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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3601:

  Milra Choudra is considering how to invest her $100,000 investment portfolio- Choudra's investment advisor has recommended that she invest 60% in the SandP 500 stock market index and 40% in the risk-free asset. The advisor has derived the following forecasts for the SandP 500:

  

  Assuming a risk-free rate of 5%, the expected return on Choudra's portfolio is closest to:

  A. 6. 6%.
  B. 7. 4%.
  C. 9.0%.
  B. 7. 4%.

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  Explanation

• Question 3602:

  You combine three assets (A, B, and C) into a portfolio. What is the expected return and standard deviation of the portfolio? You will put 25% of your funds into Asset A with an expected return of 5% and a standard deviation of zero, 50% of your funds into Asset B with an expected return of 10% and a standard deviation of 5%, and 25% of your funds into Asset C with an expected return of 5% with a standard deviation of zero.

  A. .075 .025
  B. .025 .05
  C. .075 .075
  D. .05 .10
  A. .075 .025

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  Explanation

  Return = (.25)(.05) + (.50)(.10) + (.25)(.05) = .075Trick, the zero standard deviation causes everything to go to zero.

  p = [AA+BB+CC+ 2wAwBABAB+ 2wAwCACAC+2wCwBCBCB]

  p = [.2(0+ .5(.05+ .2(0+ 2(.25)(.5)(0)(.05)(?) + 2(.25)(.25)(0)(0)(?) +2(.25)(.5)(0)(.5)(?)]

  p = [5(.05= 50(.05) = .025 with risk free assets in the portfolio the only risk is associated with the portion of funds invested in the risky asset.

• Question 3603:

  If you were asked to study the economy over the past five years, you would use the real GDP series rather than the nominal GDP series because

  A. the nominal GDP series reflects changes in both output and prices, whereas the real GDP series, roughly speaking, merely reflects changes in output.
  B. the nominal GDP series fails to account for transfer payments, whereas the real GDP series includes these payments.
  C. the real GDP series accounts for imports, making it more precise than the nominal GDP series.
  D. exports are excluded from the real GDP series, making it less complicated than the nominal GDP series.
  C. the real GDP series accounts for imports, making it more precise than the nominal GDP series.

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  Explanation

  It is almost always true that economists are interested in real changes rather than nominal changes because nominal changes look at both changes in the amount of goods and services produced and prices. Real changes focus only on changes in the amount of goods and services produced.

• Question 3604:

  Which of the following is/are true for a project which needs only an initial outlay and no further expenses?

  I. The shorter the payback period, the greater the liquidity of the project.

  II. The discounted payback period is always more than the simple payback period.

  III.

  The payback period rule considers all the cash flows involved in a project.

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

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  Explanation

  The payback period measures how quickly you recover your initial investment. The shorter this period, the greater the liquidity in terms of cash recovery. The payback rule ignores cash flows beyond the payback period. The discounted payback period is defined as the expected number of years that would be required to recover the original investment using discounted cash flows. Hence, (II) is true if there are no negative cash flows after the initial investment since discounting reduces the present value of the future cash flows.

• Question 3605:

  A mutual fund has a load of 4 percent and a net asset value (NAV) of $20 per share. What must an investor pay to purchase 250 shares?

  A. $5,200.
  B. $4,800.
  C. $5,013.
  D. $5,208.
  D. $5,208.

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  Explanation

  

• Question 3606:

  Omar Henry is a firm believer in capital market theory and the capita! asset pricing model. Henry has developed a model to select overpriced stocks as indicated by the security market line. The model identifies the overpriced securities and then executes a short position in the overpriced stocks. Which of the following practical conditions would prevent Henry from using his model to explain capital market behavior?

  A. All investors use exactly the same two-stage dividend discount model to evaluate stocks.
  B. All investors pay the same commission rate of $0.03/share on all equity trades.
  C. All changes in Federal Reserve policy are perfectly anticipated by investors.
  B. All investors pay the same commission rate of $0.03/share on all equity trades.

