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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 541:

  The probability distribution of stock returns for Kokomo Beach Tours, Inc., is provided below.

  

  From the data provided, the expected standard deviation of returns for Kokomo is closest to:

  A. 1.3%.
  B. 2. 5%.
  C. 7. 1%.
  C. 7. 1%.

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  Explanation

• Question 542:

  An EPS amount is always shown for:

  A. income before extraordinary items and the cumulative effect of accounting changes
  B. income from continuous operations
  C. cumulative effect of accounting changes
  D. all of these answers are correct
  D. all of these answers are correct

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  Explanation

  All of the responses are true.

• Question 543:

  All other things being equal, which one of the following bonds has the greatest duration?

  A. 15-year, 8% coupon bond.
  B. 5-year, 8% coupon bond.
  C. 15-year, 12% coupon bond.
  D. 5-year, 12% coupon bond.
  A. 15-year, 8% coupon bond.

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  Explanation

  If bonds are identical except for maturity and coupon, the one with the longest maturity and lowest coupon will have the greatest duration. The rationale for this is similar to that for price volatility. Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows. Therefore, the later the cash flows are received, the greater the duration. The relationship of maturity to duration is direct - the longer the time to maturity, the greater the duration. A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. Here, one of the 15-year bonds will have the greatest duration. The relationship of coupon to duration is indirect - the lower the coupon rate, the greater the duration. A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. Here, the 15-year bond with the lowest coupon (8.00%) will have the greatest duration.

• Question 544:

  Ryan Konkol, CFA, is helping Gabriel Miskowiak study for the Level 1 CFA examination. Konkol asks Miskowiak to calculate the market risk premium based on the following assumptions: Which of the following choices is closest to the correct answer?

  A. 8.0%.
  B. 4. 4%.
  C. 8.5%.
  D. 5. 2%.
  B. 4. 4%.

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  Explanation

  The Market Risk Premium = Expected Market Return ?Nominal Risk Free Rate. Here, we are given the expected market return, but need to calculate the nominal risk free rate. Then, we can determine the Market Risk Premium.

  Step 1: Calculate the Nominal Risk-Free Rate:

  Nominal Risk-Free Rate = [(1 + Risk FreeRatereal)*(1 + Inflation Premium)] - 1

  = [(1 + 0.04)*(1 + 0.035)] ?1 = 1.076 ?1 = 0.076 or 7. 6%

  Step 1: Calculate the Risk Premium:

  Market Risk Premium = Expected Market Return ?Nominal Risk Free Rate

  = 12% - 7. 6% = 4. 4%

• Question 545:

  In a period of rising prices, the inventory method that gives the lowest possible value for ending inventory is:

  A. weighted average
  B. LIFO
  C. FIFO
  D. gross profit
  B. LIFO

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  Explanation

  The ending inventory under LIFO is priced at the earliest, and thus the lowest prices (in a period of rising prices) than any of the other methods.

• Question 546:

  Which of the following is/are TRUE?

  I. Accrual accounting follows the matching principle.

  II. In accrual accounting, revenues and cash flows are distinct concepts.

  III. In cash accounting, net income equals cash inflow.

  IV.

  In cash accounting, earnings equal net operating cash inflow.

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

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  Explanation

  In cash accounting, net income equals net operating cash inflow (total operating cash inflow - total operating cash outflow) and is the same as earnings.

• Question 547:

  Danielle Paftee, age 55, has an investment account designed to ftind her granddaughter's college education. Paftee's granddaughter is two years old. Paftee also will use the account for intermittent health care expenses for her elderly parents, whose health plans and retirement plans do not adequately cover their expenses. Which of the following statements regarding Paftee's investment objectives and constraints is least likely correct?

  A. Paftee has a long-term time horizon.
  B. Paftee has an significant liquidity requirement.
  C. Paftee should focus on total return with very low current income requirements.
  C. Paftee should focus on total return with very low current income requirements.

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  Explanation

• Question 548:

  The divergence between the trend for the stock market series and the cumulative advance-decline series signals a market ________.

  A. peak
  B. adjustment
  C. crash
  D. trough
  A. peak

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  Explanation

  The usefulness of the advance-decline series is supposedly greatest at market peaks and troughs. The divergence between the trend for the stock market series and the cumulative advance-decline series signals a market peak.

• Question 549:

  Which of the following can be found in Standard IV?

  A. Members shall maintain knowledge of and comply with all applicable laws.
  B. Members shall make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in breach of a duty.
  C. Members shall maintain appropriate records to support the reasonableness of recommendations.
  D. Members shall not undertake any independent practice in competition with employer without written consent.
  E. Members shall not participate in plagiarism.
  C. Members shall maintain appropriate records to support the reasonableness of recommendations.

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  Explanation

  Standard IV states: "Members shall maintain appropriate records to support the reasonableness of recommendations or actions."

• Question 550:

  State the formula for approximating interest rate parity.

  A. rh - rf = f1 - e0 * e0
  B. rh + rf = f1 - e0/e0
  C. rh + rf = f1 + e0/e0
  D. rh - rf = f1 + e0/e0
  E. rh - rf = f1 - e0/e0
  E. rh - rf = f1 - e0/e0

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  Explanation

  Interest rate parity will hold when there are no covered interest arbitrage opportunities.