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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3811:

  Sterling Drachma is a senior investment consultant currently researching a few high-risk internet stock companies which recently started trading on NASDAQ. Sterling manages 5 large and private investment accounts for which he has discretionary investment authority. Sterling is about 3 years away from retirement and his retirement portfolio is managed by Franc Escudo. Sterling has concluded from his research that two of the internet stocks he has been following are great buys and instructs Franc to divert part of the retirement investments into these stocks. Franc executes the orders as soon as he receives them. Sterling then instructs his brokers to buy the stocks for the two discretionary accounts that he knows are inclined toward high-risk investments. He does not buy any for the remaining three accounts since those are income-oriented, low-risk accounts. In this sequence of events, which of the following is/are true?

  I. Franc has violated Standard IV (B.1) - Fiduciary Duties - by investing retirement account funds in the high-risk stocks.

  II. Sterling has violated Standard IV (B.3) - Fair Dealing - by not treating all his accounts equally.

  III.

  Sterling has violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement account before trading for his client accounts.

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

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  Explanation

  Franc is managing a personal portfolio and as such must execute the orders of his client. The fact that it is a retirement account makes no difference in this situation. Franc would be in violation if he was managing a pension portfolio or a personal trust portfolio and the investments were deemed in violation of plan directives. Franc, however, should try to understand Sterling's motives in the redeployment of funds since this could prevent his client from what could be reckless investment. Sterling, for his part, as definitely violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement account before trading for his client accounts. Personal transactions should never take precedence over client and employer transactions. He has, however, not violated Standard IV (B.3) - Fair Dealing - by not treating all his accounts equally. Standard IV (B.3) requires a fair treatment of all clients, not an equal treatment precisely because different accounts have different investment needs and risk appetites. The internet stocks should only be bought for accounts for which they are a suitable investment.

• Question 3812:

  If you want $1,000,000 when you retire in 25 years, how much must you deposit each month, beginning one month from today, if your funds will earn 9% per year, compounded monthly?

  A. $7,336. 35
  B. $903. 59
  C. $$29,848.16
  D. $891.96
  E. $29,848.16
  D. $891.96

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  Explanation

  Note that since the deposits are made monthly, there are 300 of them (25 x 12 = 300). On the BAII Plus, press 300 N, 9 divide 12 = I/Y, 0 PV, 1000000 FV, CPT PMT. On the HP12C, press 300 n, 9 ENTER 12 divide i, 0 PV, 1000000 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3813:

  You currently own Cavanaugh Inc. and are thinking of adding either Coe Co. or Firm Co. to your holdings. All three stocks offer the same expected return and total risk. The covariance of returns between Cavanaugh and Coe is +0.5 and the covariance between Cavanaugh and Firm Co. is ?0.5. Portfolio's risk would:

  A. decline more if you bought Coe Co.
  B. decline more if you bought Firm Co.
  C. decrease if you bought Coe Co. but increase if you bought Firm Co.
  D. would decrease most if you put half your money in Coe Co. and half in Firm Co.
  B. decline more if you bought Firm Co.

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  Explanation

  In portfolio composition questions return and standard deviation are the key variables. Here you are told that both returns and standard deviations are equal. Thus, you just want to pick the companies with the lowest covariance, because that would mean you picked the ones with the lowest correlation coefficient.= [++ 2where==so you want to pick the lowest covariance which is between Cavanaugh and Firm.

• Question 3814:

  Six-month LIBOR is an interest rate which:

  A. represents the interest rate paid on a CD that matures in 6 months
  B. is the return available on the shortest term euro-denominated securities.
  C. is determined by adding a small spread to the yield available on a UK government bond maturing in 6 months.
  A. represents the interest rate paid on a CD that matures in 6 months

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  Explanation

• Question 3815:

  What is the range of values for a coefficient of correlation?

  A. -1.0 to +1.0 inclusive
  B. Unlimited range
  C. -3 to +3 inclusive
  D. None of these answers
  E. 0 to +1.0
  A. -1.0 to +1.0 inclusive

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  Explanation

  The closer the value to 1 or -1, the stronger the correlation. The sign +/- just shows the direction, not the strength.

• Question 3816:

  Employment is the number of persons employed divided by the number of persons

  A. In the civilian population age 16 and over.
  B. Employed plus the number unemployed.
  C. Unemployed.
  D. In the labor force.
  A. In the civilian population age 16 and over.

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  Explanation

  The employment/population ratio is the number of persons aged 16 years and over employed as civilians divided by the total civilian population 16 years of age and over. The ratio is expressed as a percentage. This rate does not make a subjective judgment as to whether a person is actually "available for work" or "actively seeking employment."

• Question 3817:

  What is the variable used to predict another variable called?

  A. Important
  B. Causal
  C. Independent
  D. None of these answers
  E. Dependent
  C. Independent

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  Explanation

  The dependent variable is the variable Y which is being predicted by the X variable, the independent variable. The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of the line. Y' is the predicted value of Y given a specific value of X.

• Question 3818:

  Which of the following best describes the relationship between the velocity of money and the demand for money?

  A. When the demand for money increases, the velocity of money increases.
  B. The demand for money is not related to the velocity of money.
  C. The demand for money must be stable for the velocity of money to increase.
  D. When the demand for money declines, the velocity of money increases.
  D. When the demand for money declines, the velocity of money increases.

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  Explanation

  When decision makers conduct a specific amount of business with a smaller amount of money, their demand for money balances is reduced. Each dollar, though, is now being used more often. Therefore, the velocity of money is increasing. Thus, for a given income level, when the demand for money declines, the velocity of money increases.

• Question 3819:

  To claim compliance with the AIMR Performance Presentation Standards,

  A. at least 1/2 of the investment managers in the firm must comply with the Standards.
  B. the entire firm must comply with the Standards.
  C. none of these answers. The Standards apply to individual investment manager's performance only.
  D. at least 3/4 of the investment managers in the firm must comply with the Standards.
  B. the entire firm must comply with the Standards.

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  Explanation

  To claim compliance with the AIMR-PPS, the firm must comply with the Standards on a firmwide basis. Additionally, the firm must state exactly how it is defining itself for purposes of compliance.

• Question 3820:

  Which of the following are necessary conditions for the NPV and IRR methods to produce similar rankings? Choose the best possible answer.

  A. Projects must be mutually exclusive and of equal scale
  B. Projects must be independent and have normal cash flows
  C. Projects must be mutually exclusive and have normal cash flows
  D. Projects must have normal cash flows, and must be equal in scale and lifespan
  E. Projects must be of equal scale and have equal lifespans
  D. Projects must have normal cash flows, and must be equal in scale and lifespan

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  Explanation

  When examining mutually exclusive projects with equal lifespans and of equal size, the IRR and NPV calculations will produce similar ranking results as long as the projects under examination have "normal" cash flows. It is when the projects under examination have "non-normal" cash flows that the IRR method can experience some difficulty. Non-normal cash flows are defined as cash flows in which negative cash inflows are juxtaposed within a series of positive cash inflows, creating a situation in which the sign will change more than once. When examining these "non-normal" projects, the Internal Rate of Return calculation will often produce multiple answers which leads to an incorrect accept/reject decision. In any examination in which the IRR and NPV produce conflicting rankings, the NPV calculation should be used.