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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 391:

  The ratio of upside-downside volume is equal to

  A. the number of downticks in the stock market divided by the number of upticks.
  B. the total volume of increasing stocks plus half the volume of unchanged stocks, divided by the total volume of decreasing stocks.
  C. the number of stocks increasing divided by the number of stocks decreasing.
  D. the total volume of increasing stocks divided by the total volume of decreasing stocks.
  D. the total volume of increasing stocks divided by the total volume of decreasing stocks.

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  Explanation

  Technical analysts may use the ratio of upside-downside volume as an indicator of short-term momentum for the market. They feel that a ratio value of 1.50 or more indicates that the market is overbought, while a ratio of 0.70 or less indicates that the market is oversold.

• Question 392:

  A company is currently being sued by a customer. A reasonable estimate can be made of the costs that would result from a ruling unfavorable to the company, and the amount involved is material. The company's managers, lawyers, and auditors agree that there is a remote likelihood of an unfavorable ruling. This contingency

  A. none of these answers.
  B. should be disclosed as a parenthetical comment in the balance sheet.
  C. should be disclosed as an appropriation of retained earnings.
  D. should be disclosed in a footnote.
  E. need not be disclosed in a footnote.
  E. need not be disclosed in a footnote.

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  Explanation

  Losses arising from litigation should be accrued if both probable and reasonably estimable, and should be disclosed if reasonably possible. In this case, the likelihood is remote. Therefore, no disclosure is required.

• Question 393:

  Augusta Sevilla has made the statements about company analysis and stock valuation:

  Statement 1:A growth company is a growth stock. A growth company has opportunities to make investments that yield returns above the firm's required rate of return. A growth company also offers higher rates of return on investments in its

  shares they are undervalued and generate high returns when complete information about the company arrives in the marketplace.

  Statement 2:A defensive stock has a low, but not negative, beta. A stock with a negative beta is actually pro-cyclical.

  Are Sevilla's statements most likely correct?

  A. Both statements are incorrect.
  B. Only Statement 1 is correct.
  C. Only Statement 2 is correct.
  A. Both statements are incorrect.

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  Explanation

• Question 394:

  An increase in accounts payable would be considered ________.

  A. a non-cash charge to income
  B. an adjusting entry
  C. a use of cash
  D. a source of cash
  D. a source of cash

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  Explanation

  An increase in accounts payable shows a decrease in the outflow of cash.

• Question 395:

  When preparing a statement of cash flow, one of the relationships between balance sheet changes and cash flows can be summarized as

  A. decreases in liabilities represent net cash inflows.
  B. increases in liabilities represent net cash outflows.
  C. increases in assets represent net cash outflows.
  D. decreases in assets represent net cash outflows.
  C. increases in assets represent net cash outflows.

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  Explanation

  Increases (decreases) in assets represent net cash outflows (inflows). If an asset increases, the firm must have paid cash in exchange. On the other hand, when a liability increases, the firm must have received cash in exchange.

• Question 396:

  Contrarians assume that:

  A. you should bet against "smart money."
  B. Past winners will lose in the future.
  C. the majority of investors are wrong.
  D. the market moves against the trend.
  C. the majority of investors are wrong.

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  Explanation

  According to the contrarians, most market participants make wrong investment decisions as the market approaches the peak or trough in a cycle. Hence, their basic trading rule is to determine if the general investing populace is strongly bullish or bearish and then bet against that trend (hence the name, "contrarian").

• Question 397:

  Which of the following statements is true?

  A. The shares of an open-end investment company usually trade at a 10 to 25% discount to its NAV, but in some relatively rare instances, the shares trade exactly at NAV.
  B. The shares of a closed-end mutual fund almost never trade exactly at its NAV. Rather, shares typically trade at a 5 to 20% discount to the NAV.
  C. The shares of a closed-end investment company usually trade at exactly its NAV, but in some relatively rare instances, the shares trade at a small discount or premium to the NAV.
  D. The shares of an open-end investment company usually trade at exactly its net asset value (NAV), but in some relatively rare instances, the shares trade at a small discount or premium to the NAV.
  E. The shares of a closed-end investment company almost never trade at exactly its NAV. Rather, shares typically trade at a 5 to 20% discount to the NAV.
  E. The shares of a closed-end investment company almost never trade at exactly its NAV. Rather, shares typically trade at a 5 to 20% discount to the NAV.

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  Explanation

  Open-end investment companies continue to sell and repurchase shares after their initial public offerings. They sell shares at the net asset value with or without sales charges, and repurchase shares at the net asset value with or without redemption fees. The shares of closed end investment companies,however, are rarely sold or redeemed by the funds, but typically trade on a stock market. Over the long-run, the shares tend to trade at a 5 to 20% discount to their net asset value (NAV). There is no such thing as a closed-end mutual fund. Only open-end investment companies are referred to as mutual funds.

• Question 398:

  Given the following points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3)

  What is the critical value necessary to determine a confidence interval for a 95% level of confidence?

  A. 2. 776
  B. None of these answers
  C. 3. 182
  D. 2. 132
  E. 2. 353
  C. 3. 182

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  Explanation

  Look at the t tables for n-2 degrees of freedom at the 5% level. Here, we look for a two tailed test with 5-2 = 3 degrees of freedom. This is 3. 182.

• Question 399:

  A block uptick-downtick ratio of 0.67 would be viewed by technical analysts as

  A. a neutral sign.
  B. a bearish sign.
  C. a bullish sign.
  D. a sign that the market is oversold.
  E. a sign that the market is overbought.
  B. a bearish sign.

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  Explanation

  A block uptick-downtick ratio is equal to the number of upticks for block trades divided by the number of downticks for block trades in a given period. Upticks are assumed to be initiated by buyers, while downticks are assumed to be initiated by sellers. Technicians view a low ratio value (0.70 for example) as a sign of heavy selling and a bearish sentiment on the market. In contrast, they view a high ratio value (1.2 for example) as a sign of heavy buying and a bullish sentiment on the market.

• Question 400:

  Suppose the probability that oil prices will rise any given quarter is 0.51, and the probability that oil prices will stay level or decline is 0.49. If oil prices rise, GNP will contract by 1% with 80% probability, and expand by 0.5% with 20% probability. If oil prices decline or stay level, GNP will expand 3% with a 75% probability and contract 0.5% with a 25% probability. What is the expected change in GNP in the next quarter?

  A. +0.68%
  B. -0.86%
  C. +0.86%
  D. -0.68%
  A. +0.68%

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  Explanation

  We need the total probability rule for expected value, for which the formula is E(X) = E(X | S_1) * P(S_1) + E(X |S_2) * P(S_2) + ... + E(X |S_n) * P(S_n). Here, E(X) is the expected change in GNP. S_1 is the event that oil prices rise, and S_2 is the event that oil prices fall. Therefore, E(X) = 0.51 * (- 1%*80% + 0.5%*20%) + 0.49 * (3%*75% - 0.5%*25%) = 0.68%, an expansion.