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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 701:

  According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

  A. prices
  B. velocity
  C. real income
  D. employment
  A. prices

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  Explanation

  The quantity theory of money implies that the existing money stock M multiplied by velocity V equals the nominal GDP (output times the price level). In order to maintain the equality, if M increases, the price level P must also increase.

• Question 702:

  Returns on the market and Takeda Company's stock during the last 3 years are shown below: YearMarketTakeda 1995-12%-14% 19962331 19971610 The risk-free rate is 7 percent, and the required return on the market is 12 percent. Takeda is considering a project whose market beta was found by adding 0.2 to the company's overall corporate beta. Takeda finances only with equity, all of which comes from retained earnings. The project has a cost of $100 million, and it is expected to provide cash flows of $20 million per year at the end of Years 1 through 5 and then $30 million per year at the end of Years 6 through 10. What is the project's NPV (in millions of dollars)?

  A. $23. 11
  B. $22. 55
  C. $28.12
  D. $20.89
  E. $25. 76
  A. $23. 11

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  Explanation

  1. Run a regression to find the corporate beta. It is 1.1633.

  2. Find the project's estimated beta by adding 0.2 to the corporate beta. The project beta is thus 1.3633.

  3. Find the company's cost of equity, which is its WACC because it uses no debt: k(s) = WACC = 7% + (12% - 7%)1.3633 = 13. 8165%.

  4. Now find NPV (in millions): CF(0) = -100 CF(1-5) = 20 CF(6-10) = 30 I = 13. 82 Solve for NPV = $23. 11 million.

• Question 703:

  Krissy Steele, CFA, manages money for high net worth individuals. Steele develops unique investment policies for all of her clients and uses various investment funds to construct portfolios. However, Steelehas been reluctant to use hedge funds. Which of the following statements made by Steele is least likely to be correct?

  A. The volatility of historical returns associated with hedge fund indexes understates their true risk level.
  B. Hedge fund returns are normally distributed.
  C. Published information on hedge fund returns is based on incomplete historical data.
  B. Hedge fund returns are normally distributed.

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  Explanation

• Question 704:

  Which of the following is a valuable investigation tool for analysis of the collectibility of a firm's receivables?

  A. All of these answers.
  B. Determining patterns of receivables for peers as a percent of sales.
  C. An examination of any customer concentrations.
  D. An analysis of the adequacy of allowances for trade discounts, and returns and allowances.
  E. An aging schedule.
  A. All of these answers.

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  Explanation

  Each of the above mentioned tools are valuable in assessing the collectibility of a firm's accounts receivables. An aging schedule will pinpoint which customers are not paying within terms. An analyst should investigate if a firm is understating allowances for discounts, returns and allowances, as this would overstate receivables. If too much of a firm's sales are made to one or more firm's that are experiencing financial distress, receivables are at risk.

• Question 705:

  A current measure of speculative trading activity on the market is the ratio of

  A. LSE volume to OTC volume.
  B. OTC volume to NYSE volume.
  C. mutual fund volume to NYSE volume.
  D. TSE volume to NYSE volume.
  E. AMEX volume to NYSE volume.
  B. OTC volume to NYSE volume.

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  Explanation

  Technicians consider speculative activity high when the OTC volume reaches some high level (such as 112%, for example) relative to NYSE volume. Conversely, they consider speculative activity low when OTC volume reaches some low level (such as 87%, for example) relative to NYSE volume.

• Question 706:

  Historically, the earnings per share (EPS) figure for a stock market series has been less volatile than the earnings multiplier for the same series. Which of the following best characterizes the primary reason for the greater volatility experienced by the earnings multiplier? Choose the best answer.

  A. The price/earnings figure experiences a tax leveraging effect that is not passed on to the EPS figure.
  B. The EPS figure is less volatile due to accounting manipulations and the malleability of international and domestic accounting standards including GAAP.
  C. The earnings multiplier is more sensitive to changes in dividend policies than is the EPS figure.
  D. None of these answers is correct.
  E. The price/earnings ratio is more sensitive to changes in the spread between the required rate of return and the anticipated future growth rate.
  F. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS figure; i.e. the earnings multiplier is "forward looking."
  E. The price/earnings ratio is more sensitive to changes in the spread between the required rate of return and the anticipated future growth rate.

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  Explanation

  The greater relative volatility of the earnings multiplier versus the EPS figure is primarily attributable to an increased sensitivity to changes in the spread between the required rate of return "k" and the anticipated growth rate "g." Remember

  that the equation used to determine the appropriate earnings multiplier for a stock market series is the following:

  P/E = [D/E / (k - g)]

  Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated growth rate of dividends.

  As you can see, changes in the spread between the required rate of return and the anticipated growth rate can have a dramatic effect on the earnings multiplier for a stock market series. While the earnings multiplier is sensitive to changes in

  the dividend payout ratio, volatility in this figure is not cause for the increased volatility of the earnings multiplier versus the EPS figure.

• Question 707:

  Suppose the probability that electricity prices will rise any given quarter is 0.60, and the probability that oil prices will stay level or decline is 0.40. If electricity prices rise, corporate profits will decline by 2% with 90% probability, and increase by 0.5% with 10% probability. If electricity prices decline or stay level, corporate profits will increase 3% with a 65% probability and decline 0.5% with a 35% probability. What is the expected change in corporate profits in the next quarter?

