www.CFAtogether.

com Mock test, 06 Aug 2022

MOCK TEST SOLUTION

Topic: Ethics + Equity + Derivatives + Alternative + PM
ETHICS
1 A is correct because Lan’s actions do not violate Standard IV(A)–Duties to Employers. Lan
does not use company time to make arrangements for his new venture, nor does he
misappropriate any information (financial models or client contacts) from his former employer.
All of the actions performed by Lan are permissible under Standard IV(A).
2 B is correct as selective disclosure occurs when companies discriminate in making material
nonpublic information public. Corporations that disclose information on a limited basis create
the potential for insider-trading violations. Standard II(A).
3 A is correct as members/candidates who possess material nonpublic information that could
affect the value of an investment should not act or cause others to act on the information. Crux
traded on the material information that Orca is about to be acquired by Cyber Kinetics. The
information is nonpublic because it is not publicly available, which was verified when Crux
researched Orca on the Internet and found nothing about the acquisition [Standard II(A)].
4 A is correct because under Standard III(B)–Fair Dealing, members and candidates should
disclose to clients and prospective clients how they select accounts to participate in an order and
how they determine the amount of securities each account will buy or sell. Trade allocation
procedures must be fair and equitable, and disclosure of inequitable allocation methods does
not relieve the member or candidate of this obligation. All discretionary accounts should be
treated in the same manner. Treating newer accounts differently would be considered
inequitable regardless if this policy is disclosed.
5 A is correct because photocopying copyrighted material, regardless of the year of publication,
is a violation of the CFA Institute Standards [Standard I(A)] as copyrighted materials are
protected by law. Candidates and members must comply with all applicable laws, rules, and
regulations and must not knowingly participate or assist in a violation of laws.
6 A is correct. The GIPS standards benefit two main groups: investment management firms and
prospective clients. GIPS presentations allow prospective clients to know that the track record of
a prospective GIPS compliant fund manager is complete and fairly presented.
7 C is correct because Standard  VI(A) requires the disclosure of conflicts. For Meir to
understand what potential conflicts of interest employees may have with the firm and with their
clients, he would need to know the outside interests of each staff member. The staff members
themselves may not know enough about the company and its clients to disclose those interests
that would present a potential conflict. Therefore, it may be best to have all employees declare
their outside business interests on an annual basis so Meir can make the determination as to
what outside business interests need to be disclosed to clients
8 C is correct because both Musa and Kassim violated the Standards of Professional Conduct.
Musa violated Standard IV(C)–Responsibilities of Supervisors by not ensuring that policies were
in place to prevent violations of the Code and Standards (in this case Standard VI(B)–Priority of
Transactions) by someone subject to her supervision. As the head of compliance, Musa
supervised Kassim and must meet her supervisory responsibilities outlined in the Standards of

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www.CFAtogether.com Mock test, 06 Aug 2022

Professional Conduct. Kassim violated Standard VI(B)–Priority of Transactions in that he did

not give sufficient priority to Dunfield’s clients before trading on his recommendation.
9 B is correct because the analyst has not violated Standard I(A)–Knowledge of the Law related
to intellectual property because there is no indication the analyst was ignorant of, or has
violated, any law related to intellectual property. Taking his personal papers and research notes
would not be a violation of strict local laws on intellectual property transference because these
documents were created by the analyst prior to his employment at Apac.
10 A is correct as the information concerning the qualified opinion is nonpublic and if it is
material she would be in violation of Standard II(A) if she took investment action based on the
information. She should also make reasonable efforts to achieve public dissemination of the
information.
11 A is correct because Standard III(B)–Fair Dealing requires members and candidates to deal
fairly and objectively with all clients. Certain clients cannot be favored over other clients when
their investment objectives and circumstances are similar. Therefore, the most appropriate way
to handle the reallocation of an illiquid share is to reduce each client’s proportion on a pro rata,
or weighted basis.
12 C is correct because discussing the level of difficulty of the essay portion of the examination
did not violate Standard VII(A)–Conduct as Members and Candidates in the CFA Program.
Standard VII(A) and the Candidate Pledge were violated by candidates revealing broad topical
areas and formulas tested or not tested on the exam.
EQUITY
1. A is correct. Regulators help solve agency problems by setting minimum standards of
competence, not skill, for agents and by defining and enforcing minimum standards of practice.
2. B is correct. An index provider will adjust the value of the divisor as necessary to avoid
changes in the index value that are unrelated to changes in the prices of constituent securities.
3. B is correct. The investor has written a put contract, which means she is short the option. She,
therefore, must satisfy the obligation to purchase the asset if requested to do so by the put
owner. The investor has a long exposure to the risk of the underlying index future because she
benefits when its quoted price increases—that is, when the put declines in value (or suffers a loss
when its quoted price decreases as the put increases in value).
4. B is correct. In an informationally efficient market, consistent and superior risk-adjusted
returns (net of all expenses) are not achievable.
5. B is correct. Participating preference shares do not entitle the shareholders to participate in
corporate decisions through voting rights. But they do entitle them to (1) an additional dividend
if the company’s profits exceed a prespecified level and (2) additional distribution of the
company’s assets upon liquidation, above the par.
6. C is correct. Companies with large amounts of undervalued assets (which can be sold to
reduce debt) that generate high levels of cash flow (which are used to make interest and
principal payments on the debt) are likely candidates for MBO transactions.
7. A is correct. The process consists of initially examining commercial classification systems and
then refining it to the companies operating in the chosen industry.

