Exam 1 - Questions

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Exam #1 | Questions - Morning Session

Time Topic Questions
27 Ethical and Professional Standards 1-18

21 Quantitative Methods 19-32
18 Economics 33-44
36 Financial Reporting and Analysis 45-68
15 Corporate Finance 69-76
18 Equity Investments 77-88
18 Fixed Income Investments 89-100
9 Derivatives 101-106
9 Alternative Investments 107-112
9 Portfolio Management 113-120
180 minutes 120 questions

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Ethical and Professional Standards 1-18
1. Which of the following forms of referral fees, compensation, consideration or benefit earned
in the course of issuing a recommendation must be disclosed?
A. Only cash considerations should be disclosed.

B. Only considerations in the form of cash or soft dollars must be disclosed.
C. Considerations in the form of cash, soft dollars or in kind must be disclosed.
2. Illeana Cruze, CFA, is a portfolio manager at Alpha Sense and manages a mutual fund and a
pension plan. On receipt of proxies for the mutual fund, Cruze hands it over to her
administrative assistant, Tom Hillman. Cruze says that she does not have enough time to
handle proxies herself because of other commitments. When the proxies are for stocks owned
by the pension plan, she asks Hillman to send it to the sponsor of the plan. Which of the
following statements is most likely accurate?
A. Cruze’s policy on mutual fund proxies is a violation, but her policy on pension plan
proxies is not a violation.
B. Cruze’s policy is not a violation.
C. Cruze’s policy on both the mutual fund as well as the pension plan proxies is a violation.
3. Robert Galvin, CFA, is a money manager and takes care of choosing assets for Retire Smart’s
pension fund. The director of Retire Smart’s Pension Fund directs Galvin to use a particular
broker for the trade in the pension fund with the intention of obtaining research with soft
dollars earned from the broker. Galvin follows the instructions of the director as there is no
significant difference in the price and execution. Galvin has most likely:
A. Not violated any standard if the research benefits the plan beneficiaries.
B. Not violated any standard if the research benefits Retire Smart.
C. Violated the Standard III(A) – Loyalty Prudence and Care.
2

4. Blair Noir, CFA, is an analyst in the healthcare sector. Noir recently attended a meeting with
the management of a company under her coverage. In the meeting, management expressed
extremely positive views about a drug that is in the development stage. Based on the views of
management, Noir stated in her report: “In the coming years, the Company is going to see a
significant growth in sales.” Which of the following statements is correct regarding Standard
V(B) – Communication with Clients and Prospective Clients?
A. Noir is not in violation of Standard V(B) – Communication with Clients and Prospective
Clients as she had a reasonable basis for her statement.
B. Since Noir did not verify the statement of the management, she has violated Standard
V(B) – Communication with Clients and Prospective Clients.
C. Noir has violated Standard V(B) – Communication with Clients and Prospective Clients
as she presented the optimism of management as a certain event.
5. Mandy Elmar, CFA, has been conducting research on Xoom Corp. Elmar was almost done
with her research and was planning to get the report typed today and delivered to the clients
the next day. However, this morning, Elmar lost her folder which had all the documents related
to Xoom Corp. In a panicked state she called the management of Xoom Corp who sent her their
projections of the company. Although Elmar did not remember the exact forecast from her
report she knew they were lower than management’s projections. Therefore, Elmar reduced the
forecast provided by the management of Xoom by 15%. She also used graphs and charts from
another report a colleague performed on Xoom 2 years earlier. Elmar managed to finish the
report and submitted it on time to the clients. Elmar has most likely:
A. Violated Standard V(A) – Diligence and Reasonable Basis, Standard I-B: Independence
and Objectivity and Standard III(E) – Preservation Of Confidentiality.
B. Violated Standard I(C) – Misrepresentation, Standard III-D: Performance Presentation
and Standard III(E) – Preservation Of Confidentiality.
C. Violated Standard V(A) – Diligence and Reasonable Basis, Standard I(C) –
Misrepresentation and Standard V(C) – Record retention.
3

6. Ronda Bayes, CFA, recently joined Skylark Investments. Which of the following
recommendations from the directors of Skylark is not in line with the recommendations of the
CFA Institute standards?
A. Bayes should be made aware that dishonest personal behavior reflects poorly on the
profession.
B. Bayes should write a personal ethical statement.
C. A background check should be conducted on Bayes.
7. A mutual fund follows a strategy where it invests in treasury securities along with extremely
risky securities. Treasury investments are made such that 95% of the fund value should be
recovered from the treasury securities at the end of the investment horizon. The mutual fund is
planning to include one of the following statements in its communication with its clients:
I. Since the fund is backed by treasury securities, the investors will get guaranteed returns.
II. There is no default risk on the investments made by the fund.
Which of the statements is a violation of Standard I(C) – Misrepresentation?
A. Only statement I.
B. Both statement I & II.
C. Only statement II.
8. When introducing herself to a potential client, Jhansu Haldon usually says “I was awarded a
CFA degree in 2015.” Haldon has:
A. Not violated any standard in mentioning this.

B. Has violated Standard VII(B) – Reference to CFA Institute, the CFA® designation, and
the CFA® Program
C. Has violated Standard VII(A) – Conduct as Members and Candidates in the CFA®
Program.
4

9. Which of the following is least likely a motivation for the creation of the GIPS?
A. Increasing the intervention of the government in the investment industry

B. Standardizing the performance presentation for facilitating comparison
C. Improving the services offered to clients
10. Jennifer Lively, CFA, manages accounts for WS Capital. When transacting any trades in her
client’s accounts, Lively ensures that she does not trade in her mother’s account, who is also a
client, until all the other clients have been given the opportunity to trade. Is Lively’s approach
to trading in her mother’s account in line with Standard VI (B) – Priority of Transaction?
A. No, Lively should not trade in her mother’s account at all.

B. Yes, Lively gives enough opportunity to all her client to trade before trading in her
mother’s account.
C. No, Lively should treat her mother’s account like any other client account.
11. Justin Scott, CFA, is an analyst and covers Amond Corp. In one of his recent meetings with
the management of Amond Corp, Scott received non-material financial data. Using this
information provided by management and his knowledge of the industry and competitors,
Scott is of the opinion that Amond is likely to make a tender offer to one of its competitors. If
Scott’s analysis is correct, this will impact Amond Corp shareholder’s materially. Which of the
following statements is most likely accurate?
A. Scott should publish the report.

B. Scott should send a copy of the report to the Management of Amond Corp for
verification.
C. Scott should not disseminate any information until the tender offer is public.
5

12. John Reed, CFA, is managing the portfolio of Brandy Anniston, a wealthy client. Mrs
Anniston is part of the mailing list of the company and is also informed that she should get in
touch with her investment manager whenever there is a significant change in circumstances. It
has been more than 2 years since Reed and Anniston have spoken. Is Reed in violation of
Standard III(C) – Suitability?
A. No, as there has been no significant change in Anniston’s financial situation.

B. Yes, Reed has violated the Standard III(C) – Suitability.
C. No, the case presented does not involve Standard III(C) – Suitability.
13. Vin Wisely, CFA, is employed by Wise Corp to provide investment advice to pension plan
participants. Wisely realizes that the stock of Wise Corp is one of the investment options for the
plan participants. However, he believes that investing in Wise Corp stock is too risky for a
pension plan and advises the employees not to invest in Wise Corp. The company treasurer tells
Wisely that he is violating his fiduciary duty to the Company by giving such advice and that he
could also lose his job if he continues. Wisely should most likely:
A. Inform employees about the conflict of interest and stop advising them on the stock of
Wisely Corp.
B. Continue to advise employees to sell the stock of Wise Corp.
C. Continue giving his ‘’Sell’’ recommendation but mentioning the differing opinion of the
treasurer.
14. Eva Watson, CFA, is a manager at Fern Investments. Watson’s compensation includes a base
salary and a percentage of fees generated by the firm. It also includes a performance bonus if
the clients’ return is 200 bps higher than the benchmark. In a meeting with a prospective client,
Eva did not disclose the compensation arrangement. Eva has most likely:
A. Not violated Standard VI(A) – Disclosure of Conflicts by not disclosing the

compensation.
B. Violated Standard VI(A) – Disclosure of Conflicts by not disclosing the performance
bonus.
C. Not violated Standard VI(A) – Disclosure of Conflicts by not disclosing the bonus
arrangement as there is no inherent conflict of interest in the bonus.
6

15. Financial advisors at Asda manage individual client’s investments. To identify the most
appropriate portfolio for any client, Asda uses a model that analyzes a range of simulated
portfolios and comes up with a probability of achieving different levels of returns. A portfolio
that gives the highest probability of achieving the minimum required return specified by the
client is then selected. Advisors at Asda are:
A. Violating Standard I (C) – Misrepresentation.

B. Violating Standard III (C) – Suitability.
C. Not violating any standard.
16. Paul Teshima is preparing a research report on a new drug called ABXV IV in the oncology
industry. He gets in touch with a few scientists and medical professionals working in the field
of oncology, and obtains information about some competing oncology treatments. Most of these
drugs are in the pre-clinical development phase, which is public information. Teshima
concludes in his research report that ABXV IV might have some competing drugs coming into
the market in the next few years if the pre-clinical and clinical trials prove to be successful. Has
Teshima violated any Standard of Professional Conduct?
A. Yes, Teshima has violated the Standards by relying on material non-public information.
B. Yes, Teshima has violated the Standards by not performing due diligence to confirm the
reliability of the information.
C. No, Teshima did not violate any Standards.
17. Lucas Boski currently works at Wealth Succession Management Firm. Boski decides to leave
his current employer to join a competing firm, MoneySimple. Which of the following is most
likely accurate with regards to what Boski can do?
A. It is permissible for Boski to take a list of clients' details as long as the employee believes
that he might have been able to replicate the list from private records and public records.
B. It is permissible for Boski to take a list of clients' details as long as the employee believes
that he might have been able to replicate the list only from public records.
C. It is permissible for Boski to contract the old employer’s clients in an attempt to gain
business for his new employer in all circumstances.
7

18. Consider the following statements about the role of composites in performance presentation:
Statement I: Composites help in presenting a firm’s performance under various asset classes.
Statement II: Composites help to evaluate a firm’s performance in a single statistic that enables
comparison across firms.
Statement III: Composites help the investor to evaluate if a firm is GIPS compliant.
Identify which of the above statement/statements about composite is/are most likely accurate?
A. I only
B. I & II only
C. I, II & III
8

