Mock Exam 1 - Solutions

Edge
FIT – CFA FOUNDATIONS

MOCK EXAM 1 - SOLUTIONS
120 marks
Time allocation: 120 minutes

CHAPTER 1: QUESTIONS 1-6
CHAPTER 2 - 3: QUESTIONS 7 - 18
CHAPTER 4 -8: QUESTIONS 19 - 42
CHAPTER 9 – 12: QUESTIONS 43 - 66
CHAPTER 13 – 15: QUESTIONS 67 - 90
CHAPTER 16 - 17: QUESTIONS 91- 96
CHAPTER 18 – 20: QUESTIONS 97- 120
No: Question: Solution Explanation

1. The financial services industry exists to provide a link B The financial services industry exists to
between provide a link between savers/lenders/
providers of capital who have money to
A. Savers and Lenders invest and spenders/borrowers/users of
B. Savers and Borrowers capital who need money.
C. Savers and Providers

2. Which of the following statements is most likely A Financial intermediaries act as middlemen
correct? between savers and spenders.

A. Financial intermediaries act as middlemen
between savers and spenders.
B. Financial intermediaries act as middlemen
between savers and lenders.
C. Financial intermediaries act as front man between
savers and spenders.

3. Which of the following statements is most likely B Financial markets and the investment
correct? industry help allocate capital, a scarce
resource, to the most productive uses, which
A. Financial markets and the investment industry fosters economic growth and benefits
help distribute capital to the most productive uses, society.
which promotes only corporate and investment
individuals’ growth.
B. Financial markets and the investment industry
help allocate capital to the most productive uses,
which fosters economic growth and benefits
society.
C. Financial markets and the investment industry
help allocate capital to the most productive uses,
which fosters economic growth.

EDGE FIT – MOCK EXAM 1 – CFA FOUNDATIONS 2018/2019
4. The investment industry provides numerous benefits C The investment industry provides numerous
to the economy, excluding: benefits to the economy, including the
efficient allocation of scarce resources,
A. The efficient allocation of common resources. better information about investment
B. Liquidity. opportunities, products and services that are
C. Products and services that are appropriate for appropriate for providers and users of
providers and users of capital. capital, and liquidity.

5. Which of the below is not a benefit for investors in a B The benefits for investors of a well-
well-functioning investment industry: functioning investment industry include a
broad range of investment products and
A. It provides a broad range of investment products services that meet their needs, competitive
and services that meet their needs. markets that provide liquidity and keep
B. Passive markets that provide liquidity. transaction costs low, timely and efficient
C. It keeps transaction costs low. disclosure of information, and the ability to
modify their risk exposures.

6. Which of the below is not a benefit for investors in a A The benefits for investors of a well-
well-functioning investment industry: functioning investment industry include a
broad range of investment products and
A. Timely and efficient disclosure of information. services that meet their needs, competitive
B. The ability to modify their risk exposures. markets that provide liquidity and keep
C. Insider trading. transaction costs low, timely and efficient
disclosure of information, and the ability to
modify their risk exposures.

7. Ethical actions are: A Ethical actions are those actions that are
perceived as beneficial and conforming to
A. Those actions that are perceived as beneficial and the ethical expectations of society.
conforming to the ethical expectations of society.
B. Those actions that are perceived as a balance
between good and bad behavior.
C. Those actions that are perceived as beneficial and
conforming to the ethical expectations of managers
and stakeholders.

8. Which of the below statements is least likely to be a A An ethical decision-making framework will:
component of the Code of Ethics? help a decision maker see the situation from
multiple perspectives and pay attention to
A. Promote the integrity of capital markets aspects of the situation that may be less
B. Reporting of Private Equity Investments evident with a short-term, self-focused
C. Maintain and improve professional competence perspective.
9. Applying the Ethical Framework is best described as: A Applying the Ethical Framework:

A. Laws, regulations, professional standards, and Laws, regulations, professional standards,
codes of ethics can guide ethical behavior, but and codes of ethics can guide ethical
individual judgment is a critical ingredient in behavior, but individual judgment is a
making principled choices and engaging in critical ingredient in making principled
appropriate conduct. choices and engaging in appropriate
B. Laws, regulations and the codes of ethics can guide conduct.
ethical behavior, but individual judgment is a
critical ingredient in making principled choices
and engaging in appropriate conduct.
C. Laws, regulations, professional standards, and
codes of ethics are set rules for ethical behavior,
but individual judgment is a critical ingredient in

making principled choices and engaging in
appropriate conduct.

10. Tiffany Ruth works for Sun Inc. as asset manager for A Ruth has a duty of care to the client, which in
the pension fund of HighKey. Ruth’s duty of care is to: this case is the trustees and participants in
the pension plan assets, not the management
A. The trustees and participants in HighKey’s pension or shareholders of the corporation that she
plan works for.
B. The management of Sun Inc.
C. The shareholders of Sun Inc.

11. Which of the below declarations is not part of the Code A Option A is not a requirement of the Code of
of Ethics? Ethics, but a requirement under the CFA
Standards of Professional Conduct.
A. Members must disclose all conflicts of interest to
the client, prospective clients, and employer in
order to achieve unbiased and objective
investment recommendations.
B. Members must act with integrity, competence,
diligence, respect, and in an ethical manner when
dealing with the public, clients, prospective clients,
employers, employees, and fellow professionals in
the global capital markets.
C. Members must use reasonable care and exercise
independent professional judgment.

