CFA L1 SCHWSR FL Test Ques+Ans - N

CFA Level I
Question #1 of 18 Question ID: 1104308
Karen Jones, CFA, is an outside director for Valley Manufacturing. At a directors' meeting, Jones finds out that Valley has made
several contributions to foreign politicians that she suspects were illegal. Jones checks with her firm's legal counsel and
determines that the contributions were indeed illegal. At the next board meeting, Jones urges the board to disclose the
contributions. The board, however, votes not to make a disclosure. Jones's most appropriate action would be to:
A) protest the board’s actions in writing to the executive officer of Valley.
B) resign from the board and seek legal counsel as to her legal disclosure
requirements.
C) inform her supervisor of her discovery and cease attending meetings until the matter is
resolved.
Explanation
According to Standard I(A) Knowledge of the Law, since she has taken steps to stop the illegal activities and the board has
ignored her, Jones must dissociate from the board and seek legal advice as to what other actions would be appropriate in this
instance. She may need to inform legal or regulatory authorities of the illegal activities. (Study Session 1, Modules 2.1, 3.1)
Over the past two days, Lorraine Quigley, CFA, who is the manager of a hedge fund, has been purchasing large quantities of
Craeger Industrial Products' common stock while at the same time shorting put options on the same stock. Quigley did not notify
her clients of the trades, although they are aware of the fund's general strategy to generate returns. Which of the following
statements is most likely correct? Quigley:
A) did not violate the Code and Standards.

B) violated the Code and Standards by manipulating the prices of publicly traded
securities.
C) violated the Code and Standards by failing to disclose the transactions to clients before
they occurred.
Explanation
Quigley's trades are most likely an attempt to take advantage of an arbitrage opportunity that exists between Craeger's common
stock and its put options. She is not manipulating the prices of securities in an attempt to mislead market participants, which
would violate Standard II(B) Market Manipulation. She is pursuing a legitimate investment strategy. Participants in her hedge
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fund are aware of the fund's investment strategy, and thus Quigley did not violate the Code and Standards by not disclosing this
specific set of trades in advance of trading. (Study Session 1, Modules 2.1, 3.3)
Melvin Byrne, CFA, manages a portfolio for James Martin, a wealthy client. Martin's portfolio is well diversified with a slight tilt
toward capital appreciation. Martin requires very little income from the portfolio. Recently, Martin's brother, Cliff, has become a
client of Byrne. Byrne proceeds to invest Cliff's portfolio in a similar manner to James's portfolio based on the fact that both
brothers have a similar lifestyle and are only two years apart in age. Which of the following statements is most likely correct?
Byrne:
A) violated the Code and Standards by knowingly creating a conflict of interest between
James’s and Cliff’s portfolios.
B) violated the Code and Standards by failing to determine Cliff’s objectives and
constraints prior to investing his portfolio.
C) did not violate the Code and Standards.
Explanation
Standard III(C) Suitability requires that before taking investment action, members and candidates must make a reasonable
inquiry into a client's or prospect's investment objectives and constraints as well as their prior investment experience. Byrne
cannot assume that because the brothers have similar lifestyles and are close in age that they should have similarly managed
portfolios. Byrne should have interviewed Cliff directly before investing his portfolio. (Study Session 1, Modules 2.1, 3.5)
Robert Blair, CFA, is a director of research and has had an ongoing battle with his firm's management about the adequacy of its
compliance system. Blair believes the firm's compliance procedures are inadequate in that they are not being monitored or
carefully followed. Blair should most appropriately:
A) resign from the firm unless the compliance system is strengthened and followed.
B) send his superior a memo outlining the problem.

C) decline in writing to continue to accept supervisory responsibility until
reasonable compliance procedures are adopted.
Explanation
According to Standard IV(C) Responsibilities of Supervisors, because he is aware that the firm's compliance procedures are not
being monitored and followed and because he has repeatedly tried to get company management to correct the situation, Blair
should decline supervisory responsibility until adequate procedures to detect and prevent violations of laws, regulations, and the
Code and Standards are adopted and followed. If he does not do so, he will be in violation of the Code and Standards. (Study
Session 1, Modules 2.1, 3.6)
Question #5 of 18 2 Question ID: 1104315

