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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 471:

  Aggressive (growth) funds have tended to

  A. outperform conservative funds.
  B. have portfolio compositions very similar to conservative funds.
  C. have returns about equal to those of conservative funds.
  D. underperform conservative funds.
  A. outperform conservative funds.

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  Explanation

  A study by McDonald found a positive relationship between stated objectives (growth vs. income, for example) and measures of risk. The higher risk was also found to have been positively related to higher return. The objectives of a fund were thus found to have influenced its performance.

• Question 472:

  Standard III (D) - Disclosure of Additional Compensation Arrangements - requires members to provide complete disclosure to their employer about any additional compensation arrangements. In order to abide by this, you must:

  A. Inform the legal department in writing.
  B. Inform your immediate supervisor in writing or by email.
  C. Inform senior management orally or in writing.
  D. Inform your supervisor in writing, by email or orally.
  B. Inform your immediate supervisor in writing or by email.

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  Explanation

  Standard III (D) requires written notification to the employer. This includes any form of communication that can be documented.

• Question 473:

  A firm has an expected dividend payout ratio of 50%, and an expected dividend growth rate of 6% per year. What is the firm's Price/Earnings ratio if the appropriate discount rate is 10% per year?

  A. 50
  B. Not able to compute with the above data.
  C. 12. 5
  D. 125
  C. 12. 5

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  Explanation

  Value = 0.50/(0.10-0.06) = 12. 5.

• Question 474:

  Which of the following represents a "smart money" technical indicator? Choose the best answer.

  A. More than one of these answers is correct.
  B. Confidence Index.
  C. Futures traders bullish on stock index futures.
  D. Diffusion Index.
  E. Breadth of market.
  F. Block Uptick/Downtick Ratio.
  B. Confidence Index.

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  Explanation

  Of the choices listed, only the Confidence Index represents a "smart money" technical indicator. The Confidence Index, published weekly by Barron's, is used to measure the degree of confidence amongst bond traders. The Confidence Index is constructed by measuring the ratio of Barron's average yield on 10 top-grade corporate bonds to the yield on the Dow Jones average of 40 bonds. The Confidence Index is designed to measure the difference in yield between high grade and more-speculative bonds. As the yield spread between the two sets of bonds narrows, (i.e. high-grade bonds are being bid down and low-grade bonds are being bid up) the ratio will approach one. Remember that the yields on highgradebonds is always less than that on lower-grade issues, so this ratio will never exceed 1. Technicians would view an increase in the Confidence Index as a bullish signal. The reasoning behind this opinion is relatively straightforward more money is being directed toward speculative bonds, indicating that investor confidence in the economy is high. "Breadth of market" refers to the measure of advancing versus declining issues. The "Diffusion Index" is a measure of market breadth and is defined as the volume of advancing issues plus one-half of the volume of unchanged issues, divided by the total number of issues traded. Short interest measures the total volume of outstanding short positions, and the sentiment of futures traders is used by contrarian technical analysts, who take a contra approach. The "Block Uptick/ Downtick Ratio" is used to measure the near-term sentiment of institutions.

• Question 475:

  If an investment company originally issued 0.5 million shares for $30, then issued a further 0.1 million shares for $40, and its portfolio of investments now has a market value of $27 million and a book value of $19 million, what is its net asset value (NAV)?

  A. Not enough information
  B. $31.67
  C. $27 million
  D. $45
  E. $19 million
  D. $45

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  Explanation

  An investment company sells shares in itself, and uses the proceeds to invest in a portfolio of individual investments such as stocks and bonds. The NAV is equal to the net value of the investment company's assets divided by the number of its shares outstanding. In this question the NAV is equal to $27 million / (500,000 + 100,000) = $45.

• Question 476:

  Which of the following statements is most correct?

  A. All of these answers are correct.
  B. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing.
  C. The optimal capital structure maximizes EPS.
  D. If the after-tax cost of equity financing exceeds the after-tax cost of debt financing, firms are always able to reduce their WACC by increasing the amount of debt in their capital structure.
  E. The optimal capital structure minimizes the cost of equity.
  B. Increasing the amount of debt in a firm's capital structure is likely to increase the cost of both debt and equity financing.

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  Explanation

  Increases in the debt ratio increase the cost of both debt and equity. Bondholders recognize that firms with higher debt levels are more likely to experience financial problems, which will explain why increases in the debt ratio raise the cost of debt. Concerning the cost of equity, the business risk premium, in the required rate of return equation, does not depend on the debt level. It will remain constant at all debt levels. However, the financial risk premium does vary depending on the debt level; the higher the debt level, the greater the risk premium, and therefore the higher the cost of equity.

• Question 477:

  Spassky was assigned the task of managing the portfolio of Fisher three days ago when Anand, who was managing Fisher's portfolio, retired. Fisher's portfolio consists of some deep-in-the-money put options, which will be exercised today, resulting in a cash flow of about $40,000. Spassky has not yet had a chance to meet Fisher in person to determine his needs, investment objectives and risk appetite. He did get a briefing from Anand about the portfolio and has a general idea about Fisher's investment attitude. In fact, over the past two years, Fisher's portfolio has generated handsome returns due to high-risk investments which Fisher prefers. Spassky's problem is determining what he should do with the $40,000. According to the AIMR Code of Ethics, he should:

  A. keep the money in cash form and not risk it till he can meet Fisher to discuss the situation.
  B. "roll over" the put positions for another week or two till he can meet Fisher and discuss the reinvestment of the funds.
  C. invest the funds in a diversified portfolio with a risk profile similar to what Anand and Fisher have been maintaining over the past 3 months.
  D. invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine his needs, investment objectives and risk appetite.
  D. invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine his needs, investment objectives and risk appetite.

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  Explanation

  In most cases, a portfolio manager must manage a portfolio based on the investment needs and objectives of the portfolio owner consistent with the willingness to bear risk. One exception to this rule is when a new portfolio manager takes over and has the task of reinvesting funds arising from the existing portfolio investments. Since these funds should not be kept idle, a prompt investment of the money in liquid, risk-free securities is prescribed by the AIMR code of Ethics.

• Question 478:

  Firms A and B have simple capital structure with the same number of common stock outstanding. A finances its operations relying on debt financing while B prefers issuing preferred equity. If both the firms had the same net income last year, Firm A will have a:

  A. higher EPS than B.
  B. lower EPS than B.
  C. all of these answers can happen.
  D. the same EPS as B.
  A. higher EPS than B.

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  Explanation

  For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares Since both the firms have the same net income and common shares outstanding, Firm B will show a lower EPS due to the payment of preferred stock dividends.

• Question 479:

  Which of the following types of receivables is generally the most liquid?

  A. Trade receivables
  B. Receivables due from affiliated companies
  C. None of these answers
  D. Notes receivable
  E. Receivables due from corporate officers
  A. Trade receivables

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  Explanation

  Trade receivables are generally the most liquid type of receivable because they are generated from the sale of the firm's goods or services. Other forms of receivables are less liquid because the terms of repayment may vary such as the case with those due from corporate officers and/or affiliated companies. Of particular interest is notes receivable. The analyst should take care to understand the terms of these arrangements.

• Question 480:

  Which is a measure of a stockholder's return?

  A. Return on Equity
  B. Debt to Equity Ratio
  C. Dividend Yield
  D. Return on Assets
  E. Payout Ratio
  C. Dividend Yield

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  Explanation

  The dividend yield = Dividends for the Year/Stock Price at the Beginning of the Year; It is one of the two important measures of a stock investor's return, with the other being capital gain.