12. Which of the following is included as part of the Code A This is part of the Code of Ethics. The others
of Ethics? are part of the Standards of Professional
Conduct.
A. Practice and encourage others to practice in a
professional and ethical manner that will reflect
credit on members and their profession.
B. Members and candidates shall not engage in any
conduct that compromises the reputation or the
integrity of the CFA Institute or the CFA
designation or the integrity, validity, or security of
the CFA examinations.
C. Members and Candidates must deal fairly and
objectively with all clients when providing
investment analysis, making investment
recommendations, taking investment action, or
engaging in other professional activities.

13. Which of the following statements is most likely A Another important aspect of this trust is
correct? Trust is important in the financial industry that as apposed to other industries, the
because: products supplied by the investment
industry are intangible. The client needs
A. The products supplied are mainly intangible
to trust that what they are being told by
B. Investment professionals handle money
C. Investment professional give out investment
the investment professional is true.
advice

14. Todd Markey, CFA has just joined a leading research C Todd is most likely to be influenced by his
company. He is very excited about his new position and new boss.
is very eager to impress. Which of the following
situational inferences is most likely to have the greatest
influence on him?

A. Clients
B. Fellow team members
C. New boss
15. Which of the following statements are least likely C On the reverse side, when investors lose
correct? The result of a loss of trust in the investment trust in their investment professionals, they
industry is: will be less likely to accept risks and will
demand a higher return on their
A. Investors less likely to accept risk investments. They are likely to invest
B. Higher expected returns elsewhere or perhaps not invest at all. This
C. Investors will move towards fixed-income will result in less funding available to
securities borrowers that would increase the costs of
borrowing. This would, in turn, have a
negative impact on the overall economy.

16. Which of the following statements is most accurate? C New laws designed to reduce or eliminate
conduct that adversely affects the markets
A. Increased regulations are the most useful means to can create opportunities for different, but
reduce unethical behavior by market participants. similarly problematic, conduct.
B. Regulators quickly design and implement laws and
regulations to address practices that adversely
affect the fairness and efficiency of markets.
C. New laws designed to reduce or eliminate conduct
that adversely affects the markets can create
opportunities for different, but similarly
problematic, conduct.

17. Which of the following principles least likely describes C The principles that the code and standards
the principles that the code and standards are based are based on are:
on? • Honesty
• Integrity
A. Honesty • Transparency
B. Placing client interests first • Diligence
C. Hard work • Placing client interests first

18. Paul de Chaud, CFA is organizing a buy note on Finest B The cousin's repair work is the only choice
Cars, Ltd. for his research Company. Which of the that does not reflect a conflict of interest.
following is not a possible conflict of interest?

A. Finest Cars allows Paul free use of their cars in
return for some consultancy work that he
performs during his spare time
B. Paul's cousin repairs production machinery for on
Finest Cars.
C. Paul s family trust has a large ownership stake in
on Finest Cars.

19. The figure below shows the histogram for the C The histogram clearly shows that the return
distribution of weekly returns on an index. The mean distribution of the index is positively skewed
of the returns on the index, if compared to the median, (skewed to the right) and is unimodal (it has
will most probably be: one most frequently occurring value). For a
positively skewed unimodal distribution, the
median is always less than the mean.

A. Equal
B. Smaller
C. Greater

20. The arithmetic and geometric mean are computed for A The geometric mean is always less than or
the same data. If there no variability in the data, equal to the arithmetic mean. The only time
compared with the geometric mean, the arithmetic the two means will be equal is when there is
mean will most probably be: no variability in the observations.
A. Equal
B. Lesser
C. Larger
21. When defining interest rates, investors frequently B Opportunity cost is the return forgone by
think about the next best thing that they could have not choosing the next best alternative, from
used their money on. This perception is known as: an investors point of view the next best
thing you could have done with your money.
A. Default risk The discount rate makes us able to compare
B. Opportunity cost money between two different time periods,
C. Discount rate so isn’t the answer. Default risk is also a
different concept.

22. Which statement offers the best data about a A The income statement displays the
corporation's net income in the financial year? corporation's net income for the year.

A. The income statement
B. The balance sheet
C. The cash flow statement

23. Which of the below is the accurate expression of the A The correct equation is Assets = Equity +
accounting equation? Liabilities, or otherwise, owner’s equity is
equal to assets less liabilities.
A. Assets = Owner’s equity + Liabilities
B. Assets = Liabilities – Owner’s equity
C. Assets + Liabilities = Owner’s equity

24. Which of the below is the correct formula for ROE? C ROE = Net Income / Equity

A. Current Assets/ Current Equity
B. Net Income / Revenue
C. Net Income / Equity
25. Which of the subsequent statements is most likely to B The balance sheet offers the best data about
offer the best data concerning a corporation's liquidity? a corporation's liquidity as it offers data
about the levels of current assets and
A. The statement of changes in owner’s equity current liabilities at the financial year end.
B. The balance sheet
C. The income statement

26. Which of the following options does not provide a A The balance sheet (or statement of financial
company’s position over a given period of time? position or statement of financial condition)
provides a statement of the company’s
A. Balance Sheet financial position at one point in time. The
B. Income Statement balance sheet shows the company’s assets,
C. Statement of Cash Flows liabilities, and equity

The income statement (or profit and loss
statement or statement of operations)
identifies the profit (or loss) generated by a
company during a given time period.