  A. +0.34%.
  B. -0.34%.
  C. +0.43%.
  D. -0.43%.
  B. -0.34%.

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  Explanation

  We need the total probability rule for expected value, for which the formula is E(X) = E(X | S_1) * P(S_1) + E(X |S_2) * P(S_2) + ... + E(X |S_n) * P(S_n). Here, E(X) is the expected change in corporate profits. S_1 is the event that electricity prices rise, and S_2 is the event that electricity prices fall. Therefore, E(X) = 0.60 * (-2%*90% + 0.5%*10%) + 0.40 * (3%*65% - 0.5%*35%)= -0.34%, a decline.

• Question 708:

  Armina Stump is a junior portfolio manager on the verge of a promotion at Black Stallion, a strongly bullish fund management firm. Armina reports to Brouster Bragg, who has been with the firm for about 8 years. Brouster has been busy over the past 6 months and has not been able to keep up with account reviews but has complete faith in his subordinate managers. Now that it's time for Armina's promotion, he has been going over her transactions in the past 6 months and has discovered that all her trades are going through Blackwell Brokers. Blackwell is a well-reputed brokerage firm and is known to give extremely competitive prices and speed on trade executions. Due to the bulk transactions that originate with Armina, Blackwell has been providing research reports and investment tips to Armina which she has found extremely useful. Brouster does not find anything wrong with this, though he has now instructed Armina to file her monthly reports in more detail and in a timely fashion. She explained that due to company work and visits to their Los Angeles office, she had not been able to complete the reports for two months but she would take additional care in the future in this regard. Black Stallion has no official policy about filing of account reports. Given this entire sequence of events, your analysis as a student of AIMR ethics code should reveal which of the following?

  I. Armina has violated Standard I - Fundamental Responsibilities by not filing the reports on time.

  II. Brouster has violated Standard III (E) - Responsibilities of Supervisors by failing to enforce proper supervision.

  III.

  Armina has violated Standard IV (B.1) - Fiduciary Duties by routing her orders solely through Blackwell.

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

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  Explanation

  Since Black Stallion does not require a monthly report from its portfolio managers, Armina has not violated company policy because she is not responsible for monthly reports. However, Brouster still must develop procedures to monitor the actions of his subordinate portfolio managers since he is responsible for their actions. Indeed, the absence of such a policy at Black Stallion makes it incumbent upon Blackwell to be more diligent about monitoring. By failing to regularly review the accounts for 6 months, Blackwell has left open the possibility of manipulation by his subordinates and is thus in violation of Standard III (E) - Responsibilities of Supervisors. Finally, since Armina is getting best price execution from Blackwell, she has not violated any Fiduciary duties. The fact that she receives free research advice due to bulk trades does not automatically imply that her client accounts are being hurt or being made to pay for the services. Additionally, it should be noted that if Blackwell were to wine and dine Armina as a symbol of appreciation or send her lavish gifts, Armina may be in violation of the Standard IV (A.3) -Independence and Objectivity - because acceptance of such gifts creates an appearance of impropriety even if none is present.

• Question 709:

  A closed-end investment company

  A. operates like any other public firm; its stock trades on the secondary market, and the price of the stock is determined by supply and demand. Most closed-end investment companies do not offer more shares or repurchase shares after the initial public offerings.
  B. continues to sell and repurchase shares after their initial public offerings. It sells shares at the net asset value with or without sales charges, and repurchases shares at the net asset value plus a redemption fee.
  C. is a type of mutual fund. Most closed-end mutual funds continue to sell and repurchase shares after their initial public offerings. They sell shares at the net asset value with or without sales charges, and repurchase shares at the net asset value with or without redemption fees.
  D. is a type of mutual fund. It operates like any other public firm; its stock trades on the secondary market, and the price of the stock is determined by supply and demand. Most closed-end investment companies do not offer more shares or repurchase shares after the initial public offerings.
  A. operates like any other public firm; its stock trades on the secondary market, and the price of the stock is determined by supply and demand. Most closed-end investment companies do not offer more shares or repurchase shares after the initial public offerings.

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  Explanation

  The only way to invest in a typical closed-end investment company after its initial public offering is to purchase its shares on the secondary market. Many such companies trade their shares on the NYSE. Over the long-run, shares of closed-end investment companies tend to trade at a 5 to 20% discount to their net asset value (NAV).

• Question 710:

  An appreciation of the U.S. dollar

  A. is the same thing as an increase in the domestic price level.
  B. increases the purchasing power of the U.S. dollar in foreign markets for goods and services.
  C. decreases the purchasing power of the U.S. dollar in foreign markets for goods and services.
  D. is the same thing as a decrease in the consumer price level.
  B. increases the purchasing power of the U.S. dollar in foreign markets for goods and services.

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  Explanation

  An appreciation of the U.S. dollar implies that it takes less U.S. dollars to purchase one unit of foreign currency. Thus, a U.S. dollar goes further than it did before. This is an increase in the purchasing power of the U.S. dollar.