Cfa L 1 Equity SS 13 - CH 1 - Review - Question Solving

CFA LEVEL 1 Market Organization and Structure
LOS B : Describe classifications of assets and markets

LOS C : Describe the major types of securities, currencies, contracts, commodities, and real assets that trade
in organized markets, including their distinguishing characteristics and major subtypes
QUESTION: 1
A university endowment fund is mandated to hold some of its value in

alternative investments. Which of the following would most likely be included
in the fund’s alternative investments portfolio?
A. Real estate securities

B. Exchange-traded funds
C. Convertible preferred shares
1
Answer :
A is correct.
Real estate securities qualify as alternative investments.
B is incorrect because exchange-traded funds are publicly traded and do not
qualify as alternative investments.
C is incorrect because convertible preferred shares may be publicly traded and
do not qualify as alternative investments.
2
QUESTION: 2
Forward contracts are most likely to be attractive hedging vehicles to investors

who:
A. do not want to make an upfront outlay of cash.

B. want to reserve the right to close out their position early.
C. are not in a position to investigate the creditworthiness of their
counterparties.
3
Answer :
A is correct.
Most forward contracts do not require an upfront cash outlay. Other hedging
vehicles, such as futures (which require margin accounts) and options (which
must be purchased for a fee), do require upfront payments.
B is incorrect because forward contracts are custom agreements, it is difficult
to find another party who is both willing to take over the contract obligations
and acceptable to the existing counterparty. Futures would be more suitable in
this circumstance because they can be closed out early.
C is incorrect because forward contracts are custom agreements that depend
on each counterparty’s knowledge of the creditworthiness of the other.
4
QUESTION: 3
A closed-end fund is trading at a premium to its net asset value. This scenario
most likely reflects:
A. a belief that the portfolio securities are undervalued.

B. concerns about the quality of management.
C. excess demand for redemption of the shares.
5
Answer :
A is correct.
Closed-end funds may trade at a premium (discount) to net asset value when
investors believe that the portfolio securities are undervalued (overvalued).
B is incorrect because concerns about the quality of management could
suggest discounts from net asset value.
C is incorrect because excess redemption demand suggests selling pressure,
which could indicate a discount to net asset value.
6
LOS D : Describe types of financial intermediaries and services that they provide
QUESTION: 4
Dark pools are best described as:
A. trading venues that exercise little regulatory authority over their

subscribers.
B. operated by investment dealers that specialize in high-risk securities.
C. certain groups of similar assets that issue securities representing shared
ownership.
7
Answer :
A is correct.
Dark pools are trading venues that function like exchanges but do not exercise
regulatory authority over their subscribers except with respect to the conduct
of their trading in those venues.
B is incorrect because dark pools may be operated by investment dealers but
do not necessarily trade high risk securities.
C is incorrect because this is the definition of pooled investment vehicles.
8
LOS E : Compare positions an investor can take in an asset
QUESTION: 5
An investor writes a put option on FTSE 100 Index futures. Which of the
following best describes the investor’s position with respect to the put contract
and her exposure to the underlying index future, respectively?
A. Long, short
B. Short, long
C. Short, short
9
Answer :
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).
A is incorrect because the investor has a short position in the put contract, not
a long position, because she suffers a loss when the quoted price of the
contract increases. The investor has a long exposure to the underlying index
future, not a short position, because she benefits when its quoted price
increases (or suffers a loss when its quoted price decreases).
C is incorrect because the investor has a long exposure to the underlying index
future, not a short position, because she benefits when its quoted price
increases (or suffers a loss when its quoted price decreases).
10
LOS F : Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the
security price at which the investor would receive a margin call
QUESTION: 6
A trader buys 500 shares of a stock on margin at $36 a share using an initial
leverage ratio of 1.66. The maintenance margin requirement for the position is
30%. The stock price at which the margin call will occur is closest to:
A. $25.20.
B. $30.86.
C. $20.57.
11
Answer :
C is correct.
Initial equity (%) in the margin transaction = 1/Leverage ratio = 1/1.66 = 0.60.
Initial equity per share at the time of purchase = $36 × 0.60 = $21.60
∗ .
Price (P) at which margin call occurs:= =20.57
.
12
LOS A : Define an exchange rate and distinguish between nominal and real exchange rates and spot and
forward exchange rates
QUESTION: 7
A trader describes her currency contract exposure as “long the euro against
the British pound.” Which of the following situations best fits her description?
She has a:
A. contract that allowed her to sell British pounds and acquire euros.
B. forward contract to buy euros in exchange for British pounds at a
predetermined exchange rate.
C. forward contract to buy British pounds, using euros she currently holds.
13
Answer :
B is correct.
The trader has a long forward position in the euro, which means she has
committed to purchase euros in exchange for British pounds sometime in the
future at an exchange rate determined when the contract was initiated.
A is incorrect because this is a spot transaction, so there is no contract.
C is incorrect because forward contracts do not require holding one of the
currencies; in most cases, one party will be receiving a foreign currency in the
future (a payment in a foreign currency for example), and one party wishes to
convert that into the domestic currency at that time without worrying about
the exchange rate at the time of payment.
14
LOS I : Define primary and secondary markets and explain how secondary markets support primary
markets
QUESTION: 8
Which of the following is most likely a primary market transaction?
A. A private placement of shares