The statement of cash flows identifies the
sources and uses of cash during a period and
explains the change in the company’s cash
balance reported on the balance sheet.
27. Which of the below is the correct formula for the quick A Current Assets - Inventories/ Current
ratio? Liabilities

A. Current Assets - Inventories/ Current Liabilities
B. Current Assets / Current Liabilities
C. Current Liabilities / Current Assets

28. The purchase and sale of cash equivalent and trading B Longer term securities could be financing
securities are most probable to be classified as:: cash flows if they are the business's own
securities, and investing cash flows if they
A. Investing cash flows are other businesses' securities.
B. Operating cash flows
C. Financing cash flows

29. Which of the following is the correct equation for GDP C Using the expenditures approach, GDP is
using the expenditures approach? estimated with the following equation: GDP
= C + I + G + (X – M)
A. GDP = C - I - G + (X + M)
B. GDP = C - I + G + (X – M)
C. GDP = C + I + G + (X – M)

30. Which of the below best describes disinflation? A Disinflation is when prices are still riding,
but by a smaller amount than previously. For
A. Prices are increasing but slower than previously example, country 1 has inflation of 16% for 5
B. Prices are declining years, which comes back to 5% annually.
C. Prices are declining faster than previously
31. Keynesian Economists are more expected to favor: B Fiscal Policy was seen as a solution to an
economy that could not ‘fix’ itself by Keynes.
A. Random policy Monetary Policy was favored by the Austrian
B. Fiscal policy School and Monetarists.
C. Monetary policy
32. Which of the following is not a true statement A Economic growth is the annual percentage
regarding economic growth? change in real output. It is also sometimes
expressed in per capita terms.
A. Economic growth is the annual percentage change
in nominal output.
B. It is also sometimes expressed in per capita terms.
C. Economic growth is the annual percentage change
in real output.

33. Which of the following best describes the phases of a C Phases of a business cycle include expansion,
business cycle? peak, contraction, trough, and recovery.

A. Expansion, peak, recession, trough, and boom.
B. Expansion, peak, trough, and recovery.
C. Expansion, peak, contraction, trough, and recovery.

34. Movement along the demand curve for good X occurs A The demand curve shows quantity
due to a change in: demanded as a function of own price only.

A. The price of good X
B. Income
C. Production

35. If the cross-price elasticity between two goods is C With complements, consumption goes up or
negative, the two goods are classified as: down together. With a negative cross-price
elasticity, as the price of one good goes up
A. Normal the demand for both falls.
B. Substitutes
C. Complements

36. Economic profit is: C Economic profit is the difference between

TR and TC (total costs) and differs from
A. The difference between TR and TC and differs from accounting profit because accounting profit
does not include opportunity cost.
accounting profit because accounting economic

profit does not include opportunity cost.
B. Is the sum of between TR and TC and differs from
accounting profit because accounting profit does
not include opportunity cost.
C. Is the difference between TR and TC and differs
from accounting profit because accounting profit
does not include opportunity cost.

37. The income definition of GDP is nearest to: A Option A is the income definition of GDP.
Option B is the output definition of GDP.
A. The aggregate income earned by all households, all Option C is incorrect as it only refers to
businesses and the government within the businesses and not the rest of the economy.
economy.
B. The market value of all final goods and services
made within the economy.
C. The aggregate profits made by all businesses
making goods within an economy.

38. Which of the subsequent actions is expected to C The fiscal budget looks at government
alleviate a fiscal budget deficit? spending vs. tax receipts: Government
spending > taxation = Budget deficit.
A. Rise government spending or drop taxes Government spending < taxation = Budget
B. Drop taxes or drop government spending surplus. By declining government spending
C. Raise taxes or drop government spending or growing taxes, we would drop the deficit.

39. Which of the below is least likely true? B Macroeconomics is the study of an economy
as a whole.
A. Macroeconomics is the study of an economy as a
whole. Demand is the desire for a product or
B. Supply is the desire for a product or service service coupled with the ability and
coupled with the ability and willingness to pay a willingness to pay a given price for it.
given price for it.
C. The law of demand states that the quantity The law of demand states that the quantity
demanded and price of a product are usually demanded and price of a product are usually
inversely related. inversely related.
40. Which of the below is most likely true? B If the change in a factor makes a product
more attractive, the demand curve will shift
A. If the change in a factor makes a product more to the right.
attractive, the demand curve will shift to the left.
B. If the change in a factor makes a product more
attractive, the demand curve will shift to the right.
C. If the change in a factor makes a product more
attractive, the demand curve will shift up.

41. What would be the consequence on the demand for C Lower interest rates mean more people will
real money balances of a decline in the rate of interest? be willing to borrow. demand for money will
therefore increase.
A. The effect depends on other factors like real
income
B. The demand for money would decline
C. The demand for money would rise

42. Which of the following is least likely true? B The current account reports trades of
imported and exported goods and services
A. The current account reports trades of imported as well as income and current transfers.
and exported goods and services as well as income
and current transfers. The capital account primarily reports capital
B. The capital account reports trades of imported and transfers between domestic entities and
exported goods and services as well as income and foreign entities.
capital transfers.
C. In theory, the sum of the current account and the In theory, the sum of the current account
capital and financial account is equal to zero. and the capital and financial account is equal
to zero.
43. Which of the following not true regarding Fixed-rate C Fixed-rate bonds are the most common
bonds? bonds. They offer fixed coupon payments
based on an interest (or coupon) rate that
A. They are the most common bonds. does not change over time. These coupon
B. They offer fixed coupon payments based on an a payments are typically paid semiannually.
coupon rate that does not change over time.
C. These coupon payments are typically paid
annually.
44. Which of the below is least likely a negative covenant B Negative covenants are restrictions enlisted
on a bond’s indenture? on the issuer of the bond. Paying all taxes
and claims when due is considered an
A. Not letting the current ratio drop below 2.3 affirmative covenant, which is a promise
B. Pay all taxes and claims when due from the issuer of the bond to the
C. Limits on incurring any additional debt bondholder.