Quantitative methods 19-32
19. Which of the following are sentiment indicators?
I. Relative strength index (RSI)
II. CBOE Volatility Index
III. Short interest ratio
IV. Put/call ratio
V. Moving average convergence-divergence (MACD)
VI. Stochastic oscillator
A. I, II & VI only
B. II, III & IV only
C. II, V & VI only
20. The manager of a pension fund is expecting that payments of $1,500,000 per year will be
paid to the retirees starting at the beginning of Year 6. They will extend until Year 19. The
discount rate is 8% compounded annually. The present value of the pension liability is closest to:
A. $8,416,333.80
B. $12,366,355.50
C. $12,839,218
21. Given a skewed distribution, the minimum proportion of observations that lie between +/-
2.5 standard deviation from the mean is closest to:
A. 74%
B. 84%
C. 68%
9

22. Given the following stock returns for a portfolio: 15%, 28%, 36%, 19%, 21%, 25%, the
population standard deviation is closest to:
A. 7.81%
B. 46%
C. 6.78%
23. The correlation coefficient of Microsoft and Apple’s stock returns is 0.7. The return variance
of Microsoft is 0.004 and the return variance of Apple is 0.008. The covariance of Microsoft and
Apple’s stocks is closest to:
A. 0.02
B. 0.000765
C. 0.00395
24. You own an asset that is expected to pay $50,000 10 years from today. If the discount rate is
7%, the asset's value 3 years from today is closest to:
A. $31,137.50
B. $25,417.50
C. $40,814.90
25. YNH stock has a price of $12.16. Which of the following price targets is most likely based on
the golden ratio?
A. $19.67
B. $14.35
C. $24.32
10

26. Which of the following is/are (an) assumption(s) of the binomial distribution?
I. The expected value is always positive.
II. The probabilities of success vary over the trials.
III. The trials are independent.
A. III only
B. I & III only
C. I, II & III
27. Which of the following statements is/are accurate regarding normal distributions?
I. Mean > Median
II. Kurtosis = 2
III. Approximately 95% of all observations fall in the interval µ+/-2σ
A. III only
B. I, II & III
C. None of the above
28. Calculate the present value of a 30-year annuity with the first annual payment of $120,000
starting today, assuming an interest rate of 6% per year compounded annually?
A. $1,510,886.50
B. $1,750,886.50
C. $1,651,779.70
29. If a $1,000 face value Treasury bill (T-Bill) is selling for $985 with 170 days until maturity,
then the money market yield is closest to:
A. 2.8%
B. 3.18%
C. 3.22%
11

30. X follows a continuous uniform distribution over the interval 8 < X < 54. What is the
probability that X is between 14 and 21?
A. 0.25
B. 0.7
C. 0.15
31. Given the following returns: 12%, 16%, 10%, 7%, the mean absolute deviation is closest to:
A. 2.4%
B. 3.1%
C. 2.75%
32. A portfolio's mean return is 15% and its standard deviation is 18%. The returns are normally
distributed. What confidence interval does the -20.28% to 50.28% range describe?
A. 99%
B. 95%
C. 68%
12

Economics 33-44
33. The Canadian dollar and the Euro share a common feature with most other major currencies
in that:
A. They can be exchanged for a fixed quantity of gold.

B. Their values relative to the UK pound and the US dollar float within tightly controlled
bounds.
C. These currencies have value only because of our shared willingness to accept them.
34. All else being equal, estimate the change in price levels if the money supply increases by
11%.
A. Price levels will decrease by 11%.

B. Price levels will increase by 11%.
C. Price levels will increase at a faster pace (more than 11%).
35. Suppose that the exchange rate between the Canadian dollar and the Brazilian real is
BRL/CAD = 3.27. If the interest rate in Canada is 2.5 percent and the interest rate in Brazil is 8.0
percent, the exchange rate you should expect one year from today is closest to:
A. BRL/CAD 3.45
B. BRL/CAD 3.10
C. BRL/CAD 3.53
36. The effect of imposing additional emissions control requirements on electricity producers
can be best characterized as a:
A. Leftward shift in the electricity supply curve.

B. Leftward movement along the electricity supply curve.
C. Rightward shift of the electricity demand curve.
13

37. Calculate the growth in potential GDP if the growth in technology, labor and capital is 2%,
3%, and 4% respectively. Assume that national income allocated to labor compensation is 55%.
A. 5.55%
B. 5.45%
C. 5.85%
38. For an inferior good, if the price of the good falls in comparison to a normal good, the:
A. Income effect will reinforce the substitution effect leading to a larger increase in
demand.
B. Income effect will offset the substitution effect leading to a smaller increase in demand.
C. Income effect will reinforce the substitution effect leading to a larger decrease in
demand.
39. Suppose that for a manufacturer their total costs are currently greater than their total
revenue. In the short run, the manufacturer should:
A. Shut down.
B. Shut down if fixed cost is greater than marginal revenue.
C. Shut down if marginal cost is greater than marginal revenue.
40. Calculate the 4-firm Herfindahl-Hirschman Index of Tech Inc., Sun Systems, LiteC.org, and
Git firms with market shares of 32%, 20%, 31%, and 17% respectively.
A. 1.0000
B. 0.2674
C. 0.5171
14

41. Suppose the GDP deflator for Brazil was 120.0 in 2012 and 211.5 in 2017. This indicates an
inflation rate of:
A. 9.8%
B. 15.3%
C. 12.0%
42. An economy is operating at full employment when the government eliminates sales taxes.
This will most likely result in:
A. Cost-push inflation.
B. Supply-push inflation.
C. Demand-pull inflation.
43. If the economy is at or near full employment, a sudden and unanticipated reduction in the
availability of a key resource such as electricity is most likely to:
A. Shift aggregate supply to the left resulting in higher GDP.

B. Shift aggregate supply to the left resulting in higher prices.
C. Shift aggregate demand to the left causing a higher price level.
44. Weaknesses of the CPI as a tool to measure the rate of inflation include:
A. Overrepresentation of the purchases made by farmers and other rural residents.

B. Failure to account for changes over time in the nature or quality of goods included.
C. Over sensitivity to changes in gasoline prices.
15

Financial Statement Analysis 45-68
45. XYZ Infra Limited has entered into a contract to complete the construction of a thermal
power plant for a customer for a total contract price of GBP 400 million. The work order is
expected to take an estimated four years to complete. Considerable uncertainty surrounds the
cost of the project due to the application of untested new technologies. The outcome cannot be
reliably measured, but it is expected that the costs up to the agreed upon price will be
recovered. At the end of the year 1, if XYZ Infra Limited has incurred a cost of GBP 175 million,
how much revenue, expense (Cost of construction) and income would be recognized by the
company at the end of year 1 under IFRS?
A. Zero revenues, zero expenses, and zero income

B. GBP 175 million in revenues, GBP 175 million in expenses, and zero income
C. GBP 100 million in revenues, GBP 100 million in expenses, and zero income
46. Which of the following statement(s) is/are true with regard to income and expenses on the
income statement?
I. The definition of income encompasses both revenues and gains
II. Expenses reflect outflows, depletions of assets, and incurrences of liabilities in the course of
the activities of a business
III. Expenses may be grouped together by their nature but not by function
A. I & II only
B. I & III only
C. II & III only
16

47. Which of the following expenses are deducted from gross profit to obtain operating profit
for non-financial companies?
I. Selling expenses
II. Administrative expenses
III. Research and development expenses
IV. Interest expenses
A. I, II & III only

B. I & II only
C. I, II & IV only
48. If the outcome of a long-term contract cannot be measured reliably, the preferred accounting
method is the:
A. Percentage-of-completion method under both IFRS and US GAAP.

B. Completed contract method under US GAAP. Under IFRS, the revenue may be
recognized to the extent of contract costs incurred but only if it is probable the costs will
be recovered.
C. Completed contract method under IFRS. Under US GAAP, the revenue may be
recognized to the extent of contract costs incurred but only if it is probable the costs will
be recovered.
17

49. Livecom, a pharmaceutical company, is working on a drug that would cure leukemia. The
total costs, before the stage of assessing feasibility, were $23 million. The molecule has passed
the feasibility stage, and the company intends to develop the molecule for commercial sale. The
development was completed within 6 months, and the costs incurred amounted to $76 million.
However, the company has not yet received any approval from the FDA. Determine the correct
accounting treatment of the costs if the company follows IFRS.
A. Record an expense of $23 million and record an intangible asset of $76 million.
B. Record an intangible asset of $99 million, charge an expense of $23 million if the
approval is received and charge an expense of $99 million if the FDA rejects the
molecule.
C. Charge an expense of $99 million and record an intangible asset of $23 million on the
receipt of the approval.
50. XYZ Electricals Limited sold commercial equipment at a total sales price of GBP 50,000,000
to a customer. The total cost of the equipment is GBP 30,000,000. The profit to be recognized is
GBP 20,000,000. The amount of cash received by the seller as a down payment is GBP
10,000,000, and the balance amount is to be received over an 8-year period. It has been
determined that there is significant doubt about the ability and commitment of the buyer to
complete payments. How much profit will be recognized attributable to the down payment if
the installment method is used by the company?
A. GBP 4,000,000
B. GBP 0
C. GBP 20,000,000
51. Which of the following account is/are most likely to be an example(s) of contra accounts?
I. Accumulated depreciation
II. Sales returns and allowances
III. Allowance for Doubtful Accounts
A. I & III only

B. I & II only
C. All of the above
18

52. When prices are rising, the value of ending inventory is the highest under the:
A. FIFO method
B. LIFO method
C. Weighted average cost
53. ABC Equipment Limited has made the following inventory purchases during the first
quarter of 2017.
Price per unit (in

Period Number of units thousands)
January 108 GBP 45
February 94 GBP 48
March 86 GBP 46
During the quarter, the company sold 200 units at GBP 50,000 per unit. The company has 88
units at the end of the quarter and specifically identifies that 86 were those procured in the
month of March and balance were purchased in the month of January 2017. If the company
follows the weighted average cost method, the gross profit of the company during the 1st
quarter 2017 is closest to (in thousands):
A. GBP 849
B. GBP 744
C. GBP 719
19