B. A market order sale of bonds
C. The exercise of an exchange-traded call option
15
Answer :
A is correct.
Private placements qualify as primary market transactions because they are
sales of securities by issuers directly to a small group of qualified investors.
B is incorrect because market order sales take place in secondary markets.
C is incorrect because the exercise of an exchange-traded call option is a
secondary market transaction involving the purchase by option owner of
previously issued security.
16
LOS J : Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and
brokered markets
QUESTION: 9
The following is a trader’s order book for a stock:

Bid Volume Limit Price (CHF) Ask Volume
42.76 6,800
42.68 9,100
42.64 6,600
42.60 2,400
2,000 42.56
4,000 42.52
7,100 42.44
5,000 5,000
17
She receives an order to sell 9,000 shares with a limit price of CHF42.52. The
average price (in CHF) at which the trades will be executed is closest to:
A. 42.52.
B. 42.50.
C. 42.53.
18
Answer :
C is correct.
Only 6,000 shares can be sold because the trader cannot execute below the
$42.52 limit price. The average price is CHF42.53/share per the calculation
below:
(2,000 shares × CHF42.56) + (4,000 shares × CHF42.52) / (2,000 shares + 4,000
shares)=CHF42.53 A is incorrect because this is the limit price but is not the
price at which the order is executed.
B is incorrect because this is the average price that would be generated if the
order was a market order:
(2,000 shares × CHF42.56) + (4,000 shares × CHF42.52) + (3,000 shares ×
CHF42.44) /(2,000 shares+4,000 shares+3, 000 shares) = CHF42.50
19
LOS I : Define primary and secondary markets and explain how secondary markets support primary
markets
QUESTION: 10
Which of the following is most likely associated with secondary capital

markets?
A. Continuous trading
B. Lead underwriters
C. Book building
20
Answer :
A is correct.
A secondary market is where investors continue to trade the securities among
themselves. Continuous trading is typically associated with secondary capital
markets.
B is incorrect because lead underwriter is associated with primary markets.
C is incorrect because book building is associated with primary markets.
21
LOS F: Calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the
QUESTION: 11
An investor opens a margin account with an initial deposit of $5,000. He then