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8. A is correct. The performance of companies with cyclical demand for their products is highly
variable and depends on economic conditions.
9. B is correct. Quarterly dividend = ($50 × 0.08)/4 = $1 a share
PMT = $1; N = 12; FV = $50; I = 3%; Compute PV = $45.02
10. A is correct. The EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation,
and amortization) approach is most useful when comparing companies with significant
differences in capital structure. EBITDA is computed prior to payment to any of the company’s
financial stakeholders and is not affected by the amount of debt leverage
Derivatives + Alternative Investment + Portfolio Management
1 B is correct. The best characterization of a derivative is that it typically transforms the
underlying asset’s performance.
2 A is correct. A limited partnership that takes long and short positions in publicly traded equity
is one type of hedge fund, a category of alternative assets.
3 C is correct. Bollinger Bands consist of a moving average price plus a higher line representing
the moving average plus a set number of standard deviations from the average price and a lower
line that is the moving average minus the same set number of standard deviations. Higher price
volatility increases the standard deviation, making the bands wider.
4 C is correct. Both forward and futures contracts can be used for hedging an exposure or
speculating on the particular price direction of the underlying security.
5 C is correct. The convenience yield must exceed the cost of carry to arrive at a futures price
below the spot price because the futures price is approximately equal to the spot price [(1 + r) +
Storage cost – Convenience yield] and the cost of carry is defined as interest cost plus storage
cost. Given that interest cost is always positive, the convenience yield must also exceed storage
costs to arrive at a futures price below the spot price.
6 B is correct. The negative correlation of –0.5 between investment securities B and C is the
lowest and thus is the most effective for portfolio diversification.
7 A is correct. Over-the-counter options are exposed to default risk, but futures contracts are
standardized transactions that take place on futures exchanges and are not exposed to default
risk.
8 A is correct. Macro strategies emphasize a top-down approach, and trades are made based on
expected movements of economic variables.
9 A is correct. Booraem Inc. is overvalued because it lies below the SML. The expected return,
12.85%, is less than the required return. According to the CAPM, the required return for
Booraem Inc. is 0.1365 or 13.65%: 0.1365 = 0.012 + 1.5(0.095 – 0.012).
10 B is correct. Forward rate agreements are used to hedge interest rate exposure present in the
money market.
11 A is correct. The management fee of private equity funds is based on committed capital until
the committed capital is fully drawn down and invested. This approach is in contrast to hedge
funds, for which the management fee is based on invested capital.

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12 B is correct. An individual’s ability to take risk is affected by such factors as time horizon and
expected income. Personality type is most likely to affect an individual’s willingness to take risk
13 C is correct. American call prices can differ from European call prices only if there are cash
flows on the underlying.
14 C is correct. Collectibles do not provide current income, but they can potentially provide long-
term capital appreciation and help further diversify a portfolio.
15 A is correct. Asset allocation decisions are made in the execution step.
16 A is correct. The value of a European put option will decrease as the risk-free interest rate
increases.
17 B is correct A conservative and theoretically accurate approach is to use bid prices for longs
and ask prices for shorts because these are the prices at which the positions could be closed.
18 B is correct. Risk budgeting quantifies and allocates the tolerable risk according to specific
metrics. A risk budget can be multidimensional or a simple, one-dimensional risk measure, such
as standard deviation, beta, value at risk, or scenario loss, among others.
19 B is correct. Long asset + Long put = Long call + Long risk-free bond.
Rearranging terms gives Long call = Long put + Long asset + Short risk-free bond
20 B is correct. Funds of hedge funds will add an extra layer of fees because each hedge fund in
which such fund of hedge funds invests will charge a management fee plus an incentive fee. Such
a layer of fees comes on top of the fees that the fund of hedge funds charges investors., including
management fees, to the costs for investors.
21 C is correct. Algorithmic trading is defined as the computerized buying and selling of
financial instruments, in accordance with pre-specified rules and guidelines.