54. The net income of Baskin Ice Creams for the year ended 31st December 2016 was USD
1,750,000. The following are the details of common stock of the company.
Shares outstanding as on 1st Jan 2016 96,000
Shares repurchased on 1st May 2016 16,000
Shares issued on 1st August 2016 40,000
Shares issued on 1st Nov 2016 6,000
Shares outstanding on 31st Dec 2016 126,000
The company declared and paid USD 450,000 dividends on preferred stock. What is the
company’s weighted average number of shares outstanding?
A. 126,000
B. 103,000
C. 101,000
55. Which of the following acts prohibit misrepresentations, requires initial registration of all
public issuances of securities and specifies the financial and other significant information that
investors must receive when securities are sold?
A. Sarbanes – Oxley Act of 2002

B. Securities Exchange Act of 1934
C. Securities Act of 1933
20

56. Biotech Solutions limited had a weighted average of 60,000 shares of common stock
outstanding for the year ended 31st Dec 2016. At the beginning of the year, the company has
outstanding 10,000 options with an exercise price of USD 125. During the fiscal year, the
company’s market price has averaged USD 200 per share. The company reported net income of
USD 1,500,000 and declared and paid preferred dividends of USD 200,000 for the fiscal year. No
other potentially dilutive financial instruments are outstanding. Biotech’s diluted EPS is closest
to:
A. USD 20.39
B. USD 19.62
C. USD 22.64
57. Argon Pharma limited reported net income USD 450,000 for the year ended on 30th June,
2017. The outstanding shares of common stock and convertible preferred shares are 40,000 and
10,000 respectively, and there are no other potentially dilutive securities. Each preferred share
pays a dividend of USD 16 per share, and each is convertible into two shares of common stock.
What was the reported diluted EPS of the company?
A. USD 7.5
B. USD 7.25
C. USD 4.83
58. The ability of a company to meet long-term obligations is generally referred to as:
A. Liquidity.
B. Solvency.
C. Financial flexibility.
21

59. The conclusions that a company can reach about a new standard not yet implemented by
IFRS include:
I. The standard does not apply
II. No discussion until implementation
III. The impact of adoption is discussed
IV. Management is still evaluating the impact
A. II only
B. III & IV only
C. I, III & IV only
60. The following is the income statement information of Gaboli technologies:
Revenues USD 950,000
Cost of goods sold USD 600,000
Other operating expenses USD 110,000
Interest expense USD 90,000
Tax expense USD 75,000
The gross profit of the company is closest to:
A. USD 350,000
B. USD 75,000
C. USD 240,000
22

61. The operating cycle of a company can be defined as:
A. The average amount of time that elapses between acquiring inventory and sales of
finished goods to customers.
B. The average amount of time that elapses between selling the finished goods and paying
the payables to suppliers.
C. The average amount of time that elapses between acquiring inventory, selling the
finished goods and collecting the cash from sales to customers.
62. Which of the following amounts are excluded from the determination of inventory costs
under IFRS and US GAAP:
I. Administrative overheads
II. Abnormal amounts of wasted materials, labor, and overheads
III. Costs involved in bringing inventories to their present location and condition
IV. Storage costs, unless they are necessary input to a further production process
A. II & IV only
B. I, III & IV only
C. I, II & IV only
63. A company must write down the value of inventory if:
A. The net realizable value (NRV) of a company’s inventory falls below its carrying amount
under IFRS, and the market value of a company’s inventory falls below its carrying
amount under US GAAP.
B. The net realizable value (NRV) of a company’s inventory falls below its carrying amount
under US GAAP, and the market value of a company’s inventory falls below its carrying
amount under IFRS.
C. The net realizable value (NRV) of a company’s inventory falls below its carrying amount
under IFRS and under US GAAP.
23

64. Which of the following statement(s) is/true with regard to reporting of Property, Plant, and
Equipment by companies?
I. IFRS permits companies to report PPE using either a cost model or a revaluation model. US
GAAP permits only the cost model for reporting PPE.
II. Reversals of impairment losses are permitted under US GAAP.
III. IFRS permits companies to use the cost model for some assets and the revaluation model for
others within a particular class of assets.
A. I & III only

B. I only
C. All of the above
65. Available-for-sale financial assets are measured at:
A. Amortised cost
B. Fair value, with any unrealized holding gains or losses recognized in other
comprehensive income
C. Fair value, with any unrealized holding gains or losses recognized as profit or loss on
the income statement
66. Which of the following financial assets are measured at cost or amortized cost?
I. Unquoted equity instruments
II. Held-to-maturity instruments
III. Loans and receivables from another company
IV. Derivatives whether stand-alone or embedded in non-derivative instruments
A. I , II & III only

B. I & III only
C. I , III & IV only
24

67. Core Corp. has an inventory with a carrying value of $12,000. Using the data given below,
calculate the current value of inventory after adjustments if Core reports under GAAP.
Selling price $8,000

Selling cost $1,500
Normal profit $2,000
Replacement cost $6,500
A. $4,500
B. $5,500
C. $6,500
68. Identify the two characteristics of a decision-useful financial report.
A. Profitable & Audited

B. Relevance & Faithful representation
C. Conservative & Factual
25

Corporate Finance 69-76
69. Ashok Industries Limited (AIL) is planning to purchase new equipment that will enhance
the capacity of their operations. AIL’s management has drawn the following summary
information for decision-making:
Present value of future after-tax

cash flows from the equipment
Cost of New Equipment
(in $ Million)
(in $ Million)
Equipment 1 150 180
Equipment 2 200 290
Equipment 3 240 360
The total number of shares outstanding of AIL are 10 million, and the current market price of
AIL’s stock is $65 per share. After AIL had selected one of the equipment options, an analyst
estimated the stock price of the company to increase to $74 per share. Assuming that this project
was new information and was independent of other expectations about the company, which
equipment option was most likely selected by AIL to meet the analyst’s projection?
A. Equipment 1
B. Equipment 2
C. Equipment 3
70. An investor wants to purchase stock of Apex Corp. but wants to avoid receiving the
dividend so that he doesn’t have to pay the tax on the investment. If the date of record is
Monday, August 8th, 2017, what is the earliest day at which the investor can purchase the stock?
A. Wednesday, August 10th

B. Saturday, August 6th
C. Thursday, August 4th
26

71. Initial outlay on a new project is $100,000. It generates annual cash flows of $40,000 for the
next 5 years. The debt-to-equity ratio of the firm is 1x and new projects are also financed in the
same proportion. The weighted average cost of capital for the company is 11.34% and floatation
costs for equity are 5%. The NPV of the project using the correct treatment of floatation costs is
closest to:
A. 44,080
B. 46,580
C. 41,251
72. A Firm has 50,000 shares outstanding and an EPS of $10. It is planning to buy back 5,000
shares from the market for which the after-tax funding cost is 10%. If the share price is $30, the
post buyback EPS is expected to be closest to:
A. $11.20
B. $10.80
C. $9.70
73. Jason Smith is a consultant engaged by a new company to formulate their policies and
systems. Jason is listing down the roles and responsibilities of the Audit Committee as per best
practices of corporate governance. The list is least likely to include which of the following?
A. Any conflicts between the external auditor and the firm are resolved in a manner that
favors the shareholders.
B. The audit committee has the authority to approve or reject any proposed non-audit
engagements with the external audit firm.
C. The internal auditor must not contact the audit committee directly and should
communicate its findings only through the management.

27

74. Two projects have the following cash flows (in thousands):
Year Alpha Beta

0 -700 -400
1 200 100
2 300 200
3 400 300
4 700 600
The crossover rate for Project A and Project B is closest to:
A. 12.6%
B. 34.0%
C. 39.6%
75. An analyst calculated the following ratios for companies A and B:
Company A Company B
Current Ratio 2.5 3.0
Quick Ratio 2.0 1.5
Given the above information, the statement that is most likely to explain the difference in the
liquidity position of companies A and B is:
A. Compared to Company A, Company B has a larger proportion cash and marketable

securities in its current assets.
B. Compared to Company A, Company B has a smaller proportion cash and marketable
securities in its current assets.
C. Compared to Company A, Company B has a smaller proportion inventories in its
current assets.
28

76. Open Ltd has average days of receivables of 50 days, average days inventory of 40 days and
average days payable of 30 days. Port Ltd, operating in the same industry, has a receivables
turnover of 6 times, inventory turnover of 12 times, and payables turnover of 9 times. Given the
aforementioned information, what is the most accurate statement?
A. Port Ltd has a shorter cash conversion cycle than Open Ltd.
B. Open Ltd has a shorter cash conversion cycle than Port Ltd.
C. Cash conversion cycle for Open Ltd and Port Ltd is approximately equal.
29

Equity Investments 77-88
77. Muhammad Umar is a fund manager who wants to purchase 5,000 stocks of Wellington Inc.
at the current price of $92. If the initial margin required to open up a leveraged position is 35%,
calculate the leverage ratio.
A. 3.10
B. 2.86
C. 4.45
78. The segregated cash flows from securitized assets are called:
A. Tranches.
B. Special purpose entities.
C. Dark pools.
79. Identify the appropriate term for excluding shares held by owners and shares unavailable
for foreign buyers while constructing a market capitalization-weighted index.
A. Free float
B. Market float
C. Index float
80. Which of the following is a primary disadvantage of market capitalization-weighting?
A. Constituent securities whose prices have risen the most (or fallen the most) have a
greater (or lower) weight in the index.
B. Constituent securities are held in proportion to their value in the target market.
C. Its simplicity and failure to take into account other factors such as the volume of shares
sold.
30

81. Texas Corp. is a calculator manufacturing firm which is expected to pay a dividend of $2
next year that will grow at the rate of 5% for two more years. If the stock is expected to sell for
$30 at the end of the third year and the required rate of return is 11%, then calculate the present
value of the stock.
A. $25.00
B. $31.50
C. $27.05
82. If a market is semi-strong form efficient, the risk-adjusted returns of a passively managed
portfolio relative to an actively managed portfolio are most likely:
A. Lower.
B. Higher.
C. The same.
83. Global Depository Receipts GDRs are denominated in:
A. The local currency of the buyer.

