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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3891:

  The price range at which a technician would expect a substantial increase in demand for a stock is

  A. the support level.
  B. the resistance level.
  C. the peak level.
  D. the demand level.
  A. the support level.

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  Explanation

  Demand level is not a real term. Technicians believe that a support level on a stock will develop after it has experienced substantial price gains. They reason that at some price range (the support level), other investors who did not buy the stock the first time it went up will now buy it after a small price reversal.

• Question 3892:

  Phoenix Products Inc. requires a new machine to produce a part for a solar air conditioner. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. Cash flow analysis indicates the following: Year Machine A Machine B 0-$1,000-$1,000 10 417 20 417 30 417 41,938 417 If the cost of capital for Phoenix Products is 5 percent, which of the following is the most valid statement?

  A. The IRR(A) > IRR(B), therefore accept Machine A.
  B. The NPV(A) < NPV(B), therefore accept Machine B.
  C. Take neither A nor B since the cost of capital is greater than the internal rate of return.
  D. The NPV(A) > NPV(B), therefore accept Machine A.
  E. The IRR(A) < IRR(B), therefore accept Machine B.
  D. The NPV(A) > NPV(B), therefore accept Machine A.

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  Explanation

  NPV(A) = $1,938(PVIF(5%,4)) - $1,000

  = $1,938(0.8227) - $1,000 = $1,594. 39 - $1,000 = $594. 39.

  NPV(B0 = $417(PVIFA(5%,4)) - $1,000

  = $417(3. 5460) - $1,000 = $1,478.68 - $1,000 = $478.68.

  Therefore, accept Machine A since NPV(A) > NPV(B).

• Question 3893:

  How much would you have in a savings account 12 months from now if you start with a balance of $3,000 today, make a deposit of $1,000 in 6 months and make another deposit 6 months after that of $500? Assume that interest accrues at 6% per year, compounded monthly.

  A. $4,684. 42
  B. $4,777. 55
  C. $4,715. 41
  D. $4,500.00
  E. $2,500.00
  C. $4,715. 41

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  Explanation

  Find the answer to this question by solving a couple of compound interest problems. Move the $3,000 to month 12, then move the $1,000 forward 6 months to month 12, then add $500. On the BAII Plus, press 12 N, 6 divide 12 = I/Y, 3000 PV, 0 PMT, CPT PV. Then press STO 1. Then press 6 N, 1000 PV, CPT FV. Then press + RCL 1 =. Make this number positive by pressing +/- and then press + 500 = to see the answer. On the HP12C, press 12 N, 6 ENTER 12 divide i, 3000 PV, 0 PMT, FV. Then press STO 1. Then press 6 N, 1000 PV, FV. Then press RCL 1 +. Make this number positive by pressing CHS and then press 500 + to see the answer. Make sure that the BAII Plus has the value of P/Y set to 1.

• Question 3894:

  Which of the following is the preferred method of return calculation in the investment management industry?

  A. Time-weighted rate of return
  B. Dollar-weighted rate of return
  C. Internal rate of return
  D. None of these answers is correct.
  E. Asset-weighted rate of return
  A. Time-weighted rate of return

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  Explanation

  The time-weighted rate of return is the preferred method of return calculation in the investment management industry, and this is precisely because the time-weighted rate of return is not sensitive to significant portfolio additions or withdrawals, unlike the dollar weighted rate of return.

  Remember that the dollar-weighted rate of return is another name for the Internal Rate of Return. Knowing this fact allows you to narrow the answer down to three possible choices. The asset-weighted rate of return is by definition sensitive to additions and withdrawals of portfolio assets.

• Question 3895:

  Which of the following is NOT a measure of a firm's liquidity?

  A. interest coverage
  B. inventory turnover
  C. quick ratio
  D. receivables turnover
  A. interest coverage

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  Explanation

  Interest coverage ratio is a measure of the financial risk.

• Question 3896:

  Sunk costs:

  A. should be ignored while evaluating a project.
  B. affect a project's desirability adversely.
  C. are incremental cash flows of the project under consideration.
  D. lower a project's NPV.
  A. should be ignored while evaluating a project.

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  Explanation

  Sunk costs represent expenses that have already been incurred or committed to. Therefore, they are not pertinent to future decisions.

• Question 3897:

  The z-value of a selected observation, X, from a normal distribution, also known as the normal deviate or the z-score of X, represents:

  A. the probability that another observation from the distribution will be less than or equal to X.
  B. the probability that another observation from the distribution will be more than or equal to X.
  C. the distance of X from the mean, in terms of standard deviation.
  D. the distance of X from zero.
  C. the distance of X from the mean, in terms of standard deviation.

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  Explanation

  The z-value of a selected observation, X, from a normal distribution with mean M and standard deviation S equals z = (X-M)/S. The z-value thus represents the distance of X from the mean, in terms ofstandard deviation. Note that the z-value is a distance measure. It does not measure probabilities directly.

• Question 3898:

  Which of the following is/are required by AIMR-PPS with regards to calculation of returns?

  I. Total return - realized and unrealized gains plus income - should be used.

  II. Returns must be based on arithmetic mean calculations.

  III.

  Accrual accounting must be used for fixed-income securities.

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

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  Explanation

  The PPS require that calculations be based on time-weighted (geometric) returns. Accrual accounting must be used for fixed-income and other securities that accrue income. The performance measurement must be based on total returns.

• Question 3899:

  Which of the following statements is likely to encourage a firm to increase its debt ratio?

  A. Management believes that the firm's stock is overvalued.
  B. Its corporate tax rate declines.
  C. Its sales become less stable over time.
  D. None of these answers are correct.
  E. All of these answers are correct.
  D. None of these answers are correct.

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  Explanation

  None of these would promote an increase in the debt ratio of a firm. Less stable sales would lead a firm to lower its debt ratio. A lower corporate tax rate reduces the tax advantage of the deductibility of interest expense. This reduction in the tax shield provided by debt would encourage less use of debt. If management believes the firm's stock is overvalued, then it would want to issue equity, rather than debt.

• Question 3900:

  When comparing the riskiness of investments with different expected returns, one must use ________.

  A. none of these answers
  B. skewness
  C. the coefficient of variation
  D. the standard deviation
  E. kurtosis
  C. the coefficient of variation

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  Explanation

  The coefficient of variation equals the ratio of the standard deviation to the mean. Thus, it standardizes the variation in the returns in terms of the expected values.