Explanation

  Combining the CML (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from what to invest in and is called the separation theorem. The investment selection process is thus

  simplified from stock picking to efficient portfolio construction through diversification.

  The other statements are false. As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches positive one. (Remember that the market portfolio has no

  unsystematic risk). The SML measures systematic risk, or beta risk. The expected return on a 0 beta security is the risk free rate (the market premium term has a value of 0).