B. USD.
C. The local currency of the firm.
84. A small investor just bought 100 shares of UYA on margin. The share price of UYA at the
time of purchase was $50, the initial margin requirement is 50%, and the maintenance margin is
30%. Given this information, the margin call trigger price is closest to:
A. $31.25
B. $79
C. $35.71
31

85. An investor buys 100 shares of a stock on margin at $146 a share using an initial leverage
ratio of 2. At what price will he receive a margin call if the maintenance margin requirement for
the position is 40%?
A. $58.40
B. $116.80
C. $121.67
86. Determine the party that benefits the most from callable shares when the market price is
greater than the call price.
A. Callable equity holders

B. Callable equity issuing firms
C. Debtholders of callable equity issuing firms
87. Sadin Nigaro is an equity analyst who is evaluating Piron Corp. The firm is a public limited
company that manufactures life boats. Using the data given below, calculate the difference
between the per share market value of equity and the per share book value of equity.
Total assets $575 million
Total liabilities $225 million
Revenue during the yea $101 million
Number of shares outstanding 8,750,000 shares
Market capitalization $393.75 million
A. $5
B. $5.33
C. $5.75
32

88. Which of the following is the most appropriate statement regarding the underutilized
capacity of an industry?
A. Underutilized capacity results in lower pricing power

B. Underutilized capacity results in higher return on capital
C. Underutilized capacity results in excess supply
33

Fixed Income Investments 89-100
89. Which of the following class of commercial paper requires registration with the SEC in the
United States?
A. Securities with original maturity in excess of 1 year

B. Securities with original maturity in excess of 270 days
C. Securities with original maturity in excess of 180 days
90. A bond with a $1,000 par value has a conversion price of $50 and the market price of the
common share is $75. The conversion value is closest to:
A. $925
B. $950
C. $1,500
91. What does an “excess of 100 PSA” prepayment model assumption developed by the Public
Securities Association (PSA) most likely indicates?
A. Prepayments are faster than the benchmark.

B. Prepayments are slower than the benchmark.
C. Prepayments are not correlated with the benchmark PSA value.
92. Which of the following statements is/are correct?
I. For a lender, loans with higher loan to value (i.e., LTVs) are less risky because the borrower
has more to lose in the event of default.
II. Mortgages to borrowers of lower credit quality, or that have a lower priority claim to the
collateral in the event of default, are called prime loans.
A. II only
B. I & II
C. All of the statements are incorrect.
34

93. In the event of default, who would have the lowest priority of claims?
A. Senior Secured Debt

B. Senior Subordinated Debt
C. Senior Unsecured Debt
94. A bond was issued on January 6th, 2017 at a price of 97 (percentage of par). The par value
was $1,500. The bond is callable in whole on September 7th, 2025 at a price of $103.40. The bond
can most likely be classified under which category?
A. Bermuda style callable bond

B. American callable bond
C. European callable bond
95. A $1,000 par value 5% semi-annual coupon bond has a Macaulay duration of 3.59 years.
Which of the following is correct?
I. If yields increase by 100 basis points, then the bond’s price will drop by approximately 3.59%.
II. If the yields increase by 1%, the bond would need to be held for approximately 3.59 years
before the decrease in price would be offset by the gain in reinvested coupons.
A. I only
B. II only
C. All of the above
96. The duration of a pure discount bond is equal to its time to maturity. Its price is:
A. Greatly affected by changes in interest rates.

B. Minimally affected by changes in interest rates.
C. Not affected by changes in interest rates.
35

97. A $1,000 par value bond with 6% annual coupons matures in 2 years. If the required rate of
return on the bond is 11%, then the current yield on the bond using simple compounding is
closest to:
A. 0.35%
B. 5.78%
C. 6.56%
98. Contingent convertible bonds are debt instruments that:
A. Give bondholders the option to exchange the bond for a specific number of shares of the
issuing corporation's common stock.
B. Give their holders the right to buy the firm's common shares at a given price over a
given period of time
C. Convert from debt to common equity automatically if a specific event occurs.
99. If a firm enters into a repo agreement to sell a 5.75% 10-year bond with a par value of $1
million and a market value of $980,000 for $945,000 and to repurchase it 120 days later for
$955,000, then the repo margin is closest to:
A. -2.55%
B. 2.62%
C. -3.57%
100. A bond has a duration of 5 years and a convexity of 92. Given a 350 bps increase in yield,
the approximate percentage price change of the bond is closest to:
A. -6.23%
B. -11.87%
C. 9.52%
36

Derivatives Investments 101-106
101. Which of the following is/are least likely exchange-traded derivative instruments?
I. Futures
II. Forward
III. Options
IV. Swaps
A. I & III only

B. II & IV only
C. I, II & IV only
102. The exercise value of a put option at expiration:
A. Will be positive if the underlying asset price is less than the exercise price.
B. Will be positive only if the underlying asset price is greater than the exercise price.
C. Will be negative if the underlying asset is greater than the exercise price.
103. Calculate the payoff of a fiduciary call option if the spot price is $38, the strike price is $31,
and the payoff on the riskless bond is $2.
A. $7
B. $9
C. $8
104. Consider a call option with a premium of $21 and a strike price of $198. What is the
maximum possible profit for the writer of the call?
A. $177
B. $198
37

105. Doug Beckham is an options trader for Galanga Bank and buys a $100 call option with an
$11 option premium. Calculate the breakeven price for the option if the current price of the
underlying is $120.
A. $109
B. $131
C. $111
106. Which of the following derivative contracts may expose the owner of the contract to default
risk?
I. Futures
II. Forward
III. Options
IV. Swaps
A. II & IV only
B. I, II & IV only
C. I, II, III & IV
38

Alternative Investments 107-112
107. Which of the following is most likely to be (a) key reason(s) for investing in real estate?
I. Potential to provide an inflation hedge if rents can be adjusted quickly for inflation.
II. Prospect that multiple-year leases with fixed rents for some property types may lessen cash
flow impact from economic shocks.
III. Potential for competitive long-term total returns driven by both income generation and
capital appreciation.
A. All of the above

B. I & III only
C. II & III only
108. Strategies that use technical analysis to identify companies that are under and overvalued
and to ascertain relationships between securities are known as:
A. Fundamental value.
B. Quantitative directional.
C. Fundamental growth.
109. Which of the following statement(s) are most likely to be correct with regard to typical
contemporary hedge funds?
I. They have high investment restrictions and have a goal of generating high returns, either in
an absolute sense or over a specified market benchmark.
II. They are set up as private investment partnerships open to a limited number of investors.
III. They have an aggressively managed portfolio of investments across asset classes and regions
that is leveraged and/or use derivatives.
A. I & II only
B. II & III only
C. All of the above
39

110. Capital provided by Venture Capital (VC) funds to companies that are prepared to go
public and that represents a bridge between the expanding company and the IPO is known as:
A. Early stage venture capital.

B. Expansion venture capital.
C. Mezzanine venture capital.
111. Which of the following is/are (a) benefit(s) of a trade sale as a form of exit strategy pursued
by private equity portfolio managers?
I. An immediate cash exit for Private Equity (PE) investors
II. Fast and simple execution
III. Higher attractiveness to the employees of the portfolio company
A. I & II only
B. I & III only
C. All of the above
112. Which of the following is/are a source(s) of return for a commodity futures contract?
I. Roll yield
II. Collateral yield
III. Change in Spot prices
A. I & II
B. I, II & III
C. II & III only
40

Portfolio management 113-120
113. BCG Bank has a one month Value at Risk (VaR) of $400 million with the probability of 5%,
which means:
A. One month maximum loss of $400 million will occur 5% of the time.
B. Loss of $20 million will occur one month from now.
C. One month minimum loss of $400 million will occur 5% of the time.
114. Over periods in which returns display volatility, the arithmetic mean return value will be:
A. Higher than the geometric mean return values.

B. Lower than the geometric mean return values.
C. The same as the geometric mean return values.
115. The line that represents the combination of the optimal risky portfolio and the risk-free
assets is known as the:
A. Capital allocation line.

B. Indifference curve.
C. Efficient frontier.
116. Ben Carter, CFA, is an equity analyst and is assigned to discount the net present value
(NPV) of Indo Inc. which has 40% of debt in its capital structure. What discount rate should
Carter use if the after-tax cost of debt is 7%, the risk premium is 11%, the risk-free rate is 2%,
and the Beta of Indo is 0.8?
A. 9.40%
B. 9.28%
C. 10.80%
41

117. Which of the following statements is most likely accurate, on an absolute basis, if the stock
beta is smaller than 1?
A. Expected return of stock > Expected return of market

B. Expected return of stock = Expected return of market
C. Expected return of Stock < Expected return of market
118. Which of the following return-generating models uses macroeconomic indicators such as
GDP growth and inflation along with fundamental factors such as earnings and earnings
growth to forecast future value?
A. Revenue model
B. Market model
C. Multifactor model
119. Jasmine Aldo is a freelance fund manager based in Seattle, who was recently asked by a
university to establish a fund which supports the ongoing research on polio disease in Africa.
Which of the following is the most appropriate type of fund for the stated purpose?
A. University endowment fund

B. Hedge fund
C. Foundation fund
120. Which of the following is/are the most likely similarity(ies) between exchange-traded funds
and closed-end funds?
I. Both types of funds are passively managed to match a particular index.
II. In both types of funds, the market price of shares and the net asset value (NAV) can differ
significantly.
III. Both types of funds can be sold and purchased on the open market.
A. III only
B. I & III only
C. I & II only
42

Annex A: Z- table
43

Exam #1 | Questions - Afternoon Session

Time Topic Questions
27 Ethical and Professional Standards 1-18

21 Quantitative Methods 19-32
18 Economics 33-44
36 Financial Reporting and Analysis 45-68
15 Corporate Finance 69-76
18 Equity Investments 77-88
18 Fixed Income Investments 89-100
9 Derivatives 101-106
9 Alternative Investments 107-112
9 Portfolio Management 113-120
180 minutes 120 questions

44

Ethical and Professional Standards 1-18
1. Which of the following statements are components of the CFA Institute Code of Ethics?
I. Act with integrity, competence, diligence, respect, and in an ethical manner with the public,
clients, prospective clients, employers, employees, colleagues in the investment profession, and
other participants in the global capital markets.
II. Preserve the confidentiality of information communicated by clients, prospects or employers

about the investment matters.
III. Practice and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the profession.
A. Only I
B. Only I & III
C. I, II & III
2. David Liam, CFA, manages portfolios for several wealthy clients. Liam met with Mr. Goel,
one of his clients, over lunch. Liam advises Mr. Goel to double his investment in JKF Corp as
the operational restructuring is expected to bring in higher profitability. In order not to violate
Standard V – Investment Analysis, Recommendation and Action, what should Liam most likely
do when he reaches his office?
A. David Liam should identify other clients for whom investment in JKF is suitable and
should inform them about the expected increase in profitability.
B. David Liam should first verify the suitability of the investment and then execute the
order.
C. David Liam should record the details of his meeting and investment recommendation.
45

