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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 571:

  Which of the following can be found in Standard IV?

  A. Members must use the CFA designation in a dignified manner.
  B. Members shall make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation.
  C. Members shall comply with any prohibitions on activities imposed by their employer if a conflict of interest exists.
  D. Members shall maintain knowledge of AIMR's Code of Ethics.
  E. If members receive material nonpublic information in confidence, they shall not breach that confidence by trading or causing others to trade in securities to which such information relates.
  B. Members shall make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation.

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  Explanation

  Standard IV states: "Members shall make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation."

• Question 572:

  Which of the following is/are required by AIMR-PPS with regards to creation and maintenance of composites?

  I. Performance must be measured at least quarterly.

  II. Combining of assets-only returns with assets-plus-cash returns is prohibited.

  III.

  Convertible and hybrid securities cannot be mixed with money-market securities in performance calculations.

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

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  Explanation

  Section A - "Creation and Maintenance of Composites" - of the PPS requires that convertible and hybrid securities be treated consistently across all composites.

• Question 573:

  Rollins Corporation is constructing its MCC (marginal cost of capital) schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2. 00, sells for $27. 00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk-premium method to find k(s) (component cost of retained earnings). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' cost of retained earnings using the CAPM (Capital Asset Pricing Model) approach?

  A. 16. 0%
  B. 14. 1%
  C. 16. 9%
  D. 16. 6%
  E. 13. 6%
  A. 16. 0%

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  Explanation

  Cost of retained earnings (CAPM approach): k(s) (component cost of retained earnings) = 10% + 1.2(5%) = 16. 0%.

• Question 574:

  What is a disadvantage of the range as a measure of dispersion?

  A. It is not in the same units as the original data.
  B. It can be distorted by a large mean.
  C. It is based on only two observations.
  D. None of these answers
  E. It has no disadvantage.
  C. It is based on only two observations.

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  Explanation

  The range uses only the highest and the lowest observations and ignores all the observations in the middle. This may not be indicative of the dispersion if the two extreme observations are outliers.

• Question 575:

  Which of the following would be considered a liability that arises from operating activities?

  A. Taxes payable
  B. All of these answers
  C. Unearned income
  D. Accounts payable
  E. Accrued salaries
  B. All of these answers

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  Explanation

  All of these answers represent liabilities that originate from the operation of a business; i.e., from the normal course of operating a business. Liabilities that arise from "operations" typically do not require compensation in the form of interest. This can be contrasted with liabilities that arise from financing activities where the lender requires the payment of interest to compensate for the extension of credit.

• Question 576:

  Wolfram Hitchwalker is a money manager with Armadillo Investments. He currently manages a few retirement accounts, clients who have a steady current income need and are averse to capital loss. Wolfram recently read a research report which concluded that the stock of HighFly, Inc. was a great buy because of a pending expansion plan into Southeast Asia which would double the profits of HighFly from foreign operations. Wolfram decided that the analysis was sound and that his clients could gain significantly if he bought the HighFly stock now and sold it once the price run-up occurred. Accordingly, he sold some of the fixed income securities in his client accounts and bought shares of HighFly. After two weeks, he sold the shares at a substantial profit and reinvested the funds back in fixed income securities. Wolfram has

  I. not violated any code of ethics since the investment was wise and made his clients better off.

  II. has violated Standard IV (A.1) - Reasonable Basis and Representations.

  III. has violated Standard IV (B.1) - Fiduciary Duties.

  IV.

  has violated Standard IV (B.2) - Portfolio Investment Recommendations and Actions.

  A. II and IV only
  B. III and IV only
  C. I only
  D. II only
  E. IV only
  F. III only
  A. II and IV only

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  Explanation

  Even though the transaction turned out to be profitable for the clients ex post, the decision to invest in the stock was unwise ex ante. Wolfram should have recognized that his clients do not have the risk appetite for speculative securities, given their need for current income and preservation of the principal. Clearly, speculation in stocks is not an appropriate investment for these clients.

• Question 577:

  ________ accounting is suggested for calculating performance.

  A. Trade-date
  B. Performance
  C. Accrual
  D. Longitudinal
  E. Composite
  A. Trade-date

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  Explanation

  Trade-date accounting is recommended when calculating performance, although settlement-date accounting is acceptable if disclosed. Because of the volatility and lengthy settlement periods of some markets, trade-date accounting is strongly recommended for calculating the performance of international portfolios.

• Question 578:

  The correlation between the capital market returns of Germany and Japan depend on all the following factors EXCEPT:

  A. international trading patterns.
  B. economic growth rate.
  C. fiscal and monetary policy.
  D. geographical separation.
  D. geographical separation.

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  Explanation

  Geographical separation has not been identified as a factor that affects correlations. The other three choices impact the capital market returns and correlations of the respective countries.

• Question 579:

  Which of the following statements is correct?

  A. The rent referred to in the other statement is a sunk cost, and as such it should be ignored.
  B. The preceding statement would be true if "upward" were replaced with "downward."
  C. The existence of "externalities" reduces the NPV to a level below the value that would exist in the absence of externalities.
  D. If one of the assets that would be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the project is not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.
  E. In a capital budgeting analysis where part of the funds used to finance the project are raised as debt, failure to include interest expense as a cost in the cash flow statement when determining the project's cash flows will lead to an upward bias in the NPV.
  D. If one of the assets that would be used by a potential project is already owned by the firm, and if that asset could be leased to another firm if the project is not undertaken, then the net rent that could be obtained should be charged as a cost to the project under consideration.

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  Explanation

  The foregone rent is an "opportunity cost" which should be charged to the project under consideration. The cash flows should not take account of interest, because financial costs are dealt with by discounting at the WACC. If interest were deducted to find cash flows, then this cost would be "double counted," and the NPV would be downward biased. Ignoring interest when determining cash flows produces no bias in the NPV whatever. Note also that externalities can be either positive or negative--they tend to be negative if the new project is a substitute for existing products, but positive if the new project is complementary to the firm's other products.

• Question 580:

  Suppose we select every fifth invoice in a file. What type of sampling is this?

  A. Random
  B. None of these answers
  C. Cluster
  D. Systematic
  E. Stratified
  D. Systematic

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  Explanation

  One of the ways to conduct systematic sampling is to have a rule for picking the sample in an unbiased way. Selecting items at specified intervals can achieve this.