Beth Anderson, CFA, is a portfolio manager for several wealthy clients, including Reuben Carlyle. Anderson manages Carlyle's
personal portfolio of stock and bond investments. Carlyle recently told Anderson that he is under investigation for tax evasion
related to his business, Carlyle Concrete. After learning about the investigation, Anderson informs a friend at a local investment
bank so that the bank may withdraw their proposal to take Carlyle Concrete public. Anderson has most likely:
A) violated the Code and Standards by failing to maintain the confidentiality of her
client’s information.
B) violated the Code and Standards by failing to detect and report the tax evasion to the
proper authorities.
C) not violated the Code and Standards since the information she conveyed pertained to
illegal activities on the part of her client.
Explanation
Anderson must maintain the confidentiality of client information according to Standard III(E) Preservation of Confidentiality.
Confidentiality may be broken in instances involving illegal activities on the part of the client, but the client's information may only
be relayed to proper authorities. Anderson did not have the right to inform the investment bank of her client's investigation.
(Study Session 1, Modules 2.1, 3.5)
A research report states: "Based on the fact that the South American utilities sector has seen rapid growth in new service orders,
we expect that most companies in the sector will be able to convert the revenue increases into significant profits. We also
believe the trend will continue for the next three to five years." The report goes on to describe the major risks of investing in this
market. The author of this report:
A) has not violated the Code and Standards.
B) violated the Code and Standards by failing to properly distinguish factual information
from opinions.
C) violated the Code and Standards by failing to properly identify details related to the
operations of South American utilities.
Explanation
Historical growth can be cited as a fact. The report states that the firm expects further growth and profitability, which phrases the
statement as an opinion. Under Standard V(B) Communication with Clients and Prospective Clients, it is not necessary to
include every detail about a potential investment in a report. Members and candidates are expected to use their judgment and
identify the most important factors to include. (Study Session 1, Modules 2.1, 3.7)
Frist Investments, Inc., has just hired Michael Pulin to manage institutional portfolios, most of which are pension related. Pulin
has just taken the Level III CFA exam and is awaiting his results. Pulin has more than 15 years of investment management
experience with individual clients but has never managed an institutional portfolio. Pulin joined the CFA Institute as an affiliate
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member two years ago and is in good standing with the organization. Which of the following statements would be most
appropriate for Frist to use in advertising Pulin as a new member of the firm? Pulin:
A) has many years of investment experience, which, along with his participation in the CFA
program, will allow him to deliver superior investment performance relative to other
managers.
B) is a CFA Level III and passed the first two exams on the first attempt. He is an affiliate
member of the CFA Institute. We expect him to become a regular member if he passes
the Level III examination.
C) is a Level III CFA candidate and has many years of excellent performance in the
investment management industry. Pulin is an affiliate member of the CFA Institute
and will be eligible to become a CFA charterholder and regular member if he
passes the Level III CFA Exam.
Explanation
Standard VII(B) governs acceptable methods of referencing the CFA Institute, CFA designation, and CFA Program. Candidates
may reference their candidacy if they are enrolled for, or waiting for the results of, a CFA exam. Pulin may also reference his
membership status with the CFA Institute as well as his remaining eligibility requirements to become a CFA charterholder. (Study
Session 1, Modules 2.1, 3.9)
Zanuatu, an island nation, does not have any regulations precluding the use of nonpublic information. Alfredo Romero has a
friend and fellow CFA charterholder there, Donna Gordon, with whom he has shared nonpublic information regarding firms
outside his industry. The information concerns several firms' internal earnings and cash flow projections. Gordon may:
A) trade on the information under the laws of Zanuatu, which govern her behavior.
B) not trade on the information under CFA Institute Standards, which govern her
behavior.
C) trade on the information under CFA Institute Standards, since the firms concerned are
outside Romero’s industry.
Explanation
Even though the laws of Zanuatu would not preclude trading on the information, as a CFA charterholder, Gordon is bound by the
CFA Institute Code and Standards. Standard II(A) prohibits the use of material nonpublic information, and Gordon may not trade
the stocks about which she has such information under any circumstances. (Study Session 1, Modules 2.1, 3.1, 3.3)
Samantha Donovan, CFA, is an exam proctor for the Level II CFA exam. The day before the exam is to be administered,
Donovan faxes a copy of one of the questions to two friends, James Smythe and Lynn Yeats, who are Level II candidates in the
CFA program. Donovan, Smythe, and Yeats had planned the distribution of an exam question months in advance. Smythe used
the fax to prepare for the exam. Yeats, however, had second thoughts and threw the fax away without looking at its contents.
Which of the following statements is most likely correct? 4
A) Smythe violated the Code and Standards, but Yeats did not.
B) Donovan violated the Code and Standards, but Smythe did not.
C) Donovan and Yeats both violated the Code and Standards.
Explanation
In this situation, Donovan, Smythe, and Yeats all violated Standard VII(A) Conduct as Participants in CFA Institute Programs.
The Standard prohibits conduct that compromises the integrity, validity, or security of the CFA exams. Donovan clearly breached
the exam security. Smythe and Yeats both compromised the integrity of the exams by planning to use the actual exam question
to gain an advantage over other candidates. Even though Yeats did not ultimately use the information to study for the exam, she
participated in a scheme to cheat on the CFA exam. (Study Session 1, Modules 2.1, 3.9)
Sally Albright, CFA, works full time for Frank & Company, an investment management firm, as a fixed-income security analyst.
Albright has been asked by a business contact at KDG Enterprises to accept some analytical work from KDG on a consulting
basis. The work would entail investigating potential distressed debt securities in the small-cap market. Albright should most
appropriately:
A) accept the work as long as she obtains consent to all the terms of the
engagement from Frank & Company.
B) not accept the work as it violates the Code and Standards by creating a conflict of
interest.
C) accept the work as long as she obtains written consent from KDG and does it on her
own time.
Explanation
Albright may accept work for which she receives outside compensation and that may compete with her employer only if she
obtains her employer's consent. Under Standard IV(A) Loyalty, she must obtain her employer's consent for her consulting work
before beginning the work. (Study Session 1, Modules 2.1, 3.6)
Josef Karloff, CFA, acts as liaison between Pinnacle Financial (an investment management firm) and Summit Inc. (an investment
banking boutique specializing in penny stocks). When Summit underwrites an IPO, Karloff routinely has Pinnacle issue vague
statements implying that the firm has cash flows, financial resources, and growth prospects that are better than is the case in
reality. This action is most likely a violation of the section of the Standards concerning:
A) fair dealing.
B) nonpublic information.
C) misconduct.
Explanation
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Since the statements are vague, we have no direct evidence that a violation of securities law has occurred. However, under
Standard I(D) Misconduct, members and candidates are prohibited from engaging in activities involving deceit. Karloff's action is
a clear attempt to mislead the investing public regarding the value of Summit IPOs. (Study Session 1, Modules 2.1, 3.2)
Steve Matthews, CFA, is a principal at Carlson Brothers, a leading regional investment bank specializing in initial public offerings
of small to mid-sized biotech firms. Just before many of the IPOs are offered to the general public, Matthews arranges for 10% of
the shares to be distributed to management of the firm going public. This action is a violation of the Standard concerning:
A) additional compensation.
B) disclosure of conflicts of interest.
C) fair dealing.
Explanation
Standard III(B) Fair Dealing requires that members not use their position to disadvantage clients, specifically in the case of IPOs.
(Study Session 1, Modules 2.1, 3.4)
Will Hunter, CFA, is a portfolio manager at NV Asset Managers. An investment banker asks Hunter to purchase shares in a new
IPO to support the price long enough for insiders to liquidate their holdings. Hunter realizes that the price of the shares will
almost certainly fall dramatically after his buying support ceases. NV management strongly suggests that Hunter honor the
investment banker's request since NV has had a longstanding relationship with the investment bank. If Hunter agrees to make
the purchases, he will:
A) not violate the Code and Standards.

B) violate the Standard concerning market manipulation.
C) violate the Standard concerning priority of transactions.
Explanation
NV management is asking Hunter to violate Standard II(B) Market Manipulation, which prohibits actions that are designed to
distort prices or artificially increase trading volume. The intent is to mislead market participants and allow corporate insiders to
take advantage of artificially high prices. (Study Session 1, Modules 2.1, 3.3)
Neiman Investment Co. receives brokerage business from Pick Asset Management in exchange for referring prospective clients
to Pick. Pick advises clients—in writing, before the relationship is established—of the nature of its arrangement with Neiman.
With regard to this practice, Pick has:
A) complied with the Code and Standards.