3. Amir Karimili, CFA, has been very vocal about his views on the CFA® exam testing policies.
Karimili claims that “Because there are a lot of CFA® charterholders, CFA Institute deliberately
fails students to save the prestige of CFA® charter from dilution.” Which of the following is
most accurate about Karimili’s behavior?
A. Karimili has violated Standard VII(A) – Conduct as Members and Candidates in

the CFA® Program.
B. Karimili has violated Standard V(B) – Communication with Clients and
Prospective Clients.
C. Karimili has not violated any standard.
4. When a firm is being verified for Compliance with GIPS, which of the following is a verifier
most likely to do?
I. A verifier must attest that the procedures and processes followed by the firm for performance
presentation are in accordance with GIPS.
II. A verifier should clearly distinguish the composites for which the verification is done and not
done.
A. Only I
B. Only II
C. Both I & II
5. Leena McCaroll and Eric Smith are both friends and work for the same investment
management firm. McCaroll is a CFA® level II candidate. While introducing herself to the
clients, she usually mentions that she expects to pass the CFA® level II exam in June. Eric
Smith, on his business card, mentions that he has passed both level I and II CFA® exams at his
first attempts, which is a fact. Are Leena McCaroll and Eric Smith in violation of any standard?
A. Both Leena McCaroll and Eric Smith are in violation of Standard VII(B) – Reference to
CFA Institute, the CFA Designation and the CFA® Program.
B. Only Leena McCaroll is in violation of Standard VII(B) – Reference to CFA Institute, the
CFA Designation and the CFA® Program.
C. Neither Leena McCaroll nor Eric Smith is in violation of any standard.
46

6. Ravi Mehra is an Indian citizen working in India for the US branch of a Canadian bank.
Referral fees are allowed in the U.S. and in Canada but not in India. What should Ravi Mehra,
CFA, do if his company offers referral fees?
A. Mehra should accept the referral fees and disclose the referral fees.
B. Mehra should accept the referral fees, and there is no requirement to make any
disclosure as referral fees are allowed in US and Canada.
C. Mehra should not accept the referral fees.
7. Aly Nabil, CFA, covers the real estate sector of Middle East. Emar Group, a Real Estate
company in Dubai, has gotten a few phone calls by Nabil who is trying to estimate the value of
the company. Emar runs 878 Hotel in Dubai and recently offered Nabil to have a trip to Dubai
and stay at 878 at the expense of Emar Group. Which of the following is the most appropriate
action that Nabil should take so that he does not violate any standard?
A. Aly should accept the offer and inform his supervisor about the offer.
B. Aly should decline the offer.
C. Aly should accept the offer and mention it in his research report.
8. Laura Haldon, CFA, has been working for a full-service brokerage firm. She recently met with
a client and, after understanding all the requirements, informed him that her firm can provide
the services he needs. Given the abovementioned information, has Haldon violated Standard I
(C) – Misrepresentation?
A. Yes, Haldon cannot make such commitments.

B. No, Haldon is not in violation as this was only an oral communication.
C. No, Haldon is not in violation if her commitment was based on facts.
9. Marco Triaelli, CFA, works for a large bank in New York City. He has recently been arrested
for participating in a non-violent protest against capitalism. Has Triaelli violated any standard?
A. Yes, Triaelli has violated Standard I(D) – Professional Misconduct.

B. Yes, Triaelli has violated Standard IV(A) – Duties to Employer.
C. No, Triaelli has not violated any standard.
47

10. Robert Walker, CFA, decided to buy the stock of Raymond Inc. However, since the stock is
thinly traded, Walker is worried that buying the stock in large volume will result in a price
surge. In order to avoid the surge in price, Walker decides to do the transaction by getting into a
series of block trades. Walker has most likely:
A. Violated Standard II(B) – Market manipulation by getting into a transaction-based

manipulation.
B. Not violated any standard.
C. Violated Standard II(B) – Market Manipulation by getting into an information-based
manipulation.
11. Which of the following is least likely expected from a member with fiduciary responsibility
for a pension plan?
A. The member should make judgments from the perspective of the total portfolio.
B. In the case of a proxy fight, the member should provide support to the sponsor’s
management.
C. The member should always act in the interest of plan participants.
12. Aisun Almas, CFA, has been managing the portfolio of Mrs. Sanem for the past year. Almas
was able to earn good returns for Mrs. Sanem and requested that Mrs. Sanem tell her friends
about the above average returns that she was able to earn on her portfolio. Is Almas violating
Standard III(D) – Performance Presentation?
A. No, Almas is not violating the standard.

B. Yes, Almas is violating the standard as she cannot request that her client talk about the
portfolio performance to others.
C. Yes, Almas is violating the standard as the message does not pass the test of
completeness.
48

13. John Powell, CFA, is a research analyst covering the pharmaceutical sector. Powell is asked
to initiate coverage on a small-cap local pharmaceutical company. Powell writes and publishes
the report, but fails to disclose in the report that his uncle works for the pharmaceutical
company. Has Powell violated the Code and Standards?
A. Yes, Powell has violated the Standard on Disclosure of Conflicts, but not the Standard
on Confidentiality.
B. Yes, Powell has violated the Standard on Disclosure of Conflicts and the Standard on
Confidentiality.
C. No, Powell might not have violated the Code and Standards.
14. Dan Walton, CFA, is a supervisor of a research analyst team at Pioneer Investing. Walton
notices that Eva Peters developed a new model and started trading based on the new model
without testing the model. Walton asks Peters to stop trading immediately. When Walton
enquired further into the situation, he realized that the company has no policy or guidelines for
the testing of new models. What should Walton do in this situation?
A. Walton should report Peters to the Compliance Team.

B. Walton should encourage the firm to develop guidelines for the testing of new models.
C. Walton should fire Peters for not testing the model.
15. Raymond Investing wants to be GIPS compliant by the end of the financial quarter. Which of
the following actions of Raymond Investing will most likely result in non-compliance?
A. Raymond Investing defines its firm as “Investment Management Firm registered with
the SEC.”
B. Raymond Investing makes a separate disclosure of the non-fee-paying account included
in the composite.
C. Raymond Investing makes complete disclosure of all the assets under active
management.
49

16. Which of the following is least likely required to be disclosed according to Standard VI (A) –
Disclosure of Conflicts?
A. Real Estate holdings

B. Beneficial Ownership of Securities
C. Directorship in a company
17. With respect to referral fees, which of the following statements is most likely accurate?
A. A member is required to disclose only the fees he receives.

B. A member is required to disclose only the fees that he pays.
C. A member is required to disclose, both, fees received as well as paid.
18. Martina Hinges, CFA, is a portfolio manager. In her free time, Hinges reviews the
investment of her friend Serena Walls. Hinges did not charge any fees for Walls. According to
the standard of professional conduct, did Hinges violate her duty of loyalty to her employer?
A. No, because Hinges did not charge any fees.

B. No, because this was just a one-time exercise.
C. Yes, because Hinges used her expertise for someone other than her employer.
50

Quantitative methods 19-32
19. Suppose in any given year that the probability of economic growth greater than 7% is 50%,
the probability of growth between 3% and 7% is 35%, and the probaility of growth being below
3% is 15%. The probability of having 2 years of economic growth between 3 and 7% in a row is
closest to:
A. 0.0225
B. 0.1225
C. 0.25
20. A random sample of 100 stocks is selected from a population of 1,000 stocks, and the mean
return of the sample is 97.85. The sampling error of the mean is 8.65. The population mean is
closest to:
A. 89.2
B. 106.5
C. 900
21. If the significance level of a test is 0.05 and the probability of a type II error is 0.25, the power
of the test is closest to:
A. 0.2
B. 0.7
C. 0.75
22. The relative strength index (RSI) is a:
A. Momentum Oscillator.
B. Sentiment indicator.
C. Flow-of-funds indicator.
51

23. An asset pays 13% compounded quarterly. You have the right to reinvest the income at the
same rate, and the maturity is 3 years. How much will the asset be worth at maturity if you
invest $400,000 today?
A. $454,590.40
B. $587,138.71
C. $652,189.40
24. Suppose your portfolio has declined in value from $1,240,000 to $1,114,000 during the year.
The continuously compounded rate of return is closest to:
A. -10.71%
B. 6.21%
C. 12.48%
25. A portfolio's mean annual return and standard deviation are 10% and 9.5% respectively. If
the risk-free rate is 3.5%, then the portfolio's Sharpe Ratio is closest to:
A. 0.72
B. 0.54
C. 0.68
26. A $100,000 face value T-bill is selling for $95,500. There are 180 days until maturity. The T-
bill's effective annual yield is closest to:
A. 9.64%
B. 9.78%
C. 4.7%
52

27. You bought 2 shares of XYZ's stock at $75. At the end of the first year, you bought 3 more
shares at $85, and you sold them all for $82 at the end of the second year. If dividends of $2 and
$4 were paid in the first and second years respectively, then the time-weighted rate of return for
this investment is closest to:
A. 7.4%
B. 8.3%
C. 12.2%
28. As the degrees of freedom increases and the t-statistic approaches the z-statistic, the tails of
the distribution:
A. Become thicker.
B. Become thinner.
C. Do not change.
29. The appropriate test statistic for a test of the equality of variances based on two independent
random samples is the:
A. F-test.
B. t-test.
C. Chi-squared test.
30. A stock's return is 12% with a standard deviation of 25%. The returns are normally
distributed. Using the Z-table given at the end of the document, the probability of a negative
return is closest to:
A. 0.3156
B. 0.6844
C. 0.48
53

31. Suppose an asset will pay $1,500 per year in perpetuity. If the required rate of return is 7%,
then the asset’s value is closest to:
A. $19,260.10
B. $16,050.59
C. $21,428.60
32. The standard error of a sample mean is 0.59, the sample size is 30, and the mean is 13.50. If
the population follows a normal distribution, the standard deviation of the population is closest
to:
A. 0.11
B. 3.23
C. 2.46
54

Economics 33-44
33. In November of 2008, Zimbabwe had an estimated monthly inflation rate of 79.6 billion
percent. If nominal annual GDP increased by 1,000 percent, then:
A. Real GDP also increased.