purchases 300 shares of a stock at $30 each on margin, and his account
requires a maintenance margin of 30%. Ignoring commissions and interest, the
price at which the investor will receive a margin call is closest to:
A. $19.05.
B. $23.08.
C. $23.81
22
Answer :
A is correct.
Initial Margin=5/9
Margin call price=30*(1-5/9) / (1-.30)=19.05
23
LOS C : Describe the major types of securities, currencies, contracts, commodities, and real assets
that trade in organized markets, including their distinguishing characteristics and major
subtypes
QUESTION: 12
Which of the following is most likely a characteristic of real assets?
A. Substantial management costs
B. High liquidity
C. Homogeneity
24
Answer :
A is correct.
Real assets are characterized by illiquidity, not high liquidity. The
heterogeneity of real assets, their illiquidity, and the substantial costs of
managing them are all factors that complicate the valuation of real assets.
B is incorrect because real assets are characterized by illiquidity, not high

liquidity.
C is incorrect because real assets are characterized by heterogeneity, not

homogeneity.
25
LOS G : Compare execution, validity, and clearing instructions
LOS H: Compare market orders with limit orders
QUESTION: 13
A stop-buy order is most likely placed when a trader:
A. wants to limit the loss on a short position.

B. thinks that the stock is overvalued.
C. wants to limit the loss on a long position.
26
Answer :
A is correct.
A trader who has entered into a short sale will incur losses if the stock price
begins to increase. A stop-buy order helps limit the loss on a short position
because it becomes valid for execution when the stock price rises above the
specified stop price.
B is incorrect because a stop-buy order is beneficial when the stock is
undervalued (not overvalued) but the trader is unwilling to trade without
market confirmation.
C is incorrect because a stop-sell order is appropriate when the trader holds a
long position, not short position. A stop-sell order becomes valid when the
stock price falls.
27
LOS J: Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and
brokered markets
QUESTION: 14
A trader seeking to sell a very large block of stock for her client will most
likely execute the trade in a(n):
A. quote-driven market.
B. order-driven market.
C. brokered market.
28
Answer :
C is correct.
Instruments that are infrequently traded and expensive to carry as inventory
(e.g., very large blocks of stock, real estate properties, fine art masterpieces,
and liquor licenses) are executed in brokered markets. Organizing order-
driven markets for such instruments is not sensible because too few traders
would submit orders to them.
A is incorrect because in quote-driven markets (also called price-driven,

dealer, or OTC markets) customers trade with dealers, and the instruments
traded are mostly bonds, currencies, and spot commodities.
B is incorrect because an order-driven market follows an order matching

system run by an exchange or a broker using rules to arrange trades submitted
by traders.
29
LOS H : Compare market orders with limit orders
QUESTION: 15
A market has the following limit orders standing on its book for a particular
stock:
Buyer Bid Size Limit Price Seller Offer Size Limit Price
(# of shares) ($) (# of shares) ($)
1 500 18.5 1 200 20.2
2 300 18.9 2 300 20.35
3 400 19.2 3 400 20.5
4 200 20.1 4 100 20.65
5 100 20.15 5 200 20.7
30
If a trader submits an immediate-or-cancel limit buy order for 700 shares at a
price of $20.50, the average price the trader would pay is closest to:
A. $20.35.
B. $20.58.
C. $20.50.
31
Answer :
A is correct.
The limit buy order will be filled first with the most aggressively priced limit
sell order and will be followed by filling with the higher priced limit sell
orders that are needed up to and including the limit buy price until the order
is filled.
Average price = [(200×$20.20)+(300×$20.35)+(200×$20.50)]/700 = $20.35.
C is incorrect because it simply uses the sell limit price that is exactly equal to
the limit buy order.
B is incorrect because it starts filling the order with the highest limit sell price
and moves downward.
Average price = [(200×$20.70)+(100×$20.65)+(400×$20.50)]/700 = $20.58
32
LOS G : Compare execution, validity, and clearing instructions
LOS H : Compare market orders with limit orders
QUESTION: 16
A trader places a limit order to buy shares at a price of $49.94 with the stock
trading at a market bid price of $49.49 and the bid–ask spread of 0.7%. The
order will most likely be filled at:
A. $49.94.
B. $49.84.
C. $49.49.
33
Answer :
B is correct.
An order is filled at the best available price as long as this price is lower than
the limit price. In this case, the best available price is the market ask price =
$49.49 × (1 + 0.7%) = $49.84. Because this price is lower than the limit price of
$49.94, the order will be filled at this price.
A is incorrect because the order limit of $49.94 is larger than the market ask
price and accordingly the order will be filled at the market ask price (i.e.,
$49.84) and not the limit order price.
C is incorrect because the trader can only sell (not buy) at the market bid price.
He has to buy at the market ask price.
34
LOS L : Describe objectives of market regulation
QUESTION: 17
Which of the following statements concerning financial regulatory bodies is

