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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 41:

  Which bond has the greatest price volatility? A

  A. 10% coupon bond with a 20-year life.
  B. 5% coupon bond with a 20-year life.
  C. 5% coupon bond with a 10-year life.
  D. 10% coupon bond with a 10-year life.
  B. 5% coupon bond with a 20-year life.

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  Explanation

  This question is asking: given a change in yield, which of the bonds will exhibit the greatest price change? Of the four choices, the bond with the longest maturity and lowest coupon will have the greatest price volatility. All else equal, the bond with the longer term to maturity is more sensitive to changes in interest rates. Cash flows that are further into the future are discounted more than near-term cash flows. Here, this means that one of the 20-year bonds will have the highest volatility. Similar reasoning applies to the coupon rate. A lower coupon bond delivers more of its total cash flow (the bond's par value) at maturity than a higher coupon bond. All else equal, a bond with a lower coupon than another will exhibit greater price volatility. Here, this means that of the 20-year bonds, the one with the 5% coupon rate will exhibit greater price volatility than the bond with the 10% coupon.

• Question 42:

  Richard Eisenberg, a quantitative analyst with Middle Road Brokerage, has been instructed to perform a statistical analysis to determine the relationship between the volatility of smaller-cap stocks and the quarterly performance of a series of smaller-cap mutual funds. Mr. Eisenberg begins his assignment by formulating and stating a hypothesis. Next, he identifies the appropriate test statistic and the probability distribution for the series. Mr. Eisenberg then progresses to specifying the significance level for the hypothesis test. Now that the first three steps of a hypothesis test have been completed, Mr. Eisenberg should proceed to which of the following? Choose the best answer.

  A. Evaluating the goodness of fit
  B. Collecting the data and performing the calculations
  C. Determining the p-value
  D. None of these answers is correct
  E. Stating the decision rule
  F. Testing for multicolinearity
  E. Stating the decision rule

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  Explanation

  Hypothesis testing involves a series of seven explicit steps:

  Step 1: Formulating and stating the hypothesis Step 2: Identifying the appropriate test statistic and its probability distribution Step 3: Specifying the significance level Step 4: Stating the decision rule Step 5: Collecting the data and performing the necessary calculations Step 6: Making the statistical decision Step 7: Making the economic/investment decision.

• Question 43:

  Ecodevelopment Company has two mutually exclusive construction projects to evaluate. Each type of project can be duplicated repeatedly in different geographic locations around the country, but each requires a very different set of assets to construct. Thus, Ecodevelopment uses the equivalent annual annuity method to evaluate such projects. Project type A costs $6 million initially and generates expected end-of-year cash flows of $3 million, $5 million, and then $10 million when it is sold after 3 years. Project type B costs $9 million initially and has projected end-of-year cash flows of $3, $3, $6, and $6 million in Year 1 through Year 4, and then $10 million in Year 5. The project types are equally risky and the firm's

  cost of capital is 12 percent. What is the EAA of the higher valued project type?

  A. $2. 726 million
  B. $4. 389 million
  C. $3. 240 million
  D. $6. 000 million
  E. $5. 600 million
  C. $3. 240 million

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  Explanation

  Calculate each project's original life NPV:

  NPV(A) = $3. 0(PVIF(12%,1)) + $5. 0(PVIF(12%,2)) + $10.0(PVIF(12%,3)) - $6. 0

  = $3. 0(0.8929) + $5. 0(0.7972) + $10.0(0.7118) - $6. 0

  = $2. 6787 + $3. 9860 + $7. 1180 - $6. 0

  = $7. 7827 million = $7,782,700.

  NPV(B) = $3. 0(PVIFA(12%,2)) + $6. 0(PVIFA(12%,2))(PVIF(12%,2))

  + $10.0(PVIF(12%,5)) - $9.0

  = $3. 0(1.6901) + $6. 0(1.6901)(0.7972) + $10.0(0.5674) - $9.0 =

  $5. 0703 + $8.0841 + $5. 6740 - $9.0

  = $9.8284 million = $9,828,400.