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B) violated the Code and Standards by failing to preserve the confidentiality of the
agreement with Neiman.
C) violated the Code and Standards by participating in an agreement that creates a conflict
of interest.
Explanation
Pick has not violated the Standards. The referral arrangement is fully disclosed to clients before they agree to do business with
Pick, in accordance with Standard VI(C) Referral Fees. Therefore, clients can fully assess the effect of the agreement on the
referral and how the agreement may affect their accounts before hiring Pick as their asset manager. (Study Session 1, Modules
2.1, 3.8)
Ralph Salley, a Level I candidate in the CFA Program, is explaining Standard VI(B) Priority of Transactions to his supervisor.
Salley states, "The Standard recommends, but does not require, that members and candidates should not participate in initial
public offerings. The Standard also recommends that trades for accounts of family members be made after those for other
clients, but before those for the account of the members and candidates responsible for executing the transactions." Salley's
explanation of the Standard is:
A) correct.
B) incorrect, because the Standard does not recommend that trades for family
members be made after those for other clients.
C) incorrect, because the Standard requires that members and candidates not participate
in initial public offerings.
Explanation
Standard VI(B) Priority of Transactions recommends that members and candidates avoid the appearance of conflict of interest
by not participating in IPOs. If a family member is a fee-paying client, the member or candidate should treat them like any other
client, not giving any advantage or disadvantage to their accounts. (Study Session 1, Modules 2.1, 3.8)
Which of the following policies is required to comply with GIPS?
A) Compliance with GIPS must be verified by an independent third party.
B) Restructuring of the firm’s organization cannot be used as a basis to change the

historical performance results of a composite.
C) The definition of the firm must include the firm’s offices in all countries and regions.
Explanation
Firms cannot alter historical performance records of composites simply because of a reorganization of the firm. This is required
by GIPS Standard 0.A.15. Third-party verification of GIPS compliance and including all geographical offices in the definition of
the firm are recommended, but not required. (Study Session 1, Module
7 4.1, LOS 4.c, Module 5.1, LOS 5.a, 5.b)
Mason Smith is trying to decide which of the following composite definitions, submitted by his junior analysts, would be
considered an acceptable composite according to GIPS. An acceptable composite can include all:
A) accounts that are managed directly from the firm’s Hong Kong office.
B) actively managed portfolios, but exclude passively managed portfolios.
C) portfolios that are managed to provide a return approximately equal to that of the
S&P 500 Index.
Explanation
Composites are groups of portfolios that represent a similar investment strategy, objective, or mandate. Clearly, grouping all
portfolios managed to mirror the S&P 500 Index return constitutes a composite according to this definition. Organizing
composites by office or by a generic active management category is not acceptable, as these categories do not reflect any sort
of strategy, objective, or mandate. (Study Session 1, Module 4.1, LOS 4.b)
An investment management firm, Investco, Inc., was recently audited by the United States Securities and Exchange Commission
(SEC). Investco included the following statement in its performance presentation report: "This report has been verified as GIPS
compliant by Investco's Compliance Department and the United States Securities and Exchange Commission." Does this
constitute acceptable verification under GIPS?
A) No, because only one party may perform GIPS verification.

B) No, because neither party involved in the audit constitutes an acceptable GIPS
verification.
C) Yes, because an audit was performed implicitly by the SEC and explicitly by the firm’s
audit team.
Explanation
GIPS verification must be performed by an independent third party. The SEC audit does not constitute a GIPS verification.
(Study Session 1, Module 4.1, LOS 4.c)
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CFA Level I
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)
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)
An analyst who wants to display the relationship between two variables graphically is most likelyto use:
A) a histogram.
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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)
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)
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
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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)
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)
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)
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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)
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%
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)
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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)
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)
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CFA Level I
An analyst is evaluating the degree of competition in an industry and compiles the following information:
Few significant barriers to entry or exit exist.

Firms in the industry produce slightly differentiated products.
Each firm faces a demand curve that is largely unaffected by the actions of other individual firms in the industry.
The analyst should characterize the competitive structure of this industry as:
A) oligopoly.
B) monopoly.
C) monopolistic competition.
Explanation
Both oligopoly and monopolistic competition are consistent with firms that produce slightly differentiated products. However, with
few significant barriers to entry and little interdependence among competitors, the industry does not fit the definition of an
oligopoly and would be best characterized as monopolistic competition. (Study Session 4, Module 13.4, LOS 13.h)
Which of the following statements about the behavior of firms in a perfectly competitive market is least accurate?
A) A firm experiencing economic losses in the short run will continue to operate if its
revenues are greater than its variable costs.
B) A firm that is producing less than the quantity for which marginal cost equals the
market price would lose money by increasing production.
C) If firms are earning economic profits in the short run, new firms will enter the market and
reduce economic profits to zero in the long run.
Explanation
A firm that is producing more than the quantity where its marginal revenue (the market price in perfect competition) is equal to its
marginal cost is losing money on sales of additional units. A firm producing where marginal cost is less than price is foregoing
additional profit by not increasing production. The other responses accurately describe characteristics of firms in perfectly
competitive markets. (Study Session 4, Module 13.1, LOS 13.e)
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Compared to a customs union or a common market, the primary advantage of an economic union is that:
A) its members adopt a common currency.

B) its members have a common economic policy.
C) it removes barriers to imports and exports among its members.
Explanation
The advantage of an economic union is that its members establish common economic policies and institutions. A common
currency is a characteristic of a monetary union. All regional trading agreements remove barriers to imports and exports among
their members. (Study Session 5, Module 17.2, LOS 17.f)
A country's balance of payments accounts show the following:
A net inflow of capital transfers.

Greater sales than purchases of non-financial assets.
Greater foreign-owned assets in the country than government-owned assets abroad.
The country is most accurately described as having:
A) a capital account deficit.

B) a current account deficit.
C) a financial account deficit.
Explanation
The components listed indicate that the capital and financial accounts are in surplus. This indicates that the current account must
be in deficit. (Study Session 5, Module 17.2, LOS 17.h)
Other things equal, an increase of 2.0% in the price of Product X results in a 1.4% increase in the quantity demanded of Product
Y and a 0.7% decrease in the quantity demanded of Product Z. Which statement about products X, Y and Z is least accurate?
A) Products X and Y are substitutes.