least accurate? Financial regulatory bodies:
A. act to level the playing field for market participants.

B. define minimum standards of competence for agents.
C. require that regulated firms maintain optimum levels of capital.
35
Answer :
C is correct.
Financial regulators impose minimum levels of capital that apply across the
board to all regulated firms—not the optimum level, which is firm specific.
A is incorrect because financial regulators act to level the playing field for
market participants as in the case of regulation concerning insider trading.
B is incorrect because financial regulators help define minimum standards of
competence for agents (e.g., the GIPS standards from CFA Institute).
36
QUESTION: 18
The following data pertain to a margin purchase of a stock:

Purchase price $50/share
Sale price $55/share
Shares purchased 500
Margin 45%
Call money rate 6%
Dividend $1.80/share
Commission on purchase and sale $0.05/share
If the stock is sold exactly one year after the purchase, the total return on this
investment is closest to:
A. 22.4%.
B. 14.4%.
C. 19.4%.
37
Answer :
A is correct.
Proceeds on sale $55 × 500 $27,500
Minus payoff loan $50 × 500 × 0.55 −$13,750
Minus margin interest paid $13,750 × 0.06 −$825
Plus dividend received $1.80 × 500 $900
Minus sales commission paid on sale $0.05 × 500 −$25
= Remaining equity
Initial Investment (including Initial Investment $11,275
(including commission)
commission)
Return on the initial investment: ($13,800−$11,275)/$11,275 22.4%
38
B is incorrect because it ignores the dividend received.
Proceeds on sale: $55 × 500 $27,500

Payoff loan: $50 × 500 × 0.55 −$13,750
Margin interest paid: $13,750 × 0.06 −$825
Dividend received: $1.80 × 500 Ignored
Sales commission paid: $0.05 × 500 −$25
Remaining equity $12,900
Initial Investment: ($50 × 500 × 0.45) + ($0.05 × 500) $11,275
Return on the initial investment: ($12,900 − $11,275)/$11,275 14.4%
39
C is incorrect because it switches the percentages between margin and loan.
Proceeds on sale: $55 × 500 $27,500

Payoff loan: $50 × 500 × 0.45 −$11,250
Margin interest paid: $11,250 × 0.06 −$675
Dividend received: $1.80 × 500 $900
Sales commission paid: $0.05 × 500 −$25
Remaining equity $16,450
Initial Investment: ($50 × 500 × 0.55) + ($0.05 × 500) $13,775
Return on the initial investment: ($16,450 − $13,775)/$13,775 19.4%
40
QUESTION: 19
A trader buys a stock at $64 on margin with a leverage ratio of 2.5 and a
maintenance margin of 30%. Below what price will a margin call most likely
occur?
A. $36.57
B. $54.86
C. $44.80
41
Answer :
B is correct.
1
Initial Margin = 1/Leverage Ratio = 2.5  0.4
Price  1  Initial Margin 

Margin Call Price 
1  Maintenance Margin 
64 1  0.4 
=
1  0.3
= 54.86
42
LOS A : Explain the main functions of the financial system
QUESTION: 20
Information-motivated traders are most likely to differ from pure investors in

that they:
A. pay lower transaction fees.

