CFA CFA Certifications CFA-LEVEL-1 Questions & Answers

• Question 41:

  A decrease in the Eurodollar-T-bill spread indicates that:

  A. there is a heavy demand for T-bills due to the economic strength of the U.S.

  B. investors are ready to take on higher credit risks and there is reduced demand for t-bills relative to Eurodollar futures.

  C. none of these answers.

  D. investors are bearish on a global basis.

  Correct Answer: B

  Eurodollar rate is the rate of interest paid on inter-banking U.S. Dollar loans and deposits outside the U.S. Since the U.S. Treasury has the best credit in the world, the yield on U.S. Treasury bills is lower than the Eurodollar rate. The "spread" or the difference between the two rates is a measure of the additional credit risk involved in inter-bank loans compared to loans to the U.S. Treasury. If the demand for Eurodollar lending increases relative to the purchase of t-bills, the ED-T- bill spread will narrow. Thus, the behavior of the spread reflects the risk attitude of investors in the lending markets.

• Question 42:

  Given that the expected dividend payout ratio on a common stock is 0.7, the required rate of return is 19%, the dividend and earnings growth rate is 15%, and current earnings are $1.38, using the earnings multiplier model, what is the estimated value of the stock?

  A. Not enough information

  B. $27.83

  C. $43.71

  D. $29.68

  E. $25.53

  Correct Answer: B

  The earnings multiplier model postulates that P/E = (D1/E)/(k -g), where P/E is the price to earnings ratio, D1 is next year's expected dividends, E is next year's earnings, k is the required rate of return, and g is the growth rate in dividends. D1/ E is also known as the dividend payout ratio. In this question, the P/E is

  (0.7) / (0.19 - 0.15) = 17.5. Next year's earnings are equal to current earnings multiplied by the earnings (and dividend) growth rate (1.38 x 1.15 = $1.59). We can multiply P/E by next year's earnings to arrive at our expected stock value ((P/E) x E = P) In this question, the estimated value is 17.5 x 1.59 = $27.83.

• Question 43:

  ________ analysis is the estimation of future security price movements based on past movements.

  A. Transactional

  B. Historical

  C. Regression

  D. Technical

  Correct Answer: D

  As opposed to fundamental analysis, technical analysis focuses on market trends rather than fundamental data, when estimating future price changes in the market.

• Question 44:

  Assume the following information about a stock market series:

  Observed beginning value: 515.60 Anticipated ending value: 609.15 Expected dividends during the period: $24 Required rate of return: 21%

  Using this information, what is the expected rate of return for this index? (Assume a one-year holding period.)

  A. None of these answers is correct.

  B. 22.80%

  C. 19.30%

  D. 11.42%

  E. 13.49%

  Correct Answer: B

  To calculate the expected rate of return for a stock market series, the following information must be known: The beginning value for the series, the anticipated ending value for the series, and the amount of any dividends and/or distributions during the period.

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation: {E(R) = [(EV - BV + Div) / BV]}. Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period. In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows: {E(R) = [$609.15 - $515.60 + $24] / $515.60} = 22.80%. This is slightly higher than the required rate of return. Assuming that the ending value and dividends prove accurate, investment in this stock market series is likely advisable.

• Question 45:

  A price level at which the supply of stock is expected to increase significantly is best described as which of the following?

  A. Resistance level.

  B. Rotation price.

  C. Reversal level.

  D. None of these answers is correct.

  E. Support level.

  Correct Answer: A

  Technical analysts frequently examine historical price information to determine important "support" and "resistance" levels. A support level is a price range at which the demand for a stock is expected to increase, i.e. buying pressure will increase forcing the stock price upward, or will prevent it from moving down. A resistance level is a price range at which the supply of a stock is expected to increase significantly, forcing the price of the stock down, or preventing it from advancing.

  "Rotation price" and "reversal level" are largely fictitious terms.