B) Products X and Z are complements.
C) Products Y and Z are complements.
Explanation
It does not necessarily follow from the information given in the question that products Y and Z are complements.
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The increase in the price of Product X caused the quantity demanded of Product Y to increase (positive cross-price elasticity)
and caused the quantity demanded of Product Z to decrease (negative cross-price elasticity). This suggests that Product Y is a
substitute for Product X, and Product Z is a complement to Product X.
But this does not mean Product Y is a complement to Product Z. For example, gasoline is a complement to automobiles;
bicycles are a substitute for automobiles; but gasoline is not a complement to bicycles. (Study Session 4, Module 12.1, LOS
12.a)
The EUR/USD spot exchange rate is 0.70145, and one-year interest rates are 3% in EUR and 2% in USD. The forward
USD/EUR exchange rate is closest to:
A) 1.1426.
B) 1.4118.
C) 1.4396.
Explanation
0.70145 × 1.03 / 1.02 = 0.7083; 1 / 0.7083 = 1.4118.
(Study Session 5, Module 18.2, LOS 18.h)
Depreciation of a country's currency is most likely to narrow its trade deficit when:
A) its imports are greater in value than its exports.
B) price elasticity of import demand is greater than one.

C) investment increases relative to private and government savings.
Explanation
The elasticities approach to evaluating the effect of exchange rates on the trade balance suggests that the more elastic both
import demand and export demand are, the more likely currency depreciation is to narrow a trade deficit. A country with a trade
deficit imports more than it exports by definition. An increase in investment relative to savings would tend to increase the trade
deficit (net exports equal private and government savings minus investment). (Study Session 5, Module 18.3, LOS 18.j)
According to real business cycle theory, business cycles result from:
A) rational responses to external shocks.

B) inappropriate changes in monetary policy.
C) increases and decreases in business confidence. 16

Explanation
Real business cycle theory holds that economic cycles are driven by utility-maximizing individuals and firms responding to
changes in real economic factors, such as changes in technology. Keynesian cycle theory attributes the business cycle to
changes in business confidence. Monetarist theory attributes the business cycle to inappropriate changes in the rate of money
supply growth. (Study Session 4, Module 15.1, LOS 15.c)
A decrease in the target U.S. federal funds rate is least likely to result in:
A) a proportionate decrease in long-term interest rates.

B) an increase in consumer spending on durable goods.
C) depreciation of the U.S. dollar on the foreign exchange market.
Explanation
Changes in the U.S. federal funds rate and changes in long-term interest rates are unlikely to be proportionate. Long-term rates
are the sum of short-term rates and a premium for the expected rate of inflation. If a decrease (increase) in the target federal
funds rate by the Fed causes economic agents to increase (decrease) their inflation expectations, the change in long-term rates
will be less than the change in the federal funds rate. Increases in spending on consumer durables and a decrease in the foreign
exchange value of the U.S. dollar are among the expected results of a decrease in the target U.S. federal funds rate. (Study
Session 5, Module 16.2, LOS 16.k)
For an economy that is initially at full-employment real GDP, an increase in aggregate demand will most likely have what effects
on the price level and real GDP in the short run?
A) Both will increase in the short run.

B) Neither will increase in the short run.
C) Only one will increase in the short run.
Explanation
An increase in aggregate demand will cause short-run equilibrium to move along the short-run aggregate supply curve. This will
tend to increase both real GDP and the price level in the short run. (Study Session 4, Module 14.3, LOS 14.l)
Potential real GDP is least likely to increase as a result of:
A) an improvement in technology.
B) an increase in the money wage rate. 17
C) an increase in the labor force participation ratio.
Explanation
An increase in the money wage rate would not increase long-run aggregate supply (potential real GDP), but instead would
decrease the short-run aggregate supply curve. An improvement in technology would tend to increase potential real GDP. An
increase in the participation ratio increases the full-employment quantity of labor supplied and potential real GDP. (Study Session
4, Module 14.2, LOS 14.h)
When the economy is operating at the natural rate of unemployment, it is most likely that:
A) inflation is accelerating.
B) frictional unemployment is absent.
C) structural unemployment is present.
Explanation
Structural and frictional unemployment are always present. The natural rate of unemployment is the lowest rate consistent with
non-accelerating inflation. (Study Session 4, Module 15.2, LOS 15.d)
18
CFA Level I
The fundamental qualitative characteristics of financial statements as described by the IASB conceptual framework least likely
include:
A) relevance.
B) reliability.
C) faithful representation.
Explanation
The fundamental qualitative characteristics of financial statements according to the IASB are relevance and faithful
representation. (Study Session 6, Module 20.2, LOS 20.c)
A decrease in a firm's inventory turnover ratio is most likely to result from:
A) a write-down of inventory.
B) goods in inventory becoming obsolete.
C) decreasing purchases in a period of stable sales.
Explanation
Obsolescence can cause goods in inventory to remain unsold, which tends to reduce the inventory turnover ratio (COGS /
average inventory). Write-downs of inventory increase the inventory turnover ratio by decreasing the denominator. If purchases
decrease while sales remain stable, inventory decreases, which increases the inventory turnover ratio. (Study Session 7, Module
24.2, LOS 24.b)
Two firms are identical except that the first pays higher interest charges and lower dividends, while the second pays higher
dividends and lower interest charges. Both prepare their financial statements under U.S. GAAP. Compared to the first, the
second will have cash flow from financing (CFF) and earnings per share (EPS) that are:
CFF EPS
19
A) The same Higher
B) Lower Higher
C) Lower The same
Explanation
Interest paid is an operating cash flow, and dividends paid are a financing cash flow, so the firm that pays higher dividends will
have lower CFF. The firm with lower interest expense will have higher EPS. ((Study Session 7, Module 23.1, LOS 23.e))
The following information is summarized from Famous, Inc.'s financial statements for the year, which ended December 31, 20X0:
Sales were $800,000.

