CFA Level I

Question #1 of 12 Question ID: 1210896

Allan Jabber invested $400 at the beginning of each of the last 12 months in the shares of a mutual fund that paid no dividends.
Which method will he correctly choose to calculate his average price per share from the monthly share prices?

A) Arithmetic mean.

B) Harmonic mean.
C) Geometric mean.

Explanation

The harmonic mean of the 12 purchase prices will be his average price paid per share. (Study Session 2, Module 7.2, LOS 7.e)

Question #2 of 12 Question ID: 1210898

Colonia has only two political parties, the Wigs and the Wags. If the Wags are elected, there is a 32% probability of a tax
increase over the next four years. If the Wigs are elected, there is a 60% probability of a tax increase. Based on the current polls,
there is a 20% probability that the Wags will be elected. The sum of the (unconditional) probability of a tax increase and the joint
probability that the Wigs will be elected and there will be no tax increase are closest to:

A) 55%.
B) 70%.

C) 85%.

Explanation

The unconditional probability of a tax increase is: 0.2(0.32) + 0.8(0.6) = 54.4%.

The joint probability that the Wigs will be elected and there will be no tax increase is: 0.8(0.4) = 32%. The sum is: 54.4 + 32 =
86.4%. (Study Session 2, Module 8.1, LOS 8.f)

Question #3 of 12 Question ID: 1210899

An analyst who wants to display the relationship between two variables graphically is most likelyto use:

A) a histogram.
 B) a scatterplot.
C) a frequency polygon.

Explanation

Scatterplots illustrate the relationship between two variables. Histograms and frequency polygons show the distribution of
observations for a single variable. (Study Session 2, Modules 7.1, 8.2, LOS 7.d, 8.k)

Question #4 of 12 Question ID: 1106390

Ralph will retire 15 years from today and has saved $121,000 in his investment account for retirement. He believes he will need
$37,000 at the beginning of each year for 25 years of retirement, with the first withdrawal on the day he retires. Ralph assumes
that his investment account will return 8%. The amount he needs to deposit at the beginning of this year and each of the
following 14 years (15 deposits in all) is closest to:

A) $1,350.
B) $1,450.

C) $1,550.

Explanation

Step 1: Calculate the amount needed at retirement at t = 15, with your calculator in BGN mode.

N = 25, FV = 0, I/Y = 8, PMT = 37,000, CPT PV = –426,564

Step 2: Calculate the required deposits at t = 0,1,….,14 to result in a time 15 value of 426,564, with your calculator still in BGN
mode.

PV = –121,000, N = 15, I/Y = 8, FV = 426,564, CPT PMT = –$1,457.21

(Study Session 2, Module 6.3, LOS 6.e)

Question #5 of 12 Question ID: 1210897

The current price of Bosto shares is 50. Over the coming year, there is a 40% probability that share returns will be 10%, a 40%
probability that share returns will be 12.5%, and a 20% probability that share returns will be 30%. Bosto's expected return and
standard deviation of returns for the coming year are closest to:

Expected return Standard deviation

A) 15.0% 7.58%

B) 17.5% 5.75%

C) 17.5% 7.58%

Explanation
 E[R] = (0.4)(10) + (0.4)(12.5) + (0.2)(30) = 15%

Variance = (0.4)(10 − 15)2 + (0.4)(12.5 − 15)2 + (0.2)(30 − 15)2 = 57.5

(Study Session 2, Module 7.2, LOS 7.g)

Question #6 of 12 Question ID: 1106391

Nikki Ali and Donald Ankard borrowed $15,000 to finance their wedding and reception. The fully amortizing loan at 11% requires
equal payments at the end of each of the next seven years. The principal portion of the first payment is closest to:

A) $1,500.
B) $1,530.

C) $1,560.

Explanation

The interest portion of the first payment is simply principal × interest rate = (15,000 × 0.11) = 1,650.

Using a financial calculator: PV = 15,000, FV = 0, I/Y = 11, N = 7, CPT PMT= $3,183

Principal = payment − interest = 3,183 − 1,650 = 1,533

(Study Session 2, Module 6.2, LOS 6.f)

Question #7 of 12 Question ID: 1210901

Which of the following statements about probability distributions is least accurate?

A) Continuous uniform distributions have cumulative distribution functions that are straight
lines from zero to one.

B) The probability that a continuously distributed random variable will take on a specific
value is always zero.
C) A normally distributed random variable divided by its standard deviation will
follow a standard normal probability distribution.

Explanation

A standard normal probability distribution has a mean of zero, so subtracting the mean from a normal random variable before
dividing by its standard deviation is necessary to produce a standard normal probability distribution. (Study Session 3, Module
9.2, LOS 9.l)

Question #8 of 12 Question ID: 1210904

An analyst wants to construct a hypothesis test to determine whether the mean weekly return on a stock is positive. The null
hypothesis for this test should be that the mean return is:

A) greater than zero.

B) less than or equal to zero.
C) greater than or equal to zero.

Explanation

The null hypothesis should state the condition which, if rejected, would lend statistical support to the alternative hypothesis.
Here, the null hypothesis should be that the mean return is less than or equal to zero, and the alternative hypothesis should be
that the mean return is greater than zero. (Study Session 3, Module 11.1, LOS 11.a)

Question #9 of 12 Question ID: 1210900

X, Y, and Z are independently distributed random variables. The probability of X is 30%, the probability of Y is 40%, and the
probability of Z is 20%. Which of the following is closest to the probability that either X or Y will occur?

A) 70%.

B) 58%.
C) 12%.

Explanation

The probability of X or Y is P(X) + P(Y) − P(XY).

0.3 + 0.4 − (0.3)(0.4) = 58%

(Study Session 3, Module 9.1, LOS 9.f)

Question #10 of 12 Question ID: 1210905

An analyst should use a t-test with n – 1 degrees of freedom to test a null hypothesis that two variables have:

A) equal means.
B) equal variances.

C) no linear relationship.

Explanation

Difference-in-means hypothesis tests are t-tests with n – 1 degrees of freedom. Tests of correlation are t-tests with n – 2 degrees
of freedom. Tests for equality of variances are F-tests. LOS (Study Session 3, Module 11.3, LOS 11.h, 11.j, 11.k)

Question #11 of 12 Question ID: 1210903

The percentage changes in annual earnings for a company are approximately normally distributed with a mean of 5% and a
standard deviation of 12%. The probability that the average change in earnings over the next five years will be greater than
15.5% is closest to:

A) 2.5%.
B) 5.0%.

C) 10.0%.

Explanation

The standard error of a 5-year average of earnings changes is 15.5% is standard errors

above the mean, and the probability of a 5-year average more than 1.96 standard errors above the mean is 2.5% for a normal
distribution. (Study Session 3, Module 10.1, LOS 10.f)

Question #12 of 12 Question ID: 1210902

Which of the following is least likely correct concerning a random variable that is lognormally distributed?

A) It has a symmetric distribution.

B) The natural logarithms of the random variable are normally distributed.

C) It is a univariate distribution.

Explanation

A lognormal distribution is skewed to the right (positively skewed). (Study Session 3, Module 9.3, LOS 9.n)