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  Explanation

• Question 3607:

  What is the name of this technical indicator?

  (Number of advancing issues + 1/2 volume of issues unchanged) / total number of issues traded

  A. Confidence Index.
  B. CBOE Put/Call Ratio.
  C. None of these answers is correct.
  D. Block Uptick/Downtick Ratio.
  E. Advance/Decline Line.
  C. None of these answers is correct.

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  Explanation

  The technical indicator profiled in this example is the diffusion index, which is a measure of market breadth. While "Advance/Decline Line" is an esthetically appealing choice, it is nonetheless incorrect. The Advance/Decline Line is found by subtracting the volume of declining issues by the volume of advancing issues, with no regard to the volume of issues unchanged.

• Question 3608:

  Most mutual funds compared to the (Dow Jones Industrial Average) DJIA _______.

  A. are less risky
  B. achieved lower net returns
  C. show similar returns
  D. achieved greater net returns
  B. achieved lower net returns

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  Explanation

  Most mutual funds compared to the (Dow Jones Industrial Average) DJIA achieved lower net returns, after deducting operating expenses.

• Question 3609:

  A market researcher with Churn Brothers Brokerage is attempting to estimate the earnings per share (EPS) for a broad market index, and has assimilated the following information:

  Sales per share: $700

  Next year's operating profit margin: 25%

  Next year's depreciation per share: $80

  Next year's interest expense: $45. 50

  Next year's corporate tax rate: 35%

  Using this information, what is the EPS figure for this stock market series?

  A. $32. 17
  B. $164. 18
  C. The answer cannot be calculated from the information provided.
  D. $46. 56
  E. None of these answers is correct.
  F. $112. 67
  A. $32. 17

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  Explanation

  The estimation of EPS for a stock market series involves five steps. Specifically, to determine an estimate of EPS for a stock market series, it is necessary to:

  Estimate the sales per share Estimate next year's operating profit (EBIDT), or operating profit margin Estimate next year's depreciation per share Estimate next year's interest expense per share Estimate next year's corporate tax rate

  Once estimates for these components have been determined, they are put into the following equation:

  EPS for a stock market series = {[(Sales per share * operating profit margin) - depreciation per share - interest expense per share] * (1 - corporate tax rate).

  Putting the given information into this equation will yield the following:

  EPS for a stock market series = {[($700 * 0.25) - $80 - $45. 50] * (1 - 0.35)} = $32. 17

  If you chose $112. 67, remember that the depreciation figure is not added back to the EPS figure in the calculation of EPS for a stock market series. What we are looking at is operating earnings after tax, not a cash-based figure.

• Question 3610:

  Interstate Transport has a target capital structure of 50 percent debt and 50 percent common equity. The firm is considering a new independent project which has an IRR of 13 percent and which is not related to transportation. However, a pure play proxy firm has been identified that is exclusively engaged in the new line of business. The proxy firm has a beta of 1.38. Both firms have a marginal tax rate of 40 percent, and Interstate's before-tax cost of debt is 12 percent. The risk-free rate is 10 percent, and the market risk premium is 5 percent. The firm should

  A. Be indifferent between accepting or rejecting; the firm's required rate of return on the project equals its expected return.
  B. Accept the project; its IRR exceeds the risk-free rate and the before-tax cost of debt.
  C. Accept the project; its IRR is greater than the firm's required rate of return on the project of 12. 05 percent.
  D. Reject the project; its IRR is less than the firm's required rate of return on the project of 16. 9 percent.
  E. Reject the project; its IRR is only 13 percent.
  C. Accept the project; its IRR is greater than the firm's required rate of return on the project of 12. 05 percent.

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  Explanation

  Calculate the required return, k(s), and use to calculate the WACC:

  k(s) = 10% + 1.38(5%) = 16. 9%.

  WACC = 0.5(12. 0%)(0.6) + 0.5(16. 9%) = 12. 05%.

  Compare expected project return, to WACC:

  Accept the project since IRR (13%) is more than the WACC (12. 05%).