Net profit margin was 20%.
Sales to assets was 50%.
Equity multiplier was 1.6.
Interest expense was $30,000.
Dividends declared were $32,000.
Famous, Inc.'s sustainable growth rate based on results from this period is closest to:
A) 3.2%.
B) 8.0%.
C) 12.8%.
Explanation
Famous, Inc.'s sustainable growth rate = (retention rate)(ROE).
ROE = 0.20(800,000) / [(800,000 / 0.5)(1 / 1.6)] = 160,000 / 1,000,000 = 16%.
Alternatively:
ROE = (0.20)(0.50)(1.6) = 0.16 = 16%
Retention rate = (1 − dividend payout ratio) = 1 − {32,000 / [(0.20)(800,000)]} = 0.80.
Sustainable growth = 0.80(16%) = 12.8%.
On January 1, Orange Computers issued employee stock options for 400,000 shares. Options on 200,000 shares have an
exercise price of $18, and options on the other 200,000 shares have an exercise price of $22. The year-end stock price was $24,
20
and the average stock price over the year was $20. The change in the number of shares used to calculate diluted earnings per
share for the year due to these options is closest to:
A) 20,000 shares.
B) 67,000 shares.
C) 100,000 shares.
Explanation
Based on the average stock price, only the options at 18 are in the money (and therefore dilutive). Using the treasury stock
method, the average shares outstanding for calculating diluted EPS would increase by [(20 − 18) / 20]200,000 = 20,000 shares.
(Study Session 7, Module 21.4, LOS 21.g)
A snowmobile manufacturer that uses LIFO begins the year with an inventory of 3,000 snowmobiles, at a carrying cost of $4,000
each. In January, the company sells 2,000 snowmobiles at a price of $10,000 each. In July, the company adds 4,000
snowmobiles to inventory at a cost of $5,000 each. Compared to using a perpetual inventory system, using a periodic system for
the firm's annual financial statements would:
A) increase COGS by $2,000,000.
B) leave ending inventory unchanged.

C) decrease gross profit by $4,000,000.
Explanation
Under a perpetual inventory system, the snowmobiles sold in January are associated with the $4,000 cost of the beginning
inventory. Cost of sales is $8,000,000, gross profit is $12,000,000, and end-of-year inventory is $24,000,000. Under a periodic
inventory system, the snowmobiles sold in January would be associated with the $5,000 cost of the snowmobiles manufactured
in July. Cost of sales would be higher by $2,000,000, gross profit would be lower by $2,000,000, and ending inventory would be
lower by $2,000,000. (Study Session 8, Module 25.2, LOS 25.c)
Which of the following is least likely to result in low-quality financial statements?
A) Unsustainable cash flows.

B) Activities that manage earnings.
C) Conservative accounting choices.
Explanation
Even if earnings or cash flows are unsustainable (i.e., low quality), the firm's financial statements can still be high quality.
Conservative accounting choices are considered to be biased compared to the ideal of neutral accounting choices. Earnings
management is viewed as reducing the quality of a firm's financial statements. (Study Session 9, Module 29.1, LOS 29.a)
21
Train Company paid $8,000,000 to acquire a franchise at the beginning of 20X5 that was expensed in 20X5. If Train had elected
to capitalize the franchise as an intangible asset and amortize the cost of the franchise over eight years, what effect would this
decision have on Train's 20X5 cash flow from operations (CFO) and 20X6 debt-to-assets ratio?
A) Both would be higher with capitalization.
B) Both would be lower with capitalization.

C) One would be higher and one would be lower with capitalization.
Explanation
If the cost was amortized rather than expensed, the $8,000,000 cost of the franchise would be classified as an investing cash
flow rather than an operating cash flow, so CFO would increase (and CFI decrease). The asset created by capitalizing the cost
would increase assets, so the debt-to-assets ratio would decrease. (Study Session 8, Module 26.1, LOS 26.c)
Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it is probable that $2,000,000 of the
deferred tax asset's value will never be realized because of the uncertainty about future income. Under U.S. GAAP, Graphics,
Inc. should:
A) reduce the deferred tax asset account by $2,000,000.

B) establish a valuation allowance of $2,000,000.
C) establish an offsetting deferred tax liability of $2,000,000.
Explanation
If it becomes probable that a portion of a deferred tax asset will not be realized, a valuation allowance should be established. A
valuation allowance serves to reduce the value of a deferred tax asset for the probability that it will not be realized (the difference
between tax payable and income tax expense will not reverse in future periods). (Study Session 8, Module 27.5, LOS 27.g)
Long-lived assets cease to be depreciated when the firm's management decides to dispose of the assets by:
A) sale.
B) abandonment.
C) exchange for another asset.
Explanation
Under both IFRS and U.S. GAAP, long-lived assets that are reclassified as held for sale cease to be depreciated. Long-lived
assets that are to be abandoned or exchanged are classified as held for use until disposal and continue to be depreciated.
(Study Session 8, Module 26.3, LOS 26.j)
22
An asset's tax base is most accurately described as the:
A) tax-deductible expense that appears in the tax return in a given period.

B) amount of the asset that will not be expensed through the tax return in the future as the
economic benefits of the asset are realized.
C) amount of the asset to be expensed through the tax return in the future as the
economic benefits of the asset are realized.
Explanation
The tax base of an asset represents the amounts that will be expensed through the tax return in future periods.(Study Session 8,
Module 27.1, LOS 27.c)
In the notes to its financial statements, Gilbert Company discloses a €400,000 reversal of an earlier write-down of inventory
values, which increases this inventory's carrying value to €2,000,000. It is most likely that:
A) the reasons for this reversal are also disclosed.

B) a gain of €400,000 appears on the income statement.
C) the net realizable value of this inventory is €2,000,000.
Explanation
Required disclosures related to inventories under IFRS include the amount of any reversal of previous write-downs and the
circumstances that led to the reversal. Under IFRS, the reversal of an inventory write-down is not recognized as a gain, but
instead as a reduction in the cost of sales for the period. From only the information given, we cannot conclude that the net
realizable value of the inventory is €2,000,000. This value may be the original cost of the inventory. (Study Session 8, Module
25.4, LOS 25.i)
If a firm's management wishes to use its discretion to increase operating cash flows, it is most likely to:
A) capitalize an expense.
B) decrease the allowance for uncollectible accounts.
C) change delivery terms from FOB destination to FOB shipping point.
Explanation
By capitalizing a purchase instead of recognizing it as an expense in the current period, a firm increases operating cash flow by
classifying the cash outflow as CFI rather than CFO. Decreasing the allowance for uncollectible accounts or changing delivery
23
terms for shipments from FOB destination to FOB shipping point would increase earnings but would not affect operating cash
flows. (Study Session 9, Module 29.2, LOS 29.h)
A firm that purchases a building that it intends to rent out for income would report this asset as investment property under:
A) U.S. GAAP only.

B) IFRS only.
C) both U.S. GAAP and IFRS.
Explanation
Under IFRS, the building is classified as investment property. U.S. GAAP does not distinguish investment property from other
types of long-lived assets. (Study Session 8, Module 26.4, LOS 26.n)
When a company redeems bonds before they mature, the gain or loss on debt extinguishment is calculated as the bonds'
carrying amount minus the:
A) face or par value of the bonds.