45. Which of the below is least accurate about callable C Callable bonds can be called in part or in
bonds? whole (entire issue). Due to the advantage to
the issuer of having a call feature on the
A. An issuer would compensate the investor by bond, they would pay the investor by
offering a higher coupon, or lower price for a bond offering a higher coupon or lower price, than
with a callable feature. like for a straight bond.
B. A call feature benefits the issuer of the bond
C. If called, the entire bond issue has to be called

46. An investor purchases a 6-year bond that has a coupon C The investor is likely to have bought a
formula of 3-month LIBOR + 100bp. He is most likely to floating rate note because it pays a coupon
have purchased which of the following types of bonds? rate that is reset periodically based on a
specified formula (i.e. 3-month LIBOR +
A. A LIBOR bond. 100bp).
B. An amortizing bond.
C. A floating rate note.

47. Which of the following statements is most likely C A bond’s current yield is calculated as the
incorrect? annual coupon payments divided by the
current market price. It provides an estimate
A. A bond’s current yield is calculated as the annual of return from coupon income only.
coupon payments divided by the current market
price.
B. It provides an estimate of return from coupon
income only.
C. A bond’s current yield is calculated as the semi-
annual coupon payments divided by the current
market price.

48. The primary risks of investing in debt securities are C The primary risks of investing in debt
credit or default risk, interest rate risk, inflation risk, securities are credit or default risk, interest
liquidity risk, and which other two? rate risk, inflation risk, liquidity risk,
reinvestment risk, and call risk.
A. Business risk and sales risk.
B. Maturity risk and put risk.
C. Reinvestment risk and call risk.
49. Which of the following options is most likely correct? A The credit spread is the difference in the
yields of two bonds with the same maturity
A. The credit spread is the difference in the yields of but different credit quality. Investors
two bonds with the same maturity but different commonly assess the credit spread of risky
credit quality. corporate bonds relative to government
B. Investors commonly assess the credit spread of bonds, such as US Treasury bonds.
risky corporate bonds relative to A rated corporate
bonds.
C. The credit spread is the difference in the price of
the bid-ask spread.

50. Gordon Rutherford is an investor that tends to allocate B Alternative investments comprise of: e.g.
a large proportion of his portfolio into stocks of Hedge funds, real estate securities and
publicly traded businesses. Gordon wants to increase properties, private equity (including venture
the diversification of his portfolio. Lilly has capital), precious gems. Traditional
recommended that he invests into real estate property. investments comprise of: Publicly traded
This type of investment would best be defined as a debts and equities and shares in pooled
transaction in the: investment vehicles that hold debt and/or
equities.
A. Traditional investment market
B. Alternative investment market
C. Derivative investment market

51. Bankers acceptances and certificates of deposit are C Bankers acceptances and certificates of
most accurately characterized as: deposit are money market instruments.
Money markets are markets in which debt
A. Derivative market instruments instruments that mature in 1 year or less are
B. Capital market instruments traded.
C. Money market instruments

52. Which of the below is least expected to be correct B Open-end funds are obtainable to new
about differences between open-end and closed-end investors, as the fund continually expands by
funds? issuing new shares when new investors
want to join in. Closed-end funds are not
A. When an investor wants cash in return for their open to new investments and investors
shares, open-end fund investors redeem their would have to buy existing shares of the
shares with the fund manager, and closed-end fund fund in the secondary markets.
investors sell their shares to other investors.
B. Open-end funds are not available to new investors.
C. Shares of closed-end funds may trade at a
premium or discount to the fund’s net asset value.

53. Against which of the subsequent types of index would B An equal-weighted index allocates an equal
an investment of equal dollar amounts in each stock weight to each constituent security at the
probable to best be measured? inception of the index.

A. Value-weighted index
B. Equal-weighted index
C. Price-weighted index

54. For putable common shares: C Putable common shares are typically sold
back to the issuer by the investor when the
A. The issuer has the right to short shares to the market price is under the pre-set put price.
investor at a pre-set price The investor is insured against loss, and the
B. The investor has the right to long shares from the issuer is able to readily raise capital because
issuer at a pre-set price exercising the put is appealing to investors.
C. The investor has the right to short shares to the
issuer at a pre-set price

55. Which of the below is least expected to be a type of A It’s a leveraged buy-out not sell-out.
private equity investment?

A. Leveraged sell-out
B. Venture capital
C. Distressed Investing

56. A firm decides not to pay a dividend in one or more C If a firm decides not to pay a cumulative
periods. For which of the below types of securities preferred dividend in one or more periods,
would the dividend accumulate? the unpaid dividends accumulate and must
be paid before common stock dividends. For
A. Non-cumulative preferred stock non-cumulative preferred dividends,
B. Common stock dividends not paid in current or subsequent
C. Cumulative preferred stock periods are permanently surrendered by the
investor. Common stock dividends are paid
at the discretion of the firm and do not
accumulate.