B. expect to earn excess returns.
C. hold well-diversified portfolios.
43
Answer :
B is correct.
Information-motivated traders expect to earn returns in excess of market
returns because they trade on securities they believe the market has over- or
undervalued. Unlike pure investors, they expect to earn a return on their
information in addition to the normal return expected for bearing risk. Excess
returns are generated when the market recognizes and corrects the valuation
error on such a security.
A is incorrect because transaction fees are unrelated to the motivation for the
trades.
C is incorrect because information-motivated traders arguably hold less

diversified portfolios than pure investors because they focus on securities that
are over- or undervalued.
44
LOS J : Describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and
brokered markets
QUESTION: 21
A Japanese exporter will sell US dollars for Japanese yen in the quote-driven
currency markets. Which of the following statements best describes her
currency exchange transactions?
A. Her counterparties are dealers.

B. She will pay commissions for exchange services.
C. This currency exchange transaction takes place in organized exchanges.
45
Answer :
A is correct.
In the quote-driven currency markets, dealers are counterparties to currency
exchange transactions.
B is incorrect because a Japanese exporter pays no fee or commission to

dealers. Dealers will profit from the bid–ask spreads.
C is incorrect because in the quote-driven currency markets, currency

exchange transactions take place in the over-the-counter, not organized,
exchanges.
46
LOS H: Compare market orders with limit orders
QUESTION: 22
A trader who owns shares of a stock currently trading at $100 per share places
a “GTC, stop $90, limit $85 sell” order (GTC means good till cancelled).
Assuming the specified stop condition is satisfied and the order becomes
executed, which of the following statements is most accurate?
A. The order becomes a market order when the price falls below $85 and
remains valid for execution.
B. The trader faces a maximum realized loss of $15.
C. The order will be executed at either $90 or $85.
47
Answer :
B is correct.
The order becomes valid when the price falls to, or below, $90. The “limit $85
sell” indicates that the trader is unwilling to sell below $85. Thus, the trader
faces a maximum loss of $15 ($100 − $85).
A is incorrect because the order becomes invalid for execution when the price
falls below $85.
C is incorrect because the order can be executed at any prices between $85 and
$90.
48
LOS K : Describe characteristics of a well-functioning financial system
QUESTION: 23
Accounting standards and reporting requirements that produce meaningful

and timely financial disclosures are most critical for achieving which of the
following efficiencies associated with a well-functioning financial system?
A. Allocational
B. Informational
C. Operational
49
Answer :
B is correct.
Accounting standards and reporting requirements that allow meaningful and
timely financial disclosures reduce the costs of obtaining fundamental
information and thereby allow analysts to form more accurate estimates of
fundamental values. They support informationally efficient markets.
A is incorrect because allocational efficiency refers to making resources

available where they are most valuable.
C is incorrect because operational efficiency relates to the costs of arranging

trades, which can be reduced via organized exchanges, brokerages,
securitization, clearing houses, and so forth.
50
LOS K : Describe characteristics of a well-functioning financial system
QUESTION: 24
The type of efficiency that exists in an economy that distributes capital in the
most productive way is best described as:
A. allocational.
B. informational.
C. operational.
51
Answer :
A is correct.
Economies are said to be allocationally efficient when their financial systems
allocate capital (funds) to those uses that are most productive.
B is incorrect because an informationally efficient financial system is one in

which the prices of assets and contracts reflect all available information related
to their fundamental values.
C is incorrect because an operationally efficient financial system is one in

which the costs of arranging trades are low.
52
LOS D : Describe types of financial intermediaries and services that they provide
QUESTION: 25
In futures markets, contract performance is most likely guaranteed by:
A. the futures exchanges.