• Question 46:

  Contrary-opinion rule technical analysts would consider

  A. a high AMEX volume to NYSE volume ratio to be a sign that the market is approaching a trough. This ratio is a measure of investor confidence in the economy. A high value indicates that investors have enough confidence to invest in the relatively volatile AMEX. Recovering confidence indicates the approach of a market trough.

  B. a high AMEX volume to NYSE volume ratio to be a sign that the market is overbought. This ratio is a measure of speculative trading activity. A high value indicates a high level of speculation, which itself is thought to indicate a market peak.

  C. a high NASDAQ volume to NYSE volume ratio to be a sign that the market is overbought. This ratio is a measure of speculative trading activity. A high value indicates a high level of speculation, which itself is thought to indicate a market peak.

  D. a high NASDAQ volume to NYSE volume ratio to be a sign that the market is approaching a trough. This ratio is a measure of investor confidence in the economy. A high value indicates that investors have enough confidence to invest in the relatively volatile NASDAQ. Recovering confidence indicates the approach of a market trough.

  Correct Answer: C

  Prior to the 1970s, the measure of speculative activity was typically the ratio of AMEX volume to NYSE volume. But because of the decline in importance of the AMEX, this ratio is no longer a useful measure. The new measure of speculative activity is the ratio of NASDAQ volume to NYSE volume. A high ratio is indicative of a high level of speculative activity, which is believed by contrary-opinion rule technical analysts to be a sign of an overbought market, and of an approaching market peak.

• Question 47:

  Studies of short-interest trading rules

  A. have tended to support their effectiveness.

  B. have strongly supported their effectiveness.

  C. have had mixed results.

  D. have not supported their effectiveness.

  Correct Answer: C

  Technical analysts believe that the short-interest ratio is a bullish indicator; the higher the ratio, the more bullish an indication for the market. But studies that have examined short-interest trading rules have had mixed results. For every study that has supported the rules, there is one that has not.

• Question 48:

  Ferengi Profiteers is a high-growth mining firm, which prefers to plow back most of its earnings into ongoing operations. As a result, it maintains a low dividend payout ratio of 12%. Its permanent earnings are expected to grow at 6%. It announced earnings of $7.22 per share yesterday and its investors are expecting a return of 9% on its stock. What's the trading price of each stock of Ferengi Profiteers?

  A. $32.44

  B. $30.60

  C. $28.12

  D. $25.83

  Correct Answer: B

  The earnings next year are expected to be 7.22 * 1.06 = $7.65 per share. So the dividend expected next year equals 0.12 * 7.65 = $0.918 per share. The growth rate of dividend also equals 6%. Therefore the price of a stock using the Dividend Discount Model equals P = 0.918/(9% - 6%) = $30.60.

• Question 49:

  An investment advisor with Churn Brothers Brokerage states that he uses the "bottom up" approach to identify promising investment opportunities. When this investment advisor is evaluating an investment using the bottom up approach, he would begin by doing which of the following?

  A. Examining individual securities and companies.

  B. None of these answers is correct.

  C. Analyzing alternative economies and security markets.

  D. Analyzing the macroeconomic environment.

  E. Examining alternative industries.

  F. More than one of these answers is correct.

  Correct Answer: A

  The bottom up approach begins with an examination of individual securities and companies. Individuals who advocate the bottom up approach believe that it is possible to identify lucrative investment opportunities within various sectors despite macroeconomic and industry influences. In the field of security analysis, there is commonly a confluence of the bottom up approach with "technical analysis,"an approach that is based on the belief that it is possible to predict securities prices by using historical data. The bottom up approach is contrasted by the top down approach, which begins with an examination of the macroeconomic environment, then progresses to an examination of alternative economies and securities markets, then moves toward industry analysis and the examination of specific securities.

• Question 50:

  If the premium on the market portfolio increases, the price of a firm's share ________, all else equal.

  A. is not affected

  B. decreases

  C. increases

  D. can be all of these answers.

  Correct Answer: B

  If the premium on the market portfolio increases, the expected return on the stock goes up, too. All else equal, this can happen only if the price of the stock decreases.