57. Which of the subsequent statements about risk and B Cumulative preference shares are not as
return characteristics of equity securities is/are most risky as non-cumulative preference shares
exact? as they have a seniority of claim on any
missed dividends. Putable shares typically
Statement A: Cumulative preference shares are not as pay a lower dividend yield than non-putable
risky as non-cumulative preference shares. shares.

Statement B: Putable shares typically pay a larger
dividend yield than non-putable shares.

A. Both Statements A & B
B. Statement A
C. Statement B

58. Which of the following is not an example of a forward A An option is an example of a contingent
commitment? claim, not a forward commitment.

A. A call option
B. A futures contract
C. A swap contract

59. In contrast to options, forward commitments provide B Forward commitments represent an
the: obligation to buy or sell the underlying asset
at an agreed upon price at a future date.
A. Right to buy or sell the underlying asset in the
future.
B. Obligation to buy or sell the underlying asset in the
future.
C. Promise to provide credit protection in the event
of default.

60. Forward commitments subject to default are: C Interest rate swaps and forwards are over-
the-counter contracts that are privately
A. Forwards and futures. negotiated and are both subject to default.
B. Futures and interest rate swaps. Futures contracts are traded on an exchange,
C. Interest rate swaps and forwards. which provides a credit guarantee and
protection against default.

61. A put option grants the holder: B A put option grants the holder the right or
the choice to sell the underlying at a given
A. The obligation to sell the underlying. exercise price.
B. The choice to sell the underlying.
C. The obligation to buy the underlying.

62. An interest rate swap is a derivative contract in which: A An interest rate swap is defined as a
derivative in which two parties agree to
A. Two parties agree to exchange a series of cash exchange a series of cash flows: One set of
flows. cash flows is variable, and the other set can
B. The credit seller provides protection to the credit be variable or fixed.
buyer.
C. The buyer has the right to purchase the underlying B is incorrect because a credit derivative
from the seller. (CDS) is a derivative contract in which the
credit protection seller provides protection
to the credit protection buyer.

C is incorrect because a call option gives the
buyer the right to purchase the underlying
from the seller.

63. Alternative investments have limitations. Which of the B Alternative investments have limitations.
following is not a limitation? Typically, they are less regulated,
transparent, liquid, and easy to value than
A. Less regulated traditional investments.
B. Less transparent
C. Liquid
64. Investors can buy real estate directly or C Investors can buy real estate directly or gain
exposure to real estate through the private
A. Private market with unlimited partnerships market via real estate limited partnerships
B. Real estate alternative funds and real estate equity funds, or through the
C. Real estate investment trusts public market via real estate investment
trusts.

65. Alternative investments are diverse and include: A Alternative investments are diverse and
include private equity, real estate, and
A. Private equity commodities.
B. Debt
C. Commodities

66. A company is contractually obligated to repay the B A company is contractually obligated to
amount it receives from: repay the amount it receives from debt
holders. However, issuing equity does not
A. Both debt holders and shareholders give rise to a liability. Shareholders have a
B. Debt holders but not its shareholders residual claim on the company’s assets after
C. Shareholders but not its debt holders all liabilities have been paid.

67. Which of the following options is most likely incorrect? A Brokers act as agents, arrange trades for
their clients, and ensure that clients settle
A. Brokers act as market makers. their trades. For complex trades, they often
B. Dealers participate on the opposite side of their serve as professional negotiators.
clients’ trades.
C. Dealers provide liquidity. Dealers participate on the opposite side of
their clients’ trades and are willing to trade
on demand, thus providing liquidity.
68. Indirect investment vehicles provide many advantages. A Indirect investment vehicles provide
Which of the following is not an advantage? many advantages to investors in
comparison with direct investments:
A. They are personally managed.
B. Allow investors to share in the purchase and • They are professionally managed
ownership of large assets. • They allow small investors to use the
C. Are substantially less expensive to trade services of professional managers
• They allow investors to share in the
purchase and ownership of large assets,
such as skyscrapers.
• They allow investors to own
diversified pools of risks and thereby
obtain more predictable, although not
necessarily better, returns.
• Finally, they often are substantially
less expensive to trade
69. Which of the following is incorrect regarding open-end C Open-end mutual funds are pooled
mutual funds? investment vehicles used by many individual
and institutional investors.
A. They are pooled investment vehicles used by
many individual and institutional investors. They can issue and redeem shares as
B. They can issue and redeem shares as necessary. necessary.
C. They are issued through an IPO
Closed- end mutual funds are issued via an
IPO
70. Which of the options below is the correct formula for A NAV = Total Net Value of the Fund / Number
NAV? of shares outstanding

A. NAV = Total Net Value of the Fund / Number of
shares outstanding
B. NAV = Total Net Value of the Investment/ Number
of shares outstanding
C. NAV = Total Net Value of the Firm / Number of
shares outstanding

71. Which of the following options is correct regarding a C Open – End Funds and ETF’s are passively
fund’s management? managed and Closed- End Funds are actively
managed.
Open- End Closed- Exchange
Fund End Fund Traded
Fund
A Passive Active Passive
B Active Active Passive
C Passive Active Active


A. C
B. B
C. A

72. Which of the below is most likely incorrect? C Broad market indices cover an entire asset
class—for example, stocks or bonds—
A. Broad market indices cover an entire asset class generally within a single country or region.
within a single country or region.
B. Multi-market indices cover an asset class across Multi-market indices cover an asset class
many countries or regions. across many countries or regions.
C. Industry indices cover several industries.
Industry indices cover single industries.