B. regulatory agencies.
C. clearing houses.
53
Answer :
C is correct.
Clearing houses arrange for financial settlement of trades. In futures markets,
they guarantee contract performance.
A is incorrect because the futures exchange facilitates transactions but it does

not guarantee contract performance.
B is incorrect because regulatory agencies do not guarantee contract

performance in futures markets.
54
QUESTION: 26
Which of the following statements is most accurate concerning a short position

of 100 shares of a stock at $50 per share?
A. Maximum loss of $5,000

B. Maximum gain of $5,000
C. Unlimited maximum gain
55
Answer :
B is correct.
The potential gains on a short position are limited to no more than 100%; the
potential losses are unbounded. The lowest market price per share an investor
can repurchase the stock to return to the security’s lender is $0, so the
maximum gain is ($50 − $0) × 100 = $5,000.
A is incorrect because the potential losses are unbounded because the market
price that an investor can repurchase the stock to return to the security’s
lender can go up with no limit. If the stock goes from $50 to $135 per share the
loss would be $8,500.
C is incorrect because the potential gains on a short position are limited to no

more than 100%: ($50 − $0) × 100 = $5,000.
56
LOS B : Describe classifications of assets and markets
QUESTION: 27
A pension fund has decided to invest in alternative investments. Which of the

following assets is the fund most likely to include in this strategy?
A. Securitized debt
B. Convertible bonds
C. Equity exchange-traded funds
57
Answer :
A is correct.
Securitized debt is an alternative investment, so it could be included in this
strategy.
B is incorrect because convertible bonds are traditional, not alternative,
investments.
C is incorrect because equity exchange-traded funds are traditional not
alternative investments.
58
LOS A: Explain the main functions of the financial system.
QUESTION: 28
Which of the following is least likely a function of the financial system?
A. To allow financial market participants to trade based on available

information.
B. To regulate arbitrageurs’ profits (excess returns).
C. To facilitate borrowing by businesses to fund current operations.
59
Answer :
B is correct.
Regulation of arbitrageurs’ profits is not a function of the financial system.
60
LOS B : Describe classifications of assets and markets.
QUESTION: 29
Which of the following statements is least accurate?
A. Private securities are often illiquid and not subject to regulation.

B. In a secondary market, investors buy and sell securities among
themselves.
C. Money markets refer to markets for equity securities.
61
Answer :
C is correct.
Money market refers to markets for debt securities with maturities of one year
or less.
62
in organized markets, including their distinguishing characteristics and major subtypes.
QUESTION: 30
Peter decides whether to buy, hold, or sell the shares of an index fund based
on a predictive macro - economic model that he has created. He hopes to
achieve abnormal returns using this model. Which of the following labels most
appropriately describe Peter?
A. Arbitrageur.
B. Information-motivated trader.
C. Investor.
63
Answer :
B is correct.
Peter is as an information-motivated trader. Peter’s intent is to earn profit from
trading on the information that his model provides.
64
in organized markets, including their distinguishing characteristics and major subtypes.
QUESTION: 31
A mutual fund invests primarily in fixed-income securities. Which of the

following is least likely to be a part of this fund?
A. Warrants.
B. Treasury bills.
C. Repurchase agreements.
65
Answer :
A is correct.
Warrants are least likely to be part of the fund since they are typically
classified as equity and are least likely to be a part of a fixed- income mutual
fund. Commercial paper and Treasury bills are short-term fixed-income
securities.
66
LOS C : Describe the major types of securities, currencies, contracts, commodities, and real assets
that trade in organized markets, including their distinguishing characteristics and major
subtypes.
QUESTION: 32
Which of the following statements about exchange-traded funds is least likely

correct?
A. Exchange-traded funds are not backed by any asset held by the fund.
B. The investment companies that create exchange-traded funds are financial
intermediaries.
C. The transaction costs of trading shares of exchange-traded funds are
generally lower than the combined costs of trading the underlying assets
of the fund.
67
Answer :
A is correct.
ETFs are securities that represent ownership in the assets held by the fund.
The investment companies that create exchange-traded funds (ETFs) are
financial intermediaries. The transaction costs of trading shares of ETFs are
generally lower than the combined costs of trading the underlying assets of
the ETF.
68
LOS D : Describe types of financial intermediaries and services that they provide.
QUESTION: 33
A. Exchanges sometimes act as brokers by providing electronic exchange

matching.
B. Alternative trading system that reveal current client orders are known as
dark pools.
C. Dealers facilitate trading by buying for and selling from their own
inventory.
69
Answer :
B is correct.
ATS that do not reveal current client orders are known as dark pools.
70
LOS E : Compare positions an investor can take in an asset.
QUESTION: 34
Margaret estimates the intrinsic value of a stock to be $37 which is currently

selling at $46. Margaret will most likely:
A. place a stop-order to buy.