B. Real GDP declined.
C. The change in real GDP cannot be estimated without knowing the change in wages.
34. Which of the following best describes a market structure with only one buyer?
A. Monopoly
B. Monopolistically competitive market
C. Monopsony
35. For the years 1981, 1982 and 1983, the year to year changes in the Canadian CPI were 10.0,
12.5 and 10.9 percent, respectively. For 1984 and 1985, although prices continued to rise, the
year to year changes declined to 5.8 and 4.3 percent, respectively. The 1984 and 1985 changes
most likely indicate a period of:
A. Disinflation
B. Deflation
C. Stagflation
55

36. A small island nation has the following economic characteristics:
Account (in billions dollars)

Government expenditures 100
Current account balance 1
Consumption 350
Investment 10
Capital depreciation allowance 8
Exports 6
Imports 10
The GDP of this country (in billions dollars) is closest to
A. 456
B. 449
C. 447
37. Consider the following table for a country’s nominal GDP and corresponding GDP deflators.
Year Nominal GDP GDP deflator

1995 290 85
2000 310 90
2005 360 100
2010 342 115
2015 375 118
For the year 2015, its real GDP (in constant 1995 dollars) is closest to:
A. 270
B. 521
C. 318
56

38. If the central bank reduces the reserve requirements and increases net redemptions
(purchases) of treasury securities, then:
A. Banks would decrease acceptance of deposits, and the money supply would decrease.
B. Banks would increase lending activities, and the money supply would increase.
C. Interest rates would rise, and bank lending activities would decrease.
39. A profit-maximizing monopolist should choose an output level and price such that:
A. Marginal revenue equals marginal cost and price exceeds average total cost.
B. Marginal revenue is greater than marginal cost and price equals average total cost.
C. Marginal revenue is greater than marginal cost and price is less than average variable
cost.
40. An analyst gathered the following national data (in thousands of U.S dollars) for a country
for the year 2017:
Exports of goods and services $6,500,000
Investment income received from foreigners $980,000
Imports of goods and services $3,500,000
Payments for purchased foreign financial assets $2,220,000
The country's account balance is closest to:
A. $4,240,000
B. $1,760,000
C. $6,200,000
41. For a manufacturer, if Total revenue is less than Total fixed cost plus Total variable cost (TR
< TFC + TVC), then the most accurate statement is:
A. The firm must shut down in the long run.

B. The firm must shut down if marginal revenue is greater than marginal cost.
C. The firm should shut down immediately.
57

42. Suppose the government is considering policies to address the prevalence of obesity through
increasing gym memberships. With respect to the market for gym memberships, if elasticity of
demand is highly elastic, then it is probable that:
A. Providing a small tax benefit to gym membership purchasers will have a large demand
effect.
B. Providing a large cash subsidy to purchase gym memberships will have little demand
effect.
C. Increasing business taxes on gym operators will have little impact.
43. The aggregate supply curve represents the relationship between the supply of output and
the price level. The distinction between short run and long run aggregate supply is necessary to
allow for differences in:
A. Daily operations and the 5-year planning cycle.

B. Firm’s inability to adjust the capital stock in the short run versus long run.
C. Inflexibility of labor input in the short run.
44. If banking is a competitive industry in which all banks are operating in ranges where they
are facing substantial economies of scale, then we will most likely see:
A. More competitive pricing from smaller banks.

B. Mergers and industry consolidation.
C. Increased marketing spending from smaller banks.
58

Financial Statement Analysis 45-68
45. Financial notes and supplementary schedules include:
I. Subsequent events i.e., events that occur after the balance sheet date
II. Related-party transactions
III. Operating segment’s performance
IV. Business acquisitions and disposals
A. II & IV only
B. II, III & IV only
C. All of the above
46. Which of the following activities is/are most likely to be classified as an operating activity by
a manufacturing company?
I. Income tax expense
II. Purchase of a factory
III. Dividends to preferred shareholders
A. I only
B. I & III only
47. When the auditor determines that the financial statements depart from accounting standards
and are not fairly presented, he/she issues:
A. An unqualified audit opinion

B. An adverse audit opinion
C. Qualified audit opinion
59

48. Which of the following activities is/are most likely to be classified as an investing activity by a
manufacturing company?
I. Sale of other entities’ equity and debt securities
II. Issuance of preferred stock
III. Sale of equipment owned by the company
A. III only
B. I & III only
49. Thermax Steel Company had a weighted average of 60,000 shares of common stock
outstanding. The company has only one potentially dilutive security: USD 25,000 of 4 percent
convertible bonds, convertible into a total of 5,000 shares. The company reported net income of
USD 100,000 for the year ended on 30th June 2016. The tax rate is 30%. The diluted EPS of the
company is closest to:
A. USD 1.67
B. USD 1.55
C. USD 1.69
50. The balance sheet and the income statements are most likely linked through the:
A. Retained earnings component of owners’ equity

B. Net profit in the income statements
C. Accrued income and accrued expenses
60

51. In the United States, listed companies are most likely to provide the following details in
Management’s Discussion & Analysis:
I. Significant events and uncertainties that affect the company’s liquidity, capital resources, and
results of operations
II. Information about the effects of inflation, changing prices, or other material events and
uncertainties that may cause the future operating results and financial condition to material
depart from the current reported financial information
III. Information about off-balance sheet obligations and about contractual commitments
IV. Critical accounting policies that require management to make subjective judgments
A. I & II only
B. I, II & IV only
C. All of the above
52. XYZ coffee limited has provided the following information to the equity analysts for the
year ended on December 31st, 2016.
Beginning retained earnings (in millions) USD 2,845

Estimated distributions to equity shareholders (in millions) USD 275
Estimated retained earnings (in millions) USD 3,750
The estimated net income (in millions) is closest to:
A. USD 630
B. USD 1,180
C. USD 905
53. A document that shows all business transactions by account is known as:
A. Trial balance and adjusted trial balance

B. Journal entries and adjusting entries
C. General ledger and T-accounts
61

54. ABC Rubber limited has provided the following information to an equity analyst for the
year ended on December 31st, 2016.
Liabilities at the end of the year (in millions) USD 9,254

Beginning retained earnings (in millions) USD 5,475
Distributions to owners (in millions) USD 1,375
Expenses during the year (in millions) USD 10,976
Contributed capital at the end of the year (in millions) USD 975
Assets at the end of the year (in millions) (in millions) USD 12,386
The estimated revenue (in millions) is closest to:
A. USD 6,283
B. USD 9,033
C. USD 8,233
55. On June 1st, 2017, Hall Street Journal received a cash payment of USD 1,000 for a two-year
subscription to the monthly journal. This transaction would most likely result in which of the
following on June 1st, 2017?
A. Cash increased by USD 1,000 and unearned fees increased by USD 1,000
B. Cash increased by USD 1,000, unearned fees increased by USD 500 and income
increased by USD 500
C. Cash increased by USD 1,000 and income increased by USD 1,000
62

56. On April 1st, 2017, XYZ engineering limited sells equipment to ABC limited for USD 25,000.
The payment is due in 45 days. No cash payment is made by the customer on April 1st, 2017.
The cost of the equipment is USD 20,000. This transaction would most likely result in which of
the following on April 1st, 2017 in the books of accounts of XYZ engineering limited?
A. Inventory decreased by USD 20,000 and cost of goods sold increased by USD 20,000.
Unearned revenue increased by USD 25,000 and accounts receivable increased by USD
25,000
B. Inventory increased by USD 25,000 and sundry creditors increased by USD 25,000.
C. Inventory decreased by USD 20,000 and cost of goods sold increased by USD 20,000.
Revenue increased by USD 25,000 and accounts receivable increased by USD 25,000
57. Which of the following statement(s) is/are true with regard to standard-setting bodies and
regulatory bodies?
I. Standard setting boards are typically private sector, self-regulated organizations with board
members who are experienced accountants, auditors, users of financial statements, and
academics
II. Regulatory bodies are governmental entities that have the legal authority to enforce financial
reporting requirements
III. The regulatory bodies often retain the legal authority to establish financial reporting
standards and can overrule the standard-setting bodies
A. I & II only
B. II & III only
C. All of the above
58. Which of the following entities of the IFRS Foundation is responsible for reviewing
accounting issues that arise in the application of IFRS which are not specifically addressed by
IFRS?
A. IFRS Advisory Council

B. IFRS Interpretations Committee
C. The Financial Accounting Foundation
63

59. The principles of securities regulation issued by the International Organization of Securities
Commissions (IOSCO) are based upon the following core objectives:
I. Reducing systematic risk
II. Ensuring that markets are fair, efficient and transparent
III. Establishing high professional standards for the securities markets globally
IV. Protecting investors
A. I, II & III only

B. I, II& IV only
C. I, III & IV only
60. The net income of Baskin Ice Creams for the year ended December 31st, 2016 was USD
1,750,000. The following are the details of common stock of the company.
Shares outstanding on January 1st, 2015 $96,000

Shares repurchased on May 1st, 2015 $16,000
Shares issued on August 1st, 2015 $40,000
Shares issued on November 1st, 2015 $6,000
Shares outstanding on December 31st, 2015 $126,000
The company declared 3 for 1 stock split on March 1st, 2016 which took effect on October 1st,
2017. If the company declared and paid a USD 450,000 dividend on preferred stock, the
company’s basic EPS is closest to:
A. 5.99
B. 12.62
C. 4.21
64

61. Which of the following information sources/documents/forms/files are required to be filed

by companies periodically as per the SEC?
I. Form 10-K, 20-F, and 40-F
II. Annual report
III. Form 10-Q and 6-K
A. All of the above

B. I & III only
C. I & II only
62. Which of the following form is filed by SEC registrants to report material corporate events
on a more current basis?
A. Form 8-K
B. Form 11-K
C. Forms 3, 4 and 5
63. As per the Conceptual Framework (2010) of IFRS, which of the following characteristic(s)
enhance the usefulness of relevant and faithfully represented financial information?
I. Verifiability
II. Comparability
III. Timeliness
IV. Understandability
A. I , II & III only