73. Which of the below indices will need rebalancing on a A Equal-weighted indices show what returns
continuous basis? would be made if an equal value were
invested in each security included in the
A. Equal-weight index index.
B. Market – weighted index
C. Price – weighted index • The prices of these securities change
continuously.
• Thus, to maintain the equal weights
between securities, regular index
rebalancing is necessary.

74. Which investment management activity determines the A Asset allocation, which is the proportion of
proportion of a portfolio that should be invested in a portfolio that should be invested in various
various asset classes to help meet financial goals? asset classes to help meet financial goals.

A. Asset Allocation
B. Investment Analysis
C. Portfolio Construction

75. Which manager tries to match the return and risk of an A Passive managers aim to match the return
appropriate benchmark? and risk of an appropriate benchmark.

A. Passive Manager
B. Active Manager
C. Funds of Fund Manager

76. As a risk averse investor, which of the below is one C Treasury Securities are the least risk of the
likely to invest in? three

A. Speculative Bonds
B. A Grade Corporate Bonds
C. Treasury Securities

77. Which of the below is least likely correct regarding C Most rating agencies do not charge
credit rating agencies? investors for their ratings, although they
may charge them for the detailed reports on
A. Most rating agencies do not charge investors for which the ratings are based.
their ratings,
B. Rating agencies may charge them for the detailed Instead, corporate issuers pay rating
reports on which the ratings are based. agencies to rate their securities because
C. Corporate issuers pay rating agencies to rate their ratings generally make securities more
securities in an investment grade region marketable.

78. Which of the below is most likely correct? B Brokerage services are provided to clients
who want to buy and sell securities.
A. Brokerage services refer to a bundle of services
that brokers provide to some of their clients, Block brokers help investors who want to
usually investment professionals engaged in trade large blocks of securities by finding a
trading. counterparty willing to buy or sell a large
B. Block brokers help investors who want to trade number of securities.
large blocks of securities by finding a counterparty
willing to buy or sell a large number of securities. Prime brokerage refers to a bundle of
C. Prime brokerage services are only provided to services that brokers provide to some of
clients who want to buy and sell securities. their clients, usually investment
professionals engaged in trading.

79. Which of the below options is most likely incorrect? B Dealers make it possible for their clients to
trade without having to wait to find a
A. Dealers make it possible for their clients to trade counterparty
without having to wait to find a counterparty.
B. Dealers profit when the ask price is lower than the Dealers profit when the bid price is lower
bid price. than the ask price
C. Dealers provide liquidity to their clients.
Dealers provide liquidity to their clients by
allowing them to buy and sell when they
want to trade.

80. Which of the below is not part of a sell-side firm? B Sell-side firms
• Investment banks, brokers, and dealers
A. Investment Banks • Primarily provide transaction services
B. Pension Funds and investment products
C. Dealers
81. Who is responsible for cash management, including the A The treasury is responsible for cash
investment of receipts and payments of bills? management, including the investment of
receipts and payments of bills
A. Treasury
B. CIO
C. CFO
82. Which of the below is most likely incorrect? B In a call market, participants can arrange
trades only when the market is called, which
A. In a call market, participants can arrange trades is usually once a day.
only when the market is called, which is usually
once a day. In contrast, in a continuous trading
B. In a put market, participants can execute sell market, participants can arrange and
trades any time the market is open. execute trades any time the market is open.
C. In a continuous trading market, participants can
arrange and execute trades any time the market is
open.

83. Exchange-traded derivatives are: C Exchanged-traded derivatives are
guaranteed by a clearinghouse against
A. Largely unregulated. default.
B. Traded through an informal network. A is incorrect because traded derivatives are
C. Guaranteed by a clearinghouse against default. characterized by a relatively high degree of
regulation.
B is incorrect because the terms of
exchange-traded derivatives terms are
specified by the exchange.

84. Which of the below is least likely correct? B Quote-Driven Markets: Markets in which
investors trade with dealers, also called
A. Quote-Driven Markets are also called broker dealer markets or price-driven markets.
markets or price-driven markets. Order-Driven Markets arrange trades
B. Order-Driven Markets arrange trades using rules using rules to match buy orders with sell
to match buy orders with sell orders. orders.
C. Brokered Markets are where dealers arrange Brokered Markets: Markets where brokers
trades among their clients. arrange trades among their clients.

85. Which of the below is the correct ratio for leveraged A Position Value / Trader’s Equity = Leverage
(margin) positions? Ratio

A. Position Value / Trader’s Equity
B. Stock Price / Trader’s Debt
C. Stock Price / Trader’s Equity
86. Buying securities on margin increases: A Buying securities on margin increases the
potential gains or losses
A. Potential gains or losses
B. Potential gains only
C. Potential losses only
87. Which of the below is the correct formula? B Ask Price - Price Bid = Market bid–ask
spread.
A. Bid Price – Ask Price = Market bid–ask spread.
B. Ask Price - Bid Price = Market bid–ask spread.
C. Bid Price + Ask Price = Market bid–ask spread.