B. place a market-order to buy.
C. place a short-sale order.
71
Answer :
C is correct.
Since Margaret believes that the stock is overvalued, she should place a short-
sale order that would be profitable if the stock moves in the direction of the
estimated value.
72
security price at which the investor would receive a margin call.
QUESTION: 35
Sean has the following information about a stock.

Price: $48.00
Leverage ratio: 2.00
Price for margin call: $34.29
The maintenance margin is most likely to be:
A. 50%.
B. 25%.
C. 30%.
73
Answer :
C is correct.
48
The stock price is 48 and the leverage ratio is 2. This means that = 2. So
Equity
equity (amount actually contributed by investor) is 24. Hence, the initial
24
margin is  0 .5
48
1  Initial Margin
Margin call price = Initial price*
1- Maintenance Margin
1  .5
34.29  48 *
1  MM
Solving for MM, we get MM = 0.30.
74
LOS G : Compare execution, validity, and clearing instructions.
QUESTION: 36
Which of the following is most likely to be cancelled if it cannot be filled (in

part or in whole) very quickly?
A. Good-till-cancelled order.
B. Fill-or-kill orders.
C. Good-on-close orders.
75
Answer :
B is correct.
Fill-or-kill orders are also known as immediate-or-cancel orders. They are
cancelled unless filled (in part or in whole) immediately.
76
QUESTION: 37
Sam has placed a buy market-on-open order—a market order that would
automatically be submitted at the market’s open tomorrow and would fill at
the market price. This order is most likely an example of a(an):
A. execution instruction.
B. validity instruction.
C. clearing instruction.
77
Answer :
B is correct.
A validity instruction tells when to fill an order.
78
QUESTION: 38
A. The disadvantage of a limit order is that it might not be filled.

B. Day orders expire if they are unfilled by the end of the trading day.
C. Stop sell orders can limit losses on a short position.
79
Answer :
C is correct.
Stop buy orders can limit losses on a short position.
80
LOS H : Compare market orders with limit orders.
QUESTION: 39
Consider an order-driven system that allows hidden orders. The following
four sell orders on a particular stock Y are currently in the system’s limit order
book. Based on the commonly used order precedence hierarchy, which of
these orders will have precedence over others?
Order Time of arrival Limit Price Special Instructions (if any)
(HH:MM:SS) (EUR)
I 7:12:01 10.29
II 7:12:08 10.29 Hidden order
III 7:13:04 10.29
IV 7:13:49 10.33
A. Order I.
B. Order II.
C. Order III
81
Answer :
A is correct.
Order I (time of arrival of 7:12:01) has precedence. In the order precedence
hierarchy, the first rule is price priority. Based on this rule, sell orders I, II and
III get precedence over order IV. The next rule is display precedence at a given
price. Because order II is a hidden order, orders I and III get precedence.
Finally, order I gets precedence over order III based on time priority at same
price and same display status.
82
LOS I : Define primary and secondary markets and explain how secondary markets support
primary markets.
QUESTION: 40
The cost of raising capital in primary markets:
A. becomes low when secondary markets are liquid.

