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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3591:

  Performance is the record of the ________.

  A. individual
  B. firm
  C. investment manager
  D. child
  E. person
  B. firm

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  Explanation

  To be in compliance with the PPS, a firm's presentation of performance must comply on a firmwide basis and must consist of 10 years of performance (or records since the date of inception if the firm is younger than 10 years).

• Question 3592:

  The T-bill - Eurodollar yield spread should increase during periods of

  A. high inflation.
  B. low inflation.
  C. international stability.
  D. high consumption levels.
  E. international crisis.
  E. international crisis.

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  Explanation

  The T-bill - Eurodollar yield spread can be used as a measure of global investor confidence. During periods of international crisis, it is believed that the spread will widen as money flows back into safe U.S. T-bills.

• Question 3593:

  A derivative security pays $100 if the Dow Jones Industrial Average shows a 15% return over the next year and does not pay anything of the return is lower. If the security costs $45 and its expected return is 30%, what's the probability that the Dow Jones return will exceed 15%?

  A. 39.87%
  B. 58.51%
  C. 41.49%
  D. 61.22%
  B. 58.51%

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  Explanation

  If p is the probability of the Dow Jones return exceeding 15%, then the expected total return on the derivative security is (p * 100 + (1-p)*0)/45 = 2. 222p. Since the expected return is given to be 30%, we get 2. 22p = 1.3. Therefore, p = 1.3/2. 222 = 58.51%

• Question 3594:

  The NAV of a closed end fund _______ the market price of the fund.

  A. can be less than, equal to or greater than
  B. is greater than
  C. is equal to
  D. is less than
  A. can be less than, equal to or greater than

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  Explanation

  Historically, the market price of a closed end fund has been 5 to 20 percent below the NAV of the fund. Closed end funds also can and do at times trade at a premium. Therefore the NAV can be less than, equal to, or greater than the market price.

• Question 3595:

  Consider the following graph of the risk-free asset Rf and the efficient frontier. The letters K, W, X Y, and Z represent risky portfolios. Portfolio M is the market portfolio. The linesRfXandRfYrepresent the combination of the risk-free asset and the risky portfolio.

  Which of the following statements about the above graph is FALSE?

  A. The area to the right of point S represents unsystematic risk, or risk that is not paid for.
  B. Assets W and Z are perfectly positively correlated with each other.
  C. By definition of the capital market line (CML), portfolio K is possible, but not the most efficient because it does not fall on the efficient frontier and is overvalued.
  D. Investors on the capital market line (CML) to the right of M are leveraged and hold more than 100% of portfolio M.
  C. By definition of the capital market line (CML), portfolio K is possible, but not the most efficient because it does not fall on the efficient frontier and is overvalued.

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  Explanation

  By definition, all stocks and portfolios other than M, the market portfolio, fall on or below the CML. Thus, K is not a possible portfolio on this graph. Overvaluation/undervaluation is usually expressed in relation to the SML (security market line). The other statements are true.

• Question 3596:

  Effects of a project on cash flows in other parts of the firm is known as which of the following terms?

  A. Cannibalization
  B. Sunk Cost
  C. Incremental Cash Flow
  D. Opportunity Cost
  E. Externality
  E. Externality

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  Explanation

  Externalities are defined as effects of a project on cash flows in other parts of the firm

• Question 3597:

  According to Standard IV (B.4), Priority of Transactions, a member is a "beneficial owner" if the member has each of the following, EXCEPT:

  A. the power to vote or direct the voting of the shares of the securities or investments.
  B. the power to dispose or direct the disposition of the security or investment.
  C. the authority to supervise reasonably and adequately the actions of those accountable to him.
  D. a direct or indirect pecuniary interest in the securities.
  C. the authority to supervise reasonably and adequately the actions of those accountable to him.

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  Explanation

  The authority to supervise those below the member has no relation to the concept of "beneficial owner." Also, supervisory responsibility is covered under Standard III (E).

• Question 3598:

  Your company is planning to open a new gold mine which will cost $3 million to build, with the expenditure occurring at the end of the year. The mine will bring year-end after-tax cash inflows of $2 million at the end of the two succeeding years, and then it will cost $0.5 million to close down the mine at the end of the third year of operation. What is this project's IRR?

  A. 12. 70%
  B. 14. 36%
  C. 10.17%
  D. 21.53%
  E. 17. 42%
  A. 12. 70%

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  Explanation

  Time line:

  -3,000,0002,000,0002,000,000-500,000

  Financial calculator solution: (In millions)

  Inputs: CF(0) = -3; CF(1) = 2; N(j) = 2; CF(2) = -.5.

  Output: IRR% = 12. 699%.

• Question 3599:

  Retained earnings represent:

  A. none of these answers.
  B. undistributed net income in the last accounting period.
  C. accumulated, undistributed earnings since inception.
  D. earnings inclusive of any paid-in capital since inception.
  C. accumulated, undistributed earnings since inception.

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  Explanation

  Any undistributed net income during a period is swept into the "retained earnings" account. Thus, retained earnings at any point represent the cumulative undistributed earnings since the company was formed. This account is the chief source of distribution of dividends and other payments to shareholders.

• Question 3600:

  You are going to hold a stock for an infinite amount of time. The current dividend is $1 per share and is expected to grow at 10% a year. Your long run required rate of return is 13%. Using the infinite period dividend discount model calculate the value of the stock.

  A. $40.01
  B. $27. 25
  C. none of these answers
  D. $38.89
  C. none of these answers

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  Explanation

  g = .10 k = .13 Dividend = 1.10 x $1.00 V = 1.10/(.13 - .10) = $36. 67