88. An analyst determines the intrinsic value of an equity A The market price is less than the estimated
security to be equal to $45. If the current price is $27, intrinsic, or fundamental, value.
the equity is most likely:
A. Undervalued
B. Fairly valued
C. Overvalued
89. Which of the below is incorrect? A Operationally efficient markets have low
transaction costs and small bid–ask spreads
A. Operationally efficient markets have low Informationally efficient prices reflect all
transaction costs and wide bid–ask spreads available information about fundamental
B. Informationally efficient prices reflect all available values.
information about fundamental values. Allocationally efficient economies are
C. Allocationally efficient economies are economies economies that put resources to use where
that put resources to use where they are most they are most valuable.
valuable.

90. In an efficient market, the change in an organization’s C Today’s price change is independent of the
share price is most likely the result of: one from yesterday, and in an efficient
market, investors will react to new,
A. Insiders’ information. independent information as it is made
B. The previous day’s change in stock price. public.
C. New information coming into the market.
91. Which of the following best describes the underlying A A written IPS is best seen as a
rationale for a written investment policy statement communication instrument allowing clients
(IPS)? and portfolio managers to establish
investment objectives and constraints
A. A written IPS communicates a plan for trying to mutually.
achieve investment success.
B. A written IPS provides investment managers with
a ready defence against client lawsuits.
C. A written IPS allows investment managers to
instruct clients on the proper use and purpose of
investments.

92. A written investment policy statement (IPS) is most B A written IPS, to be successful, must
likely to succeed if: incorporate a full understanding of the
client’s situation and requirements. As
A. It is created by a software program to assure stated in the reading, “The IPS will be
consistent quality. developed following a fact finding discussion
B. It is a collaborative effort of the client and the with the client.”
portfolio manager.
C. It reflects the investment philosophy of the
portfolio manager.

93. Which of the following is least likely to be placed in the C Asset Allocation (also known as the policy
appendices to an investment policy statement (IPS)? portfolio) and Rebalancing Policy are often
included as appendices to the IPS.
A. Rebalancing Policy
B. Strategic Asset Allocation
C. Statement of Duties and Responsibilities

94. Tactical asset allocation is best described as: B Tactical asset allocation allows actual asset
allocation to deviate from that of the
A. Attempts to exploit arbitrage possibilities among strategic asset allocation (policy portfolio) of
asset classes. the IPS. Tactical asset allocation attempts to
B. The decision to deliberately deviate from the take advantage of temporary dislocations
policy portfolio. from the market conditions and assumptions
C. Selecting asset classes with the desired exposures that drove the policy portfolio decision.
to sources of risk in an investment portfolio.

95. Which of the below risks is related to market risk? A Systematic risk: The risk created by general
economic conditions is known as systematic
A. Systematic Risk or market-related risk because the risk
B. Non-Systematic Risk stems from the wider economic system.
C. Unique Risk
96. Which of the below does not fall under IPS Constraints? B Objectives: Return requirements and risk
tolerance.
A. Liquidity Constraints: Time horizon, liquidity,
B. Risk Tolerance regulatory constraints, taxes, and unique
C. Unique Circumstances circumstances.

97. Which of the options below is not part of the B When using, developing, or reviewing a
documentation classification system? document, there are three factors to
consider: origin, direction, and level of
A. Origin standardisation.
B. Financials
C. Level of Standardiisation
98. The risk of living longer than one’s financial resources A Health risk- is the risk that can occur from
is termed: poor health.
Mortality risk - the risk of dying young.
A. Longevity risk Longevity risk - the risk of living longer than
B. Mortality Risk one’s financial resources.
C. Health Risk

99. Which of the below risks can be described as a non- C Operational risk is not a financial risk.
financial risk?

A. Liquidity risk
B. Market risk

C. Operational risk

100. Which of the below is not a response strategy for risk? B Risk response strategies can be classified
into four “T” categories:
A. Terminate • Tolerate. This strategy involves
B. Shift accepting the risk and its effect.
C. Treat • In some cases, the risk is well
understood and taking it provides
opportunities to create value.
• In other cases, the risk must be
taken because other risk response
strategies are unavailable or too
costly.
• Treat. This strategy involves taking
action to reduce the risk and its effect.
• Transfer. This strategy involves moving
the risk and its effect to a third party—
for example an insurance company.
• Terminate. This strategy involves
avoiding the risk and its effect by
ceasing activity.

101. Internal documents are generally administrative and A Internal documents are generally
formalise which of the following? administrative and formalise policies,
procedures, and processes.
A. Policies
B. Financial Statements They help reduce risk by preventing errors
C. Financial Reports and unethical behaviour.

• Policies broadly set the rules
• Procedures help apply policies
• Processes divide procedures into
manageable actions.

102. Which of the below is most likely incorrect regarding B VaR gives an estimate of the minimum loss
VaR? of value that can be expected for a given
period with a given level of probability.
A. VaR gives an estimate of the maximum loss of
value that can be expected for a given period with
a given level of probability.
B. VaR gives an estimate of the minimum loss of value
that can be expected for a given period with a
given level of probability.
C. VaR gives the exact maximum loss of value that can
be expected over a period with a given level of
probability.