B. becomes high when secondary markets are liquid.
C. is independent of the liquidity of secondary markets.
83
Answer :
A is correct.
The cost of raising capital becomes low in primary markets when securities
trade in liquid secondary markets.
84
LOS J : Describe how securities, contracts, and currencies are traded in quote-driven, order- driven, and
brokered markets.
QUESTION: 41
A. In call markets, trades occur at any time the market is open with prices set
either by the auction process or by dealer bid-ask quotes.
B. Quote-driven markets are sometimes also called dealer markets, price-
driven markets, or over- the- counter markets.
C. In order-driven markets, orders are executed using trading rules, which
are necessary because traders are usually anonymous.
85
Answer :
A is correct.
In call markets, orders are accumulated and securities trade only at specific
times.
86
LOS L : Describe objectives of market regulation
QUESTION: 42
Which of the following is least likely an objective of market regulation?
A. Prevent fraud.
B. Control Agency problems.
C. Ensure that investors earn at least the risk free
87
Answer :
C is correct.
Ensuring that investors earn at least the risk free rate is least likely to be an
objective of market regulation.
88

Cfa L 1 Equity SS 13 - CH 1 - Review - Question Solving

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cfa L 1 Equity SS 13 - CH 1 - Review - Question Solving

Uploaded by

Copyright:

Available Formats

CFA LEVEL 1 Market Organization and Structure

LOS B : Describe classifications of assets and markets

A university endowment fund is mandated to hold some of its value in

A. Real estate securities

Forward contracts are most likely to be attractive hedging vehicles to investors

A. do not want to make an upfront outlay of cash.

A. a belief that the portfolio securities are undervalued.

Dark pools are best described as:

A. trading venues that exercise little regulatory authority over their

Which of the following is most likely a primary market transaction?

A. A private placement of shares

The following is a trader’s order book for a stock:

Which of the following is most likely associated with secondary capital

An investor opens a margin account with an initial deposit of $5,000. He then

Margin call price=30*(1-5/9) / (1-.30)=19.05

Which of the following is most likely a characteristic of real assets?

A. Substantial management costs

B is incorrect because real assets are characterized by illiquidity, not high

C is incorrect because real assets are characterized by heterogeneity, not

A stop-buy order is most likely placed when a trader:

A. wants to limit the loss on a short position.

A is incorrect because in quote-driven markets (also called price-driven,

B is incorrect because an order-driven market follows an order matching

Which of the following statements concerning financial regulatory bodies is

A. act to level the playing field for market participants.

The following data pertain to a margin purchase of a stock:

Proceeds on sale: $55 × 500 $27,500

Proceeds on sale: $55 × 500 $27,500

Price  1  Initial Margin 

Information-motivated traders are most likely to differ from pure investors in

A. pay lower transaction fees.

C is incorrect because information-motivated traders arguably hold less

A. Her counterparties are dealers.

B is incorrect because a Japanese exporter pays no fee or commission to

C is incorrect because in the quote-driven currency markets, currency

Accounting standards and reporting requirements that produce meaningful

A is incorrect because allocational efficiency refers to making resources

C is incorrect because operational efficiency relates to the costs of arranging

B is incorrect because an informationally efficient financial system is one in

C is incorrect because an operationally efficient financial system is one in

In futures markets, contract performance is most likely guaranteed by:

A. the futures exchanges.

A is incorrect because the futures exchange facilitates transactions but it does

B is incorrect because regulatory agencies do not guarantee contract

Which of the following statements is most accurate concerning a short position

A. Maximum loss of $5,000

C is incorrect because the potential gains on a short position are limited to no

A pension fund has decided to invest in alternative investments. Which of the

Which of the following is least likely a function of the financial system?

A. To allow financial market participants to trade based on available

Which of the following statements is least accurate?

A. Private securities are often illiquid and not subject to regulation.

A mutual fund invests primarily in fixed-income securities. Which of the

Which of the following statements about exchange-traded funds is least likely

Which of the following statements is least accurate?

A. Exchanges sometimes act as brokers by providing electronic exchange

Margaret estimates the intrinsic value of a stock to be $37 which is currently

A. place a stop-order to buy.

Sean has the following information about a stock.

Which of the following is most likely to be cancelled if it cannot be filled (in

Which of the following statements is least accurate?

A. The disadvantage of a limit order is that it might not be filled.