B) amount required to redeem the bonds.
C) amortized historical cost of the bonds.
Explanation
Under IFRS, when a company redeems bonds before they mature, the company records a gain or loss equal to the bonds'
carrying amount minus the cash amount required to redeem the bonds. (Study Session 8, Module 28.3, LOS 28.c)
Which of the following terms from the extended DuPont equation would an analyst least likely be able to obtain, given only a
company's common-size income statement and common-size balance sheet? The company's:
A) EBIT margin.
B) asset turnover.
C) financial leverage.
Explanation
Asset turnover—revenue/assets —requires an item from the income statement and an item from the balance sheet, so this ratio
cannot be obtained from the common-size statements. The EBIT margin—EBIT/revenue (or sales)—would be on a common-
24
size income statement. Financial leverage—assets/equity—is the reciprocal of equity/assets, which would be shown on a
common-size balance sheet.(Study Session 7, Module 21.5, LOS 21.i)
An analyst is comparing two firms, one that reports under IFRS and one that reports under U.S. GAAP. An analyst is least likely
to do which of the following to facilitate a comparison of the companies?
A) Add the LIFO reserve to inventory for a United States-based firm that uses LIFO.
B) Add the present values of each firm’s future minimum operating lease payments to both
assets and liabilities.
C) Adjust the income statement of one of the firms if both have significant
unrealized gains or losses from changes in the fair values of trading securities.
Explanation
Unrealized gains and losses on trading securities are reported in the income statement under both U.S. and IFRS standards.
Since LIFO is not permitted under IFRS, adjusting the inventory amount for a LIFO firm is a likely adjustment. To account for
differences in how companies report leases, adding the present value of future minimum operating lease payments to both the
assets and liabilities of a firm will remove the effects of lease reporting methods from solvency and leverage ratios. (Study
Session 9, Module 30.2, LOS 30.e)
An analyst wants to compare the cash flows of two United States companies, one that reports cash flow using the direct method
and one that reports it using the indirect method. The analyst is most likely to:
A) convert the indirect statement to the direct method to compare the firms’ cash
expenditures.
B) adjust the reported CFO of the firm that reports under the direct method for depreciation
and amortization expense.
C) increase CFI for any dividends reported as investing cash flows by the firm reporting
cash flow by the direct method.
Explanation
By converting a cash flow statement to the direct method, an analyst can view cash expenses and receipts by category, which
will facilitate a comparison of two firms' cash outlays and receipts. CFO is correct under either method and requires no
adjustment. Neither dividends received nor dividends paid are classified as CFI under U.S. GAAP. (Study Session 7, Module
23.3, LOS 23.g)
25
CFA Level I
An analyst calculates the following leverage ratios for Burkhardt Company and Dutchin Company:
Degree of Operating Leverage Degree of Financial Leverage
Burkhardt 1.6 3.0
Dutchin 1.2 4.0
If both companies' sales increase by 5%, what are the most likely effects on the companies' earnings before interest and taxes
(EBIT) and earnings per share (EPS)?
A) Both companies’ EBIT will increase by the same percentage.

B) Dutchin’s EPS will increase by a larger percentage than Burkhardt’s EPS.
C) Burkhardt’s EBIT will increase by a larger percentage than Dutchin’s EBIT.
Explanation
The DOL is the percent change in operating income (EBIT) that will result from a 1% change in sales. Because Burkhardt has a
higher DOL than Dutchin, Burkhardt's EBIT will increase by a larger percentage if both companies' sales increase by the same
percentage. The percentage change in EPS resulting from a change in sales of 1% is measured by the degree of total leverage.
The DTL for Burkhardt is 1.6 × 3.0 = 4.8, and the DTL for Dutchin is 1.2 × 4.0 = 4.8. If both companies' sales increase by the
same percentage, their EPS will also increase by the same percentage. (Study Session 11, Module 34.1, LOS 34.b)
Sutter Corp. is considering two mutually exclusive projects with the following after-tax cash flows:
TIME 0 1 2 3 4 5 6
Project 1 –10,000 2,000 2,000 2,000 4,000 4,000 4,000
Project 2 –12,000 2,000 2,000 2,000 5,000 5,000 5,000
Given that Sutter's cost of capital is 7.5%, the IRR of the project that Sutter should select is closest to:
A) 13%.
B) 15%.
C) 17%.
26
Explanation
Sutter should choose Project 2 because it has a higher NPV. The NPV of Project 1 is $3,574 and its IRR is 16.79%. The NPV of
Project 2 is $3,668 and its IRR is 15.18%. (Study Session 10, Modules 32.1, 32.2, LOS 32.c, 32.d)
Which of the following changes in a firm's working capital management is most likely to result in a shorter operating cycle?
A) Reducing stock-outs by carrying greater quantities of inventory.

B) Stretching its payables by paying on the last permitted date.
C) Changing its credit terms for customers from 2/10, net 60 to 2/10, net 30.
Explanation
The operating cycle is average days of receivables plus average days of inventory. Changing its credit terms for customers from
"net 60" to "net 30" would likely decrease the firm's average days of receivables and shorten its operating cycle. Increasing
inventory quantities would increase average days of inventory and lengthen the operating cycle. Stretching payables by waiting
until their due date to pay would increase the firm's average days of payables. This would shorten the firm's cash conversion
cycle (days of receivables + days of inventory – days of payables) but would not affect its operating cycle. (Study Session 11,
A company's operations analyst is evaluating a plant expansion project that is likely to be financed in part by issuing new
common equity. Flotation costs are expected to be 4% of the amount of new equity capital raised. The most appropriate way for
the analyst to treat the flotation costs is to:
A) ignore them, because flotation costs for common equity are likely to be nonmaterial.
B) estimate the cost of equity capital based on a share price 4% less than the current
price.
C) determine the flotation cost attributable to this project and treat it as part of the
project’s initial cash outflow.
Explanation
The correct treatment of flotation costs is to treat them as a cash outflow at the project's initiation. Methods that adjust the cost of
equity capital (and therefore the WACC) for flotation costs are incorrect because the cost of capital is an ongoing expense,
whereas flotation costs are actually a one-time expense. Flotation costs for common equity are typically large enough that they
must be considered in computing a project's NPV. (Study Session 10, Module 33.2, LOS 33.l)
Executive directors are least likely to be included in:

27
A) a supervisory board.
B) a one-tier board.
C) a management board.
Explanation
Executive directors are board members who are also senior managers of the company. In a two-tier board structure, the
management board includes executive directors, and the supervisory board includes only external (non-executive) directors.
The manufacturer of Pow Detergent has developed New Improved Pow with Dirteaters and is considering adding it to its product
line. New Improved Pow would sell at a premium price compared to Pow. In order to manufacture New Improved Pow, the firm
will need to build a new facility and purchase new equipment. Which of the following is least likely included when calculating the
appropriate cash flows for analysis of whether to add New Improved Pow to its product line?
A) Expected depreciation on the new facility and equipment for tax purposes.
B) Costs of a marketing survey performed last month to decide whether to introduce
New Improved Pow.
C) Reduced sales of Pow that result from the introduction of New Improved Pow.
Explanation
Costs that are incurred prior to the decision of whether or not to pursue a project are sunk costs and should not be used in the
NPV calculation. Only cash flows that result from the decision to actually do the project should be considered in the analysis.
Taxes must be deducted so the project's cash flows can be analyzed on an after-tax basis. Because depreciation is tax
deductible, expected depreciation will affect annual taxes and after-tax cash flows. Cannibalization of sales of an existing
product is an externality that should be included in the estimation of incremental project cash flows. (Study Session 10, Module
32.1, LOS 32.b)
The use of secondary sources of liquidity would most likely be considered:
A) a normal part of daily business for a company.
B) a signal that a company’s financial position is deteriorating.

C) a lower-cost source of short-term financing compared to primary sources of liquidity.
Explanation
Secondary sources of liquidity include renegotiating debt contracts, liquidating assets, and filing for bankruptcy protection and
reorganization. The use of these sources of funds is typically a signal that a company's financial position is deteriorating. The
liquidity provided by these sources usually comes at a substantially higher cost than liquidity provided by primary sources. (Study
Session 11, Module 35.1, LOS 35.a)
28
Balfour Corp. is in the food distribution business and has a beta of 1.1, a marginal tax rate of 34%, and a debt-to-assets ratio of
40%. Balfour management is evaluating an entry into the fast-casual restaurant business. They have identified a publicly traded
company in the fast-casual restaurant industry that has an equity beta of 1.3, a marginal tax rate of 28%, and a debt-to-equity
ratio of 40%. The appropriate beta for Balfour to use in calculating the cost of equity capital for the analysis of the potential entry
into the restaurant business is closest to:
A) 1.15.
B) 1.30.
C) 1.45.
Explanation
Balfour's debt-to-assets ratio of 40% gives it a debt-to-equity ratio of .
(Study Session 10, Module 33.2, LOS 33.i)
With regard to the internal rate of return (IRR), which of the following statements is most accurate?
A) The IRR is the discount rate that maximizes a project’s net present value.
B) A proper decision rule is to accept the project if IRR is less than the required rate of
return.
C) IRR is the discount rate at which the present value of expected future after-tax
cash flows is equal to the investment outlay.
Explanation
The IRR is the discount rate that equates a project's initial cost with the present value of its future expected cash flows (i.e., for
which a project's net present value equals zero). The correct IRR decision rule is to accept the project if IRR is greater than the
required rate of return, and to reject the project if IRR is less than the required rate of return. (Study Session 10, Module 32.1,
LOS 32.d)
In early 20X8, a company changed its customer credit terms from 2/10, net 30 to 2/10, net 40. Comparisons of accounts
receivable aging schedules at the end of 20X7 and 20X8 follow.
29
Number of Days 20X7 20X8
$ millions $ millions
0–30 380 350
31–60 65 140
61–90 41 35
Over 90 54 55
Total accounts receivable 540 580
The trends in the company's receivables indicate:
A) improved collections on credit accounts.
B) slower payments from credit customers.

C) a higher receivables turnover ratio.
Explanation
The percentage of receivables outstanding for 31 to 60 days increased from 12% to 24%, while the percentage outstanding for 0
to 30 days decreased from 70% to 60%. Slower customer payments after the change in credit terms may indicate liquidity
problems. (Study Session 11, Module 35.1, LOS 35.f)
William Mason, CFA, is a project manager for the semiconductor division of Mammoth Industries, a conglomerate. The
semiconductor division's projected cash flows are less certain than Mammoth's overall cash flows. When determining the net
present values of projects within the semiconductor division, Mason should use:
A) Mammoth Industries’ marginal cost of capital.

B) a lower marginal cost of capital than Mammoth Industries.
C) a higher marginal cost of capital than Mammoth Industries.
Explanation
Mason should use a higher marginal cost of capital than Mammoth Industries to adjust for the semiconductor division's higher
cash flow risk. (Study Session 10, Module 33.1, LOS 33.e)
Isaac Segovia, CFA, is using the net present value (NPV) and internal rate of return (IRR) methods to analyze a project for his
firm. After its initial cash outflow, the project will generate several years of cash inflows, but will require a net cash outflow in the
final year. The problem Segovia is most likely to encounter when using the NPV or IRR methods for this analysis is:
A) multiple IRRs.
30
B) negative NPV.
C) conflicting NPV and IRR project rankings.
Explanation
A project with an unconventional cash flow pattern (multiple sign changes) can have multiple IRRs or no IRR. Conflicting project
rankings between the NPV and IRR methods can occur, but here the analyst is evaluating a single project. Not enough
information is given to determine whether the NPV will be negative, but a single project with a negative NPV will simply be
rejected. (Study Session 10, Module 32.2, LOS 32.e, 32.f)
31
CFA Level I
An investor purchased 550 shares of Akley common stock for $38,500 in a margin account and posted initial margin of 50%. The
maintenance margin requirement is 35%. The price of Akley, below which the investor would get a margin call, is closest to:
A) $45.00.
B) $54.00.
C) $59.50.
Explanation
The price below which the investor would receive a margin call is:
Adams owns 100 shares of Brikley stock, which is trading at $86 per share, and Brown is short 200 shares of Brikley. Adams
wants to buy 100 more shares if the price rises to $90, and Brown wants to cover his short position and take profits if the price
falls to $75. The orders Adams and Brown should enter to accomplish their stated objectives are:
Adams Brown
A) Limit buy @ 90 Limit buy @ 75
B) Limit buy @ 90 Stop buy @ 75
C) Stop buy @ 90 Limit buy @ 75
Explanation
Adams should enter a stop buy at 90, which will be executed only if the stock price rises to 90. Brown should enter a buy order
with a limit at 75 because he wants to buy stock to close out his short position if he can purchase it at 75 (or less). (Study
Session 12, Module 36.2, LOS 36.g)
32
Which of the factors that determine the intensity of industry competition is most likely to be affected by the presence of significant
economies of scale?
A) Threat of entry.
B) Threat of substitutes.
C) Power of suppliers.
Explanation
Economies of scale represent a barrier to entry into an industry. Existing competitors are likely to be operating on a large scale
that new entrants would find difficult and expensive to develop, reducing the threat of entry. (Study Session 13, Module 40.2,
LOS 40.g)
Price-to-book value ratios are most appropriate for measuring the relative value of:
A) a bank.
B) a manufacturing company.
C) a mature technology company.
Explanation
Price-to-book value is an appropriate measure of relative value for firms that hold primarily liquid assets, such as banks.
Manufacturing companies typically have a large proportion of fixed assets for which the book value (historical cost less
depreciation) may be less relevant as a measure of their economic value. A mature technology company likely has valuable
intangible assets, such as patents and human capital, that may not be reflected fully (or at all) on the balance sheet. (Study
Session 13, Module 41.3, LOS 41.i)
An index of three non-dividend paying stocks is weighted by their market values. One of the index stocks splits 2-for-1 during the
year, but no shares are sold. The total return of this index for the year is:
A) less than the price return of the index.

