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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 861:

  A technical analyst with Bullfighter.com, a noted investment research firm, has been examining the U.S. securities markets, and believes that the market is technically "oversold." Which of the following technical indicators would this analyst likely use to support his opinion? Choose the best answer.

  A. The CBOE Put/Call ratio is greater than 50%.
  B. The Confidence Index has decreased substantially.
  C. The ratio of short sales by specialists is at 30%.
  D. The % of issues trading below their 200 day moving average is greater than 80%.
  E. The diffusion index has increased substantially.
  F. All of these are indicative of an oversold condition.
  D. The % of issues trading below their 200 day moving average is greater than 80%.

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  Explanation

  The % of issues trading below their 200-day moving average is frequently cited by technical analysts as a measure of oversold and overbought market conditions. Specifically, technical analysts see the market as "oversold" when 80% of issues are trading below their 200-day moving average, and consider a market "overbought" when 80% of issues are trading above their 200-day moving average. The "Diffusion Index" is a measure of market breadth, and is defined as [(# of advancing issues + 1/2 # of issues unchanged) / # of issues traded]. The Confidence Index is used as a measure of international sentiment, and a decline in this index is indicative of widespread investor uncertainty. The CBOE Put/Call Ratio is a contrarian technical indicator used to gauge the sentiment of investment professionals, and a ratio greater than 50% would be viewed by contrarian technical analysts as bullish.

• Question 862:

  If the significance level of a test is the probability of incorrectly rejecting the null hypothesis, then the "power of a test" is defined as which of the following? Choose the best answer.

  A. The probability of a Type II error.
  B. More than one of these answers is correct.
  C. The "power of a test" is a nonsensical term.
  D. The probability of incorrectly accepting the alternate hypothesis.
  E. The probability of correctly rejecting the null.
  F. The probability of a Type I error.
  E. The probability of correctly rejecting the null.

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  Explanation

  If the significance level of a test is the probability of incorrectly rejecting the null hypothesis (a Type I error), then the power of the test is defined as the probability of correctly rejecting the null hypothesis. In other words, the power of a test is equal to (1 - the probability of a Type II error). The standard method of hypothesis testing involves stating only the significance level, which is equal to the probability of a Type I error.

• Question 863:

  During years of temporary supernormal growth, where growth exceeds the required rate of return, the analyst must use the ________ version of the dividend discount model to value a stock.

  A. expected
  B. current
  C. interim
  D. finite
  D. finite

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  Explanation

  During years of temporary supernormal growth, where growth exceeds the required rate of return, the analyst must use the finite version of the dividend discount model to value a stock. This is also known as the variable growth version of the dividend discount model.

• Question 864:

  Strategic Systems Inc. expects to have net income of $800,000 during the next year. Its target, and current, capital structure is 40 percent debt and 60 percent common equity. The Director of Capital Budgeting has determined that the optimal capital budget for next year is $1.2 million. If Strategic uses the residual dividend model to determine next year's dividend payout, what is the expected dividend payout ratio?

  A. 0%
  B. 56%
  C. 28%
  D. 42%
  E. 10%
  E. 10%

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  Explanation

  Equity requirement = 0.6($1,200,000) = $720,000. Expected NI$800,000 Equity requirement720,000 Available for dividends$80,000 Payout ratio = $80,000/$800,000 = 0.10 = 10%.

• Question 865:

  A boad matures in ten years, pays a 7% semiannual coupon, and is currently priced to yield 6. 25%. The bond is callable at par beginning five years from now. Debbie Scott is planning to purchase this bond. Scott can currently reinvest coupon income from the bond at 5. 50%. Which of the following statements is least accurate?

  A. If the bond is called in six years, Scott's return will be less than 6. 25%.
  B. If Scott's reinvestment rate was 6. 25%, the bond's yield to worst would be less than 6. 25%.
  C. If the bond was priced to yield 5. 50%, the current yield would be 7%.
  C. If the bond was priced to yield 5. 50%, the current yield would be 7%.

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  Explanation

• Question 866:

  Carve-outs may not be combined with ________ portfolios.

  A. new
  B. exchanged
  C. stand-alone
  D. composite
  E. benchmark
  C. stand-alone

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  Explanation

  Stand-alone composites from subsectors or carve-outs of larger international portfolios can be created only if the subsectors are actually being managed as separate entities with their own cash allocations and currency management - for example, a series of currency funds.

• Question 867:

  What is the level of significance?

  A. None of these answers
  B. Probability of a Type II error
  C. Beta error
  D. Z-vale of 1.96
  E. Probability of a Type I error
  E. Probability of a Type I error

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  Explanation

  The level of significance and the type I error are both the probability of rejecting the null hypothesis when it is actually true.

• Question 868:

  A firm has issued a perpetuity with a total face value of 100 million dollars and a coupon rate of 5. 8%. If the risk free rate equals 5. 8% and investors require a rate of return of 10.6% from the perpetuity, what's the amount the firm raised through the issue?

  A. $55. 28 million
  B. none of these answers
  C. $100 million
  D. $54. 72 million
  D. $54. 72 million

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  Explanation

  The price of a perpetuity that pays C per year, at a discount rate of R, equals C/R. Hence, the price of the perpetuity issue = $(100*5. 8%/10.6% ) million = $54. 72 million.

• Question 869:

  The market risk of a project is measured by:

  A. the project's impact on the systematic risk of the firm's stock.
  B. the variability of the project's projected returns.
  C. the project's impact on the uncertainty about the firm's future earnings.
  D. the project's impact on the unsystematic risk of the firm's stock.
  A. the project's impact on the systematic risk of the firm's stock.

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  Explanation

  Remember that it is the systematic risk that you must worry about.

• Question 870:

  You are given a risk-free rate of 3% per year, a portfolio return of -11% per year, and a standard deviation of portfolio return is 20% per year. What is the Sharpe measure of risk-adjusted performance?

  A. -0.70.
  B. -0.15.
  C. -0.67.
  D. -0.55.
  A. -0.70.

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  Explanation

  The Sharpe measure of risk-adjusted performance is equal to (rbar_p - rbar_f)/sigma_p, where rbar_p is the mean portfolio return, rbar_f is the mean risk-free return, and sigma_p is the standard deviation of portfolio return. In our case, we have (-11% - 3%) / 20% = -14/20 = -0.7.