B. II , III & IV only
C. All of the above
65

64. The amount at which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction is referred to as:
A. Present value.
B. Settlement value.
C. Fair value.
65. Which of the following is/are the barrier(s) to the creation of a single coherent framework for
effective financial reporting?
I. Standard-setting approaches
II. Consistency
III. Measurement
IV. Valuation
A. I, II & III only

B. I, III& IV only
C. II, III & IV only
66. Which of the following statement(s) is/are true with regard to standard-setting approaches?
I. A principles–based approach provides a narrow financial reporting framework with strict

specific guidance on how to report a particular transaction.
II. Rules-based approaches require the preparers of financial reports and auditors to exercise
considerable judgement in financial reporting.
III. An objectives-oriented approach combines the principles-based approach and rule-based

approach by including both a framework of principles and appropriate levels of
implementation guidance.
A. I & II only
B. II& III only
C. III only
66

67. XYZ equipment limited has made the following inventory purchases during the first quarter
of 2017.
Period Number of units Price per unit

January 108 GBP 45
February 94 GBP 48
March 86 GBP 46
During the quarter, the company sold 200 units at GBP 50 per unit. The company had 5 units of
inventory at the cost of GBP 49 per unit on hand at the beginning of the quarter. The company
has 93 units at the end of the quarter and specifically identifies that 86 were those procured in
the month of month of March and balance were purchased in the month of January 2017. What
is the gross profit of the company during the first quarter of 2017?
A. GBP 849
B. GBP 698
C. GBP 719
68. Exactly one year ago, ABC Corp bought a corporate bond for $1,000 and classified it as
available for sale. It collected $40 in coupons, and the bond is now worth $1,020. What should
ABC Corp show for this bond on its balance sheet?
A. $1,000
B. $1,020
C. $1,060
67

Corporate Finance 69-78
69. Veko Plastic is a plastics manufacturing company that has the maximum capacity to
manufacture 200,000 plastic bags per year. Currently, Veko operates at 60% of its maximum
capacity in order to generate revenues of $600,000. Without taking into account fixed financing
costs, calculate the operating breakeven quantity of bags Veko should produce.
Revenue $600,000
Total Variable cost $400,000
Fixed Operating Cost $90,000
Fixed Financing Cost $25,000
A. 30,000 bags
B. 90,000 bags
C. 54,000 bags
70. A project has the following characteristics:
Initial Investment $75,000

Expected post-tax Cash Flow (each year) from year 1 to
year 5 $22,000
Target Debt/Equity Ratio: 0.5
Cost of Equity 12.5%
Cost of Debt 11%
Marginal tax rate 40%
Effective tax rate 30%
The Net Present Value (NPV) of the project is closest to:
A. $7,239
B. $9,365
C. $6,515
68

71. Organic Foods Inc. is considering a new project in the health-based packaged foods segment.
An analyst has gathered information about a listed company named Health Farms Inc. which is
exclusively into the health-based packed foods business. The following information is available:
Organic Foods
Inc
Debt / Equity 1.5
Marginal Tax Rate 30%
Debt Yield 14.285%
Health Farms
Inc
Debt / Equity 2.0
Marginal Tax Rate 40%
Equity Beta 1.2
Market Data
Risk-Free rate 5%
Market Risk Premium 7%
The weighted average cost of capital for the project is closest to:
A. 12.8%
B. 11.1%
C. 13.2%
69

72. Below are the details of the Operating cycle and Cash Conversion cycle of Citrus Corp for
the last 3 years.
2013 2014 2015

Operating Cycle (days) 52 57 61
Cash Conversion Cycle (days) 31 34 36
The trend in the operating and cash conversion cycles most likely indicates that the:
A. Liquidity of Citrus Corp has improved over the last 3 years.

B. Payables of Citrus Corp are stretched in the last 3 years.
C. Receivable Collection of Citrus Corp has slowed down over the past 3 years.
73. Raman Enterprises and Madan Enterprises are operating in the same industry segment of
locks manufacturing. Going forward, there is an expectation of improvement in the market
environment and a 20% increase in sales is expected for all the players in the industry. Both
companies have identical scale of operations with total assets deployed of $400,000 and unit
sales of 100,000. They both sell their products at $4 per unit incurring a variable cost of $2 per
unit and fixed costs of $50,000.
Raman Enterprises finances 40% of its assets from equity and 60% from debt. Madan
Enterprises finances its operations 100% from equity. The interest rate on debt for both the
companies is 8%.
The Degree of Total Leverage for the two companies is closest to:
A. Raman Enterprises: 1.73; Mandan Enterprises 1.53

B. Raman Enterprises: 1.33; Mandan Enterprises 1.53
C. Raman Enterprises: 1.53; Mandan Enterprises 1.33
70

74. Rachel Green is discussing corporate governance best practices with her team. Following are
two of her statements regarding corporate governance.
I. To avoid wasting shareholder’s resources, before hiring an outside consultant, the Board of
Directors should get management approval.
II. A higher number of representatives on the Board of Directors is better for shareholders as the
shareholder’s interest will be fairly represented.
Which of the aforementioned statement(s) is/are most likely accurate?
A. Both statements are correct.

B. Only one statement is correct.
C. Both statements are incorrect.
75. Following is the data of Blue-Chip Co.
Target Capital Structure: Debt: 30%; Preference Shares: 15%; Equity: 55%
The price of their bonds on a fair value of $1,000 is $955. The company is paying a 6% coupon
for 10 years.
Equity dividends are expected to be $2.50 in the next year and will grow at 5%. The current
market price of the stock is $25.
The preferred stock with a par value of $100 pays a dividend of 7% and is currently selling at
$95.
If the marginal tax rate is 40%, calculate the after-tax cost of debt and after-tax cost of preferred
stock.
A. Debt: 6.63%; Preferred Shares: 7.01%

B. Debt: 3.11%; Preferred Shares: 4.42%
C. Debt: 3.98%; Preferred Shares: 7.37%
71

76. Carton Co. expects to produce 50,000 units of watches for the following year. The selling
price per watch is $200, variable cost per watch is $100, fixed costs are $3,500,000, and interests
are $750,000. Calculate the degree of operating and the degree of total leverage for Carton Co.
A. DOL: 3.33; DTL: 6.67

B. DOL: 0.30; DTL: 0.15
C. DOL: 1; DTL: 1.25
72

73

Equity Investments 77-88
77. An investor short-sells a stock at $90. A few days later, the stock is now trading at $72. What
is the most appropriate action that the investor must take if he wants to hold on to his
investment as long as the price does not go back up to $80?
A. Stop order to buy at $80

B. Stop order to sell $80
C. Limit order to buy at $80
78. The financial details of a financial transaction are given below:
Market Price per share on June 30th, 2015 $28

Number of Shares Purchased 4,000
Ending Share Price on June 30th, 2016 $30
Assuming the there are no transaction and borrowing costs, calculate the rate of return on a
margin transaction for an investor who purchased the stock on June 30th, 2015 using an initial
margin requirement of 35% and the stock price at which the investor would have received a
margin call given a 25% margin requirement.
A. Return: 7.14%; Margin Call Price: $26.00

B. Return: 20.41%; Margin Call Price: $24.27
C. Return: 20.41%; Margin Call Price: $26.00
74

79. A stock's limit order book is as follows:
Bid Size Limit Price (£) Offer Size

800 26.15
700 26.25
600 26.30
26.40 300
26.45 200
26.65 300
An investor places a new sell limit order for 150 shares at £26.35. What is the limit order said to
be?
A. Making a new market

B. Behind the market
C. An iceberg order
80. Which of these is most likely the major focus of a portfolio manager under the efficient
market hypothesis?
A. Diversify the portfolio

B. Follow a strict buy and hold strategy
C. Reduce the systematic risk to the minimum
75

81. Assume that a total return index and a price index for the same group of stocks start with
the same value. While comparing the two indices, the year-end total return index will most likely
be:
I. Greater than the price index if the price index falls and lower than the price index if the price
index rises.
II. The same as the price index if the constituent stocks do not pay dividends
III. Greater than the price index if the some of the constituent stock pay dividends.
A. I only
B. II & III only
C. II only
82. Portfolio managers in efficient markets should most likely not:
A. Limit transaction costs to the minimum.

B. Devote more time working on security selection.
C. Devote more time to better understand their clients’ preferences of risk.
83. In a semi-strong efficient market, investors must consider:
A. An enhanced indexing strategy that is dependent on trading patterns.

B. Active portfolio management strategies.
C. Passive portfolio management strategies.
84. Dylan Farmer is an active portfolio manager who uses an industry rotation strategy. How is
he most likely to treat stocks in a cyclical industry during a contraction phase?
A. Maintaining the target weight of the industry

B. Overweight the industry
C. Underweight the industry
76

85. Which of the following investors in the U.S. stock market would most likely earn the highest
return in their local currency in the event of a depreciating dollar and increasing U.S. equity
prices?
A. A non-U.S. investor who reinvests dividends

B. A U.S. investors who reinvests dividends
C. A non-U.S. investor who does not reinvest dividends
86. Which of these best describes the shape of the slope of the experience curve which illustrates
the cumulative units of production relative to the direct cost of production?
A. Upward sloping
B. Upward sloping in early years and downwards sloping in later years
C. Downward sloping
87. Identify the type of equity wherein the company needs to pay a scheduled dividend that has
been missed prior to paying any dividend to common equity holders.
A. Convertible preference shares

B. Cumulative preference shares
C. Participating preference shares
88. An analyst gathered the following information for Duckworth Co.
Expected dividend payout ratio 45%

Expected dividend growth rate 8%
Required rate of return 14.2%
Expected earnings per share next year $5.8
The fair value of Duckworth’s shares is closest to:
A. $42.1
B. $38.9
C. $48.6
77

Fixed Income Investments 89-100
89. Which of the following bond does not pay periodic coupon payments?
I. Pure discount bonds
II. U.S. Treasury Bills
III. Plain vanilla bonds
A. I only
B. I & II only
C. I, II & III
90. Debt instruments that allow an investor to take possession of an asset and pay for it over
time are most likely known as:
A. Equipment trust certificates.

