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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 821:

  Nina Foch, CFA, is considering investing in an exchange traded fund (ETF). However, she is unsure how the ETF compares to open-end and closed-end funds. Which of the following statements comparing ETFs with open-end and closed-end funds is least likely to be true?

  A. ETF shares can be sold short, while open-end fund shares cannot be shorted.
  B. The legal structure of an ETF is similar to a closed-end fund.
  C. ETF shares trade like closed-end fund shares.
  B. The legal structure of an ETF is similar to a closed-end fund.

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  Explanation

• Question 822:

  Suppose that stocks A, B, C, and D are independent with respect to their price movement, and have probabilities of increasing of 0.25, 0.50, 0.40, and 0.30. What is the probability that stocks A and C will increase in price? In other words, find P(AC).

  A. 3. 5%.
  B. 11%.
  C. 10%.
  D. 1.0%.
  C. 10%.

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  Explanation

  If events are independent, then the joint probability of them occurring together is just the product of the individual probabilities. So P(AC) = 0.25 * 0.40 = 10%. Note that we did not state whether the other stocks, B and D, increased in value or not.

• Question 823:

  Materiality is one of the pervasive concepts in financial accounting. Which of the following statements is true with regard to materiality?

  A. Relevant items are very material.
  B. Materiality judgments generally may be made without consideration of the magnitude of the item involved.
  C. None of these answers.
  D. The nature and magnitude of an item as well as the circumstances in which the judgment has to be made are integral aspects of a materiality judgment.
  E. Materiality judgments generally may be based solely on the magnitude of the item.
  D. The nature and magnitude of an item as well as the circumstances in which the judgment has to be made are integral aspects of a materiality judgment.

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  Explanation

  The basis for a materiality judgment is generally not sufficient unless the nature of the item, the circumstances in which the judgment has to be made, and the magnitude of the item are all considered.

• Question 824:

  All of the following are typically fixed expenses except for ________.

  A. raw materials
  B. rent
  C. insurance
  D. property taxes
  A. raw materials

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  Explanation

  Fixed expenses are costs that are relatively constant and costs that would be difficult to match directly with units being sold.

• Question 825:

  Members pursuing the investment profession outside of the U.S. ________ the Code and Standards when local regulations are less stringent in order to maintain a level playing field.

  A. may disregard
  B. can modify
  C. should ignore
  D. must adhere to
  D. must adhere to

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  Explanation

  The concept of fiduciary duty is not exclusive to the United States. AIMR members are expected to follow any fiduciary duties imposed on them by their country or province, in addition to being governed by the Codes and Standards. As always, the primary concern must be to follow principles of discretion, loyalty and care and to act in the client's best interest.

• Question 826:

  A stock has a beta of 1.1 and the risk-free rate is 5. 5%. Its dividend growth rate is 4. 1% and the dividend payout ratio is 38%. If the market risk premium is 7. 3%, the P/E ratio of the stock equals ________.

  A. 7. 19
  B. 6. 73
  C. 3. 86
  D. 4. 03
  D. 4. 03

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  Explanation

  The required rate of return on the stock can be found using CAPM, which gives Rstock = k = Rf + beta*(Rm - Rf) = 5. 5% + 1.1*7. 3% = 13. 53%. Therefore, P0/E1 = dividend payout/(k - g) = 0.38/(0.1353 - 0.041) = 4. 03.

• Question 827:

  Institutional Investments is a fund management firm that provides investment advice as well as investment management to large client accounts. I.I.'s senior portfolio manager, Richard Fineman's cousin, Alberto Onestone, runs a small brokerage firm. Fineman has directed all of his junior portfolio managers to execute their trades with Alberto. Alberto's fees are higher than those available from discount brokers but Alberto provides Fineman and his managers a wealth of investment tips that he hears on the street. This helps Fineman in producing a successful investment newsletter. This helps enhance I.I.'s reputation, attracting new clients and allowing lower fees on all the accounts. Since the client accounts benefit from this arrangement, Fineman's managers do not think the practice is unethical. The relationship between Fineman and Onestone is not explicitly disclosed to the clients. You are currently interviewing with them for the position of a portfolio analyst. As a CFA Level I candidate, they portray the above situation as a hypothetical case and ask you if there are any violations of the AIMR code of Ethics that they have heard about. Your response should be which of the following?

  I. Fineman and his managers are violating Standard IV (B.1) - Fiduciary Duties since they are not executing the trades at the lowest price available.

  II. Fineman and his managers are violating Standard IV (B.1) - Fiduciary Duties since they are using client brokerage to pay for services that do not directly benefit them.

  III. Fineman and his managers are violating Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects.

  IV.

  Fineman and his managers are not violating the Code as far as you can tell from the details given.

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

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  Explanation

  By not revealing the relationship between Fineman and Onestone - which is clearly a source of conflict of interest - the managers of Institutional Investors are in violation of Standard IV (B.7) - Disclosure of Conflicts to Clients and Prospects. Further, while there is a symbiotic relationship between I.I. and Onestone to the extent that both the parties gain, the clients who pay higher brokerage lose. Even though the practice leads to lower fees, it is not clear that the clients get benefits worth the cost incurred on their accounts. Further, there is a clear sense of impropriety in the setup. Unless the excess brokerage directly benefits the client accounts, this case is a violation of Standard IV (B.1) - Fiduciary Duties.

• Question 828:

  Which of the following factors directly influence capital structure decisions?

  I. Business risk

  II. Availability of various sources of capital under attractive terms

  III. Expropriation risk

  IV.

  The firm's tax position

  V.

  Management's subjective attitudes toward risk

  VI.

  Country risk

  A. II, III, IV, V
  B. I, II, III, IV, V, VI
  C. I, III, IV
  D. I, II, IV, V
  E. I, II, II, IV, VI
  D. I, II, IV, V

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  Explanation

  There are four primary factors which influence capital structure decisions: business risk, financial flexibility, the firm's tax position, and management's subjective attitudes toward risk. Business risk is defined as the riskiness of a firm if it uses no debt. Financial flexibility refers to the ability of a company to easily raise various sources of capital under favorable terms. "Expropriation risk," and "country risk," while legitimate forms of risk, are not directly applicable to the capital structure decision. Expropriation risk is defined as the risk that a firm's existing assets and facilities will be seized, or "expropriated" by a governmental, social, or military entity. This risk is frequently incorporated into discussions of international operations.

• Question 829:

  A retail investor is considering the purchase of Intelligent Semiconductor common stock, believing the shares have bottomed. In his analysis, the retail investor has gathered the following information:

  Total assets: $640,000,000 Total liabilities: $510,000,000 Number of common shares outstanding: 1,500,000 Current stock price: $110.56 per share Required return: 17. 75% per year Expected growth rate: 15. 50% per year Next dividend: $2. 26 per share Earnings per share: $7. 89

  Using this information, what is the price-to-book ratio for Intelligent Semiconductor? Further, should Intelligent Semiconductor be considered as trading at a discount or a premium to its book value?

  A. None of these answers is correct.
  B. 1.27, discount
  C. 14. 01, premium
  D. 34. 84, premium
  E. 14. 01, discount
  F. 1.27, premium
  F. 1.27, premium

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  Explanation

  The book value of a common stock is found by dividing the net worth of a company by the number of outstanding shares. While there exists several different methods for calculating net worth, the most simplistic involves subtracting total

  liabilities from total assets, giving us the shareholder's equity figure.

  Investment professionals often see the book value as a "floor" for common stock prices, and the price-to-book ratio is quite popular in the field of investment management. The calculation of the price-to-book ratio involves the following

  equation:

  Price-to-book ratio = {Market price of common stock at t0 / [(total assets - total liabilities) / # of common shares outstanding]}

  While the # of common shares outstanding has been provided, the shareholder's equity figure must be calculated manually. The calculation of the per share shareholders equity is illustrated as follows:

  Shareholders equity = [($640,000,000 - $510,000,000) / 1,500,000] = $86. 67.

  Now that the shareholders equity has been calculated and transformed into a per-share figure, the priceto-book value can be calculated as follows:

  Price-to-book value = ($110.56 / $86. 67) = 1.276.

  As you can see, the required rate of return, along with the expected growth rate, is not necessary in the calculation of the price-to-book ratio.

  Any time the price-to-book ratio is greater than one, a stock is said to be "trading at a premium to book." Frequently, investment professionals will use the term "intrinsic value" when referring to the book value. A figure of less than one for the

  price-to-book ratio is commonly referred to as "trading at a discount to book." Stocks trading below book value are often sought after by value investors, who believe that these shares have been discounted below their real value.

  While the price-to-book value is a useful tool in the stock selection process, it possesses some important flaws. One problem with the Price-to-Book Ratio is that one of the terms - Book Value - is so easilymanipulated. Valuation of inventory

  and real estate are easily adjusted on the books. Stock buy-backs and write-offs of exceptional items also deflate Book Value, making high priced stocks seem overvalued.

• Question 830:

  Assume the least squares equation is Y' = 10 + 20X. What does the value of 20 indicate?

  A. For each unit increased in Y, X increases by 20
  B. Y intercept
  C. None of these answers
  D. For each unit increased in X, Y increases by 20
  D. For each unit increased in X, Y increases by 20

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  Explanation

  The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of the line. Y' is the predicted value of Y given a specific value of X. Here b = 20.