103. A portfolio that has a VaR of $2 million for one day with A A portfolio that has a VaR of $2 million for
a probability of 5% means what? one day with a probability of 5% means that
there is a 5% chance that the portfolio will
A. There is a 5% chance the portfolio will fall in value fall in value by at least $2 million in a single
by at least $2 million in a single day. day.
B. There is a 95% chance the portfolio will rise in
value by at least $1 million in a single day.
C. There is a 5% chance the portfolio will rise in value
by at least $2 million in a single day.
104. Which of the below is a weakness to VaR? A VaR gives an estimate of the minimum, but
not the maximum, loss of value that can be
A. It gives a minimum loss but not a maximum expected.
B. It gives a maximum loss but not a minimum
C. It only guarantees a loss amount VaR does not indicate the maximum loss of
value the portfolio manager can expect to
bear in one day, and it does not guarantee
that a loss in excess of VaR will not happen
more frequently.

105. Which of the below does not fall under investment C Investment risks can take different forms
risk? depending on the company’s investments
and operations.
A. Market Risk Firms in the investment industry typically
B. Credit Risk experience three broad categories of
C. Business Risk investment risks: market risk, credit risk,
and liquidity risk.
106. Which of the below is the fourth step in the structured B A structured risk management process
risk management process: generally includes five steps, as illustrated in
the slide.
A. Detect and Identify Events
B. Select a Risk Response 1. Set objectives
C. Control and Monitor 2. Detect and Identify Events
3. Assess and Prioritise Risks
4. Select a Risk Response
5. Control and Monitor

107. The performance evaluation process includes four B The performance evaluation process
discrete but related stages. Which of the below is not includes four discrete but related stages.
part of the process? 1. Measuring absolute returns
2. Adjusting return for risk
A. Measuring absolute returns 3. Measuring relative returns
B. Measuring nominal returns 4. Attributing performance
C. Measuring relative returns

108. The return over the holding period usually comes from C The return over the holding period usually
two distinct sources which of the below is not a comes from two distinct sources:
source? • Capital gain or loss and
• Income (such as dividends or interest).
A. Dividends
B. Capital gain or loss
C. Commodities

109. Investment risk is often measured using some measure A Investment risk is often measured using
of variability. Which of the below measures risk? some measure of variability (or volatility) of
returns, and a common measure of
A. Standard Deviation variability is the standard deviation.
B. Alpha
C. Delta
110. Which of the blow correctly represents the Sharpe C Sharpe ratio = (Return on portfolio – Risk-
Ratio? free return)/Standard deviation of portfolio
returns
A. SR = (Return on portfolio – market return)/ Beta
B. SR = (Return on portfolio – Risk-free return)/Beta Sharpe Ratio = Excess return on
C. SR = (Return on portfolio – Risk-free return) / portfolio/Standard deviation of portfolio
Standard deviation of portfolio returns returns

111. Which of the below is not a reward-risk ratio? C CAPM is used to determine require return on
equity.
A. Treynor Ratio
B. Sharpe Ratio
C. CAPM
112. Which reward-risk ratio uses a tracking error? B The tracking error is measured by taking the
standard deviation of the differences
A. Treynor Ratio between the returns on the fund and the
B. Information Ratio returns on its benchmark.
C. Sharpe Ratio Tracking error can also be used to formulate
another very popular reward-to-risk ratio
known as the information ratio.

113. A fund manager’s alpha is that part of the fund’s return B A fund manager’s alpha is that part of the
that can be attributed to: fund’s return that can be attributed to skill.

A. The market
B. Skill
C. Luck
114. Which of the following is considered an institutional B A sovereign wealth fund is considered an
investor? institutional investor.

A. Accredited investor
B. Sovereign wealth fund
C. Separately managed account
115. Diversification will not help reduce a portfolio’s: A Diversification will not help reduce a
portfolio’s systematic risk (i.e., market risk)
A. Systematic risk
B. Specific risk
C. Overall risk

116. Compared with passive investment management, B Compared with passive investment
active investment management will involve: management, active investment
management will involve market timing.
A. Tracking a benchmark
B. Market timing
C. Lower transaction costs
117. Document Management does not include which of the C The importance of document management
below? cannot be over-emphasised.

A. Disposal Access. Documents that staff need to access
B. Retention should be easily retrievable.
C. Retrieve
Security. Protecting confidential
information is important and often a legal or
regulatory requirement.

Retention. It is important, not only for
business reasons but also often for legal or
regulatory reasons, that all documents are
retained until the risk associated with the
action described in the document no longer
exists.

Disposal. Documents cannot simply be
archived and forgotten.

118. Which of the below best represents the term risk B An important element in the setting of
appetite? objectives is the company’s risk tolerance,
which is the level of risk that the company is
A. The ability to handle risk able and willing to take on.
B. Willingness to take on risk
C. Strategic risk objectives • The ability to handle risk is primarily
driven by the company’s financial health
and depends on its level of earnings,
cash flows, and equity capital.
• Its willingness to take on risk, which is
also called its risk appetite, depends on
its attitude toward risk and on its risk
culture.

119. A fund manager does not compare his portfolio with C A fund manager does not compare his
the benchmark in terms of: portfolio with the benchmark in terms of
fees.
A. Performance
B. Composition
C. Fees
120. The possibility that a portfolio manager will lose A Operational risk is the risk of losses from
money because the bond valuation model he uses is inadequate or failed people, systems, and
flawed is an example of: internal policies and procedures, as well as
from external events that are beyond the
A. Operational risk control of the company but that affect its
B. Investment risk operations.
C. Compliance risk

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FIT – CFA FOUNDATIONS

No: Question: Solution Explanation

but individual judgment is a critical ingredient in

36. Economic profit is: C Economic profit is the difference between

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