B. Collateral trust bonds.
C. Mortgage-backed securities.
91. Which of the following statements is/are accurate?
A. The ‘Actual/Actual’ convention is commonly used for the calculation of days in

government bonds, and the ‘30/360’ convention is commonly used for the calculation of
days in corporate bonds.
B. The ‘Actual/Actual’ convention is commonly used for the calculation of days in
corporate bonds, and the ‘30/360’ convention is commonly used for the calculation of
days in government bonds.
C. Both the ‘Actual/Actual’ and ‘30/360’ are commonly used for the calculation of days in
both corporate bonds and government bonds.
78

92. Matrix pricing is most likely used for determining the price of:
I. New bonds
II. Existing bonds
III. Inactive bonds
A. I only
B. I & III only
C. I, II & III
93. A bond selling for par currently has a 9% yield. If the bond price increases to 102.5 when
yields fall 10 basis points and the price falls to 96 when yields rise by 10 basis points, then the
bond's effective duration is closest to:
A. 2.85
B. 3.25
C. 32.5
94. As compared to shorter maturity bonds, similar longer maturity bonds tend to have:
I. Less credit risk.
II. Wider spreads.
A. II only
B. II & II
79

95. Securitization, a process by which financial assets are purchased by an entity that then issues
securities supported by the cash flows from those financial assets, has the following primary
benefits, except:
A. A reduction in funding costs for firms selling the financial assets to the securitizing
entity the financial assets to the securitizing entity
B. An increase in credit rating from banks and other financial institutions
C. An increase in the liquidity of the underlying financial assets
96. A $1,110 premium bond has a modified duration of 4.562. In response to a 0.5% increase in
YTM, the price of the bond should most likely:
A. Fall by approximately 2.281%

B. Rise by approximately 2.281%.
C. Fall by approximately 0.2281%.
97. A repurchase agreement is similar in nature to which of the following:
A. A barter transaction
B. A collateralized loan
C. An auction
98. Which of the following are most likely characteristics of Eurocommercial paper?
I. Unsecured, short-term loan
II. Issued in the international market
III. Issued in the corporation’s domestic currency
A. I & II only
B. II & III only
C. All of the above
80

99. The most frequently used benchmark for floating-rate notes is the:
A. G-spread.
B. Libor.
C. I-spread.
100. Given the following sequence of spot rates:
S1 5.5%
S2 6.85%
The forward rate for one period, one period from now, 1y1y, is closest to:
A. 1.28%
B. 1.35%
C. 8.22%
81

Derivatives Investments 101-106
101. Which of the following statement(s) is/are most likely to be correct with regard to
derivatives?
I. Derivatives are similar to insurance in that both allow for the transfer of risk from one party to
another
II. Derivatives derive its performance from the performance of an underlying asset
III. The writer of an options contract is referred to as the short because he/she holds a short
position
A. II & III only

B. I, II & III
C. II only
102. Which of the following is not a characteristic(s) of exchange-traded derivatives markets?
A. Standardization of contract terms and conditions

B. Lower degree of regulation and oversight
C. Transparency
103. The value of a European call at expiration is the exercise value:
A. Which is the greater of zero or the value of the underlying minus the exercise price.
B. Which is the greater of zero or the exercise price minus the value of the underlying.
C. Which is the greater of the exercise price minus the value of the underlying or the value
of the underlying minus the exercise price.
82

104. Stocks of Orange Corp. are trading at $60 and the strike price of 6-month put options are
$40. What is the price of the call option if the price of 6-months put option on Orange Corp. is $2
and the risk free rate is 8%?
A. $23.51
B. $33.32
C. $29. 81
105. From the put-call parity, the long bond is equivalent to:
A. Long asset, short put, long call

B. Long asset, long put, short call
C. Short asset, long put, long call
106. The value of an asset is GBP 1.521, and the selling price of a put option is GBP 0.121 with an
exercise price of GBP 1.552. Determine the break-even price of the asset at expiration if the
protective put strategy is used by the investor?
A. GBP 1.400
B. GBP 1.673
C. GBP 1.642
83

Alternative Investments 107-112
107. Which of the following is/are most likely to be characteristic(s) of alternative investments?
I. Low level of regulation
II. High use of leverage
III. High correlation to systematic risk
A. I & II
B. II & III
C. All of the above
108. Strategies that focus on the relative value between a variety of asset-backed securities and
mortgage-backed securities and seek to take advantage of mispricing across different asset-
backed securities are known as:
A. Fixed income convertible arbitrage

B. Fixed income asset-backed
C. Activist
109. XYZ hedge fund charges a management fee of 2% based on assets under management at
year-end and a 20% incentive fee. The initial investment is GBP 125 million, and the fund earns
40 percent return in its first year. What are the fees earned by XYZ Hedge fund if incentive fee is
computed based net of management fee? Assume management fees are calculated using end-of-
period valuation.
A. GBP 5.8 million

B. GBP 13.5 million
C. GBP 12.8 million
84

110. Which of the following is/are least likely to be characteristic(s) of attractive target companies
for Leveraged buyouts (LBO)?
I. High leverage
II. Significant amount of fixed assets
III. Depressed stock price
A. I only
B. II & III only
C. All of the above
111. Which of the following is NOT a terminology used to identify venture capital investment at
different stages of a company's life?
A. Formative Stage
B. Middle Stage
C. Later Stage
112. XYZ hedge fund charges a management fee of 2% based on assets under management at
year-end and a 20% incentive fee. The following are the value of the investment at the end of
each year, net of fees.
Initial investment GBP 125 million

End of the 1st year GBP 175 million
End of the 2nd year GBP 150 million
End of the 3rd year GBP 185 million
What are the fees earned by XYZ Hedge fund in the 3rd year if incentive fees and management
fees are computed independently? Assume management fees are calculated using end-of-period
valuation, and the fee structure includes the use of a high water mark.
A. GBP 7.52 million

B. GBP 5.7 million
C. GBP 8.40 million
85

Portfolio management 113-120
113. A portfolio had the following annual rates of return:
2013 5%
2014 12%
2015 -2%
The portfolio’s manager states that the return for the period is 5%. The manager is referring to
the:
A. Holding period return.

B. Arithmetic mean return.
C. Geometric mean return.
114. The difference between the gross return and the net return of a portfolio most likely results
from:
A. Accounting methods
B. Fees
C. Taxes and regulations
115. An analyst gathered this information about two stocks:
Variance of returns Correlation coefficient

Stock A 1.5% 0.4
Stock B 2.0%
What is the covariance between A and B?
A. 0.043
B. 0.00012
C. 0.0069
86

116. Four portfolios have the following expected returns and risk:
Portfolio Expected return Standard deviation

A 5% 12%
B 7% 15%
C 9% 15%
D 8% 16%
A risk-averse agent choosing from these portfolios would most likely select:
A. Portfolios A and C
B. Portfolios A, C and D
C. Portfolios A and D
117. Which of the following statements about correlation is correct?
A. If the correlation coefficient between two assets is 0, a zero variance portfolio could be
constructed.
B. Potential benefits from diversification arise when correlation is less than +1.
C. Potential benefits from diversification arise when correlation is less than 0.
118. An analyst gathered this information about two stocks:
Time period Stock A return Stock B return

1 15% 12%
2 -10% 2%
3 -2% 15%
4 22% 12%
What is the covariance between A and B?
A. 45.91
B. 42.21
C. 43.21
87

119. Which of the following is LEAST likely a characteristic of open-ended mutual funds?
A. Open-end funds accept new investment money and issue additional shares to existing or
new investors. Therefore, the number of outstanding shares changes after every new
investment.
B. In open-end funds, new shares are created and sold at a premium or a discount to net
assets values depending on the demand for the shares.
C. An open-end structure makes it easy to grow in size but creates pressure on the portfolio
manager to manage the cash inflows and outflows.
120. Which of the following is the first-order risk measure of the change in the option price for a
change in the volatility of the underlying asset?
A. Gamma
B. Rho
C. Vega
88

Annex A: Z- table
89

Exam 1 - Questions

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Exam #1 | Questions - Morning Session

Time Topic Questions

27 Ethical and Professional Standards 1-18

180 minutes 120 questions

Ethical and Professional Standards 1-18

A. Only cash considerations should be disclosed.

II. There is no default risk on the investments made by the fund.

Which of the statements is a violation of Standard I(C) – Misrepresentation?

A. Not violated any standard in mentioning this.

A. Increasing the intervention of the government in the investment industry

A. No, Lively should not trade in her mother’s account at all.

A. Scott should publish the report.

A. No, as there has been no significant change in Anniston’s financial situation.

A. Not violated Standard VI(A) – Disclosure of Conflicts by not disclosing the

A. Violating Standard I (C) – Misrepresentation.

Quantitative methods 19-32

19. Which of the following are sentiment indicators?

I. Relative strength index (RSI)

II. CBOE Volatility Index

III. Short interest ratio

IV. Put/call ratio

V. Moving average convergence-divergence (MACD)

VI. Stochastic oscillator

I. The expected value is always positive.

II. The probabilities of success vary over the trials.

III. The trials are independent.

I. Mean > Median

III. Approximately 95% of all observations fall in the interval µ+/-2σ

A. They can be exchanged for a fixed quantity of gold.

A. Price levels will decrease by 11%.

A. Leftward shift in the electricity supply curve.

A. Shift aggregate supply to the left resulting in higher GDP.

A. Overrepresentation of the purchases made by farmers and other rural residents.

Financial Statement Analysis 45-68

A. Zero revenues, zero expenses, and zero income

I. The definition of income encompasses both revenues and gains

II. Administrative expenses

III. Research and development expenses

IV. Interest expenses

A. I, II & III only

A. Percentage-of-completion method under both IFRS and US GAAP.

II. Sales returns and allowances

III. Allowance for Doubtful Accounts

A. I & III only

Price per unit (in

January 108 GBP 45

Shares outstanding as on 1st Jan 2016 96,000

Shares repurchased on 1st May 2016 16,000

Shares issued on 1st August 2016 40,000

Shares issued on 1st Nov 2016 6,000

Shares outstanding on 31st Dec 2016 126,000

A. Sarbanes – Oxley Act of 2002

I. The standard does not apply

II. No discussion until implementation

III. The impact of adoption is discussed

IV. Management is still evaluating the impact

60. The following is the income statement information of Gaboli technologies:

Revenues USD 950,000

Cost of goods sold USD 600,000

Other operating expenses USD 110,000

Interest expense USD 90,000

Tax expense USD 75,000

The gross profit of the company is closest to: