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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3801:

  If an auditor issues an "adverse opinion" qualification in her opinion, she is referring to the fact that:

  A. the firm's financial statements do not fairly represent the company's financial performance and position.
  B. there is considerable uncertainty in the firm's asset-liability valuation, thus causing a concern about its operational health.
  C. the firm has inadequate controls in place and needs an on-going, frequent audit.
  D. the firm's liquidity is in jeopardy and the firm may not survive for long.
  A. the firm's financial statements do not fairly represent the company's financial performance and position.

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  Explanation

  An adverse opinion is rendered in cases where financial statements are not prepared in accordance with accepted accounting principles, and this has a material effect on the fair presentation of the statements.

• Question 3802:

  Which of the following statements about portfolio theory is FALSE?

  A. For a two-stock portfolio, the lowest risk occurs when the correlation coefficient is close to negative one.
  B. Assuming that the correlation coefficient is less than one, the risk of the portfolio will always be less than the simple weighted average of individual stock risks.
  C. Risk aversion results in an upward sloping security market line (SML).
  D. When the return on an asset added to a portfolio has a correlation coefficient of less than one with the other portfolio asset returns but has the same risk, adding the asset will not decrease the overall portfolio standard deviation.
  D. When the return on an asset added to a portfolio has a correlation coefficient of less than one with the other portfolio asset returns but has the same risk, adding the asset will not decrease the overall portfolio standard deviation.

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  Explanation

  This statement misstates the principle of diversification and should read, "When the return on an asset added to a portfolio has a correlation coefficient of less than one with the other portfolio asset returns but has the same risk, adding the asset will decrease the overall portfolio standard deviation." Anytime the correlation coefficient is less than one, there are benefits from diversification. The other choices are true.

• Question 3803:

  Two firms, Groening Inc. and Shearer Co., have just completed simultaneous bond issuances. Both issues have a stated coupon rate of 5%, pay interest semiannually, and have a face value of $i,000 per bond. The Groening and Shearer issues both have a maturity of 15 years and their duration is approximately the same. If the Groening bond have a higher convexity measure than the Shearer bonds, which issuance will sell for the higher price?

  A. Groening, since the bonds will depreciate less in a period of rising interest rates.
  B. Groening, since the bonds will depreciate less in a period of falling interest rates.
  C. Shearer, since the bonds will depreciate less in a period of rising interest rates.
  A. Groening, since the bonds will depreciate less in a period of rising interest rates.

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  Explanation

• Question 3804:

  Which statement is true concerning Americans living longer?

  A. All of these statements are true.
  B. None of these statements are true.
  C. The elderly have more disposable income than the younger population.
  D. The income group that has advanced the most is that of the elderly.
  E. The health care industry should expect to grow.
  F. Youth-oriented industries should expect to shrink.
  A. All of these statements are true.

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  Explanation

  These are all trends that have happened or should expect to happen in the future given the fact that there will be more older people in the population.

• Question 3805:

  Under the Performance Presentation Standards, asset-weighting of portfolio returns within a composite is required. The ________ of period weightings must be used.

  A. beginning
  B. end
  C. none of these answers
  D. midpoint
  A. beginning

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  Explanation

  Composites must be asset weighted using beginning-of-period weightings.

• Question 3806:

  Analysis, Inc. had gross sales of 5,000 last year. Its operating expenses amounted to 339 and cost of goods sold equaled 2,386. Analysis faces a corporate tax rate of 37% and had no other revenues or costs last year. Its net income after taxes was ________.

  A. 1,647
  B. 1,433
  C. 2,275
  D. 1,308
  B. 1,433

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  Explanation

  Analysis' gross profit = gross sales - cost of goods sold = 5,000 - 2,386 = 2,614. The operating expenses are deductible for tax purposes. Hence, pre-tax income equaled 2,614 - 339 = 2,275. Therefore, its after-tax income equals 2,275*(10.37) = 1,433.

• Question 3807:

  The monthly compounded rate is 4% quoted on an annualized basis. The equivalent semiannually compounded rate is:

  A. 4. 25%
  B. 4. 03%
  C. 4. 12%
  D. 3. 96%
  B. 4. 03%

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  Explanation

  To solve such problems, think about investing a dollar for 1 year. The final amount should be the same under both the quotations. Under semiannually compounded rate, r, $1 grows to (1+r/2)^2 in 1 year. Under monthly compounding, it grows to (1+0.04/12)^12 = 1.0407. Since these two should be equal, we get (1+r/2)^2 = 1.0407, giving r = 4. 03%. Note that the semi-annually compounded rate must be larger than the monthly compounded rate, ruling out 3. 96 automatically.

• Question 3808:

  An advantage of the duration/convexity approach over the full valuation approach is:

  A. its superior accuracy for nonparallel shifts in the yield curve
  B. it is not based on yield to maturity, which is a summary measure.
  C. it saves considerable time when working with portfolios of bonds.
  C. it saves considerable time when working with portfolios of bonds.

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  Explanation

• Question 3809:

  A firm's ROE equals 47%. Its financial leverage equals 1.8 and its asset turnover is 0.8. If the firm's total net sales equal $1.35 million, its net income equals ________.

  A. 1,427,625
  B. 440,625
  C. 352,500
  D. 282,000
  B. 440,625

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  Explanation

  ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (net income/sales)*(asset turnover)*(financial leverage) Therefore, net income = 0.47*1.35/(0.8*1.8) million = 440,625.

• Question 3810:

  Firm A uses Double Declining and Firm B uses Sum-of-digits method of depreciation. In the first year, which of the following is/are TRUE?

  I. A shows lower assets than B

  II. A shows higher retained earnings than B

  III. A shows a higher debt-to-equity ratio than B

  IV.

  A shows a lower debt-to-asset ratio

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

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  Explanation

  Double Declining results in a higher depreciation in the first year. Therefore, Firm A shows lower assets, lower income and hence lower equity in the first year. Thus, its debt-to-equity and debt-to- asset ratios are higher than B's.