  Calculate the equivalent annual annuity:

  NPV(A) = $7,782,700 = EAA(A)(PVIFA(12%,3))

  EAA(A) = $7,782,700/2. 4018 = $3,240,361.40.

  NPV(B) = $9,828,400 = EAA(B)(PVIFA(12%,5))

  EAA(B) = $9,828,400/3. 6048 = $2,726,475. 81.

• Question 44:

  The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the :

  A. lower of cost or market (LCM)
  B. FIFO
  C. LIFO
  D. weighted average cost
  D. weighted average cost

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  Explanation

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period). The cost for the ending inventory under this method is influenced by all the prices paid during the period.

• Question 45:

  Which of the following is/are true?

  I. A simple capital structure is one that does not include any common stock equivalents or dilutive contingent securities.

  II. A firm with common stock, preferred equity and debt can be considered to have a simple capital structure.

  III.

  Any security that is dilutive must be included in the calculation of Diluted EPS.

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

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  Explanation

  A simple capital structure consists of only common stock and non-convertible senior securities while a complex structure is one which contains potentially dilutive securities. Since there is no contingent conversion associated with straight, preferred equity, it is considered to be a part of a simple capital structure. Finally, only dilutive securities i.e. securities that do not increase earnings or decrease losses are included in the calculation of DEPS. Anti-dilutive securities are ignored in the calculations.

• Question 46:

  The following has its stock traded on the regular secondary market:

  A. investment management company
  B. load fund
  C. closed-end investment company
  D. no-load fund
  E. open-end investment company
  C. closed-end investment company

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  Explanation

  The market price of its shares is determined by supply and demand and typically offers no further shares and does not repurchase the shares on demand.

• Question 47:

  The standard normal probability distribution is one which has:

  A. a mean of 0 and any standard deviation
  B. a mean of 0 and a standard deviation of 1
  C. any mean and a standard deviation of 1
  D. a mean of 1 and any standard deviation
  E. none of these answers are correct
  B. a mean of 0 and a standard deviation of 1

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  Explanation

  The standard normal probability distribution has a mean of 0 and std. deviation of 1.

• Question 48:

  Global funds

  A. invest only in established countries.
  B. invest in any country in the world.
  C. invest only in developing countries.
  D. invest only outside of the U.S.
  B. invest in any country in the world.

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  Explanation

  A global fund is a type of foreign fund that invests in both U.S. and non-U.S. securities. The

  international investment opportunities provided by this type of fund give American investors an added level of diversification.

• Question 49:

  You are examining a portfolio composed of 10% money-market investments, 30% bonds, and 60% stocks. Last year, the return on the money-market investments was 4%; the return on bonds was 6%, and the return on stocks was 7%. What is the portfolio weighted average return?

  A. 6. 50%.
  B. 6. 30%.
  C. 6. 40%.
  D. None of these answers is correct.
  C. 6. 40%.

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  Explanation

  The portfolio weighted-average mean return is equal to the sum (as i goes from 1 to n) of w_i * X_i, where w_i is the percentage weight in the portfolio of the ith asset, and X_i is the investment return of the ith asset. Here, we get a weighted mean of 0.10 * 0.04 + 0.30 * 0.06 + 0.60 * 0.07 = 6. 40%.

• Question 50:

  Which of the following best describes a statement of cash flows?

  A. A statement of cash flows details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.
  B. A statement of cash flows summarizes the financial position of a company at a given point in time.
  C. A statement of cash flows measures a company's financial performance over a specified period of time.
  D. A statement of cash flows reports changes over a period of time in component accounts that comprise the ownership of a firm.
  E. None of these answers.
  A. A statement of cash flows details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.

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  Explanation

  Under accrual accounting, net income does not typically equal net cash flow. While net income is important to identify, accrued income does not pay wages, payables, or dividends. Cash flows are important to identify since it is cash that repays loans, etc.