B) equal to the price return of the index.
C) greater than the price return of the index.
Explanation
Because the stocks in the index do not pay dividends, there is no difference between the price return and the total return of the
index. (Study Session 12, Module 37.1, LOS 37.b)
33
Financial intermediaries that buy securities from and sell securities to investors are best described as:
A) dealers.
B) brokers.
C) investment bankers.
Explanation
Dealers maintain inventories of securities and buy them from and sell them to investors. Brokers do not trade directly with clients
but find buyers for and sellers of securities to execute customer orders. Investment banks are primarily involved in assisting with
the issuance of new securities. (Study Session 12, Module 36.1, LOS 36.d)
Among the types of assets that trade in organized markets, asset-backed securities are best characterized as:
A) real assets.
B) equity securities.
C) pooled investment vehicles.
Explanation
Asset-backed securities represent claims to a portion of a financial asset pool. (Study Session 12, Module 36.1, LOS 36.c)
Which of the following market indexes is likely to be rebalanced most frequently? An index that is:
A) price weighted.
B) value weighted.
C) equal weighted.
Explanation
An equal-weighted index is not equal weighted after even one day, unless all stocks in the index change by the same
percentage. A change in share price preserves the weightings in a value-weighted index and preserves the weightings in a price-
weighted index unless the price change results from a stock split or stock dividend. (Study Session 12, Module 37.2, LOS 37.f)
Rogers Partners values stocks using a dividend discount model and the CAPM. Holding all other factors constant, which of the
following is least likely to increase the estimated value of a stock?
34
A) An increase in the next period’s expected dividend.
B) A decrease in the stock’s systematic risk.
C) A decrease in the expected growth rate of dividends.
Explanation
Other things equal, a decrease in the expected growth rate of dividends (g) will decrease the value of a stock estimated with the
dividend discount model. According to the CAPM, a decrease in the stock's systematic risk would decrease the required return
on equity, increasing the DDM value of future dividends. Other things equal, an increase in a company's next dividend will
increase share value. (Study Session 13, Module 41.2, LOS 41.e)
Brandy Clark, CFA, has forecast that Aceler, Inc., will pay its first dividend two years from now in the amount of $1.25. For the
following year, she forecasts a dividend of $2.00 and expects dividends to increase at an average rate of 7% for the foreseeable
future after that. If the risk-free rate is 4.5%, the expected market risk premium is 7.5%, and Aceler's beta is 0.9, Clark would
estimate the current value of Aceler shares as being closest to:
A) $37.
B) $39.
C) $47.
Explanation
The required rate of return on Aceler shares is 4.5 + 0.9(7.5) = 11.25%. Note that the expected market risk premium = E(Rmkt) -
Rf, so there is no need to subtract the riskfree rate.
The dividend at t = 3, $2.00, is expected to grow at 7% for the foreseeable future, so the DDM value of Aceler shares at t = 2 is 2
/ (0.1125 – 0.07) = 47.06.
The t = 0 value of the shares is (47.06 + 1.25) / 1.11252 = $39.03. (Study Session 13, Module 41.2, LOS 41.g)
The industry that is classified the more cyclical sector under a commercial industry classification scheme is:
A) personal care products.

B) food.
C) apparel.
Explanation
Food and personal care products are typically included in the "consumer staples" sector of commercial classification systems.
Apparel is included in the "consumer discretionary" sector, which is more cyclical than the "consumer staples" sector. (Study
Session 13, Module 40.1, LOS 40.d)
35
Compared to a passive investment strategy, active management, on average:
A) cannot outperform if markets are weak-form efficient.

B) can outperform if markets are weak-form efficient but not semistrong-form
efficient.
C) can outperform if markets are semistrong-form efficient but not strong-form efficient.
Explanation
One of the implications of market efficiency is that if markets are semistrong-form efficient, active portfolio management cannot
consistently outperform (achieve positive risk-adjusted returns relative to) a passive strategy. (Study Session 12, Module 38.1,
LOS 38.e)
Malley, Inc., is a manufacturer of sports apparel. Pruett, Inc., produces cardboard boxes for packaging. In a typical industry
classification system from a commercial index provider, in which sectors are these firms most likely to be classified?
Malley, Inc. Pruett, Inc.
A) Consumer staples Basic materials and processing
B) Consumer discretionary Basic materials and processing
C) Consumer staples Industrial and producer durables
Explanation
Apparel manufacturers are typically classified as consumer discretionary. Packaging firms are typically classified as basic
materials and processing. (Study Session 13, Module 40.1, LOS 40.b)
Assuming the value effect persists over time, which of the following strategies would be most likely to earn positive abnormal
returns? Purchase stocks with:
A) low dividend yields.

B) high market-to-book ratios.
C) low price-to-earnings ratios.
Explanation
The value effect refers to value stocks outperforming growth stocks on a risk-adjusted basis. Value stocks have low price-to-
earnings or market-to-book ratios, or high dividend yields. Growth
36 stocks have high price-to-earnings or market-to-book ratios, or
low dividend yields. If the value effect persists over time and is not the result of inadequate adjustment for risk, buying value
stocks will produce positive abnormal returns. (Study Session 12, Module 38.1, LOS 38.f)
37
CFA Level I
An estimate of the increase in an option-free bond's price, based only on its duration:
A) will be too small.

B) will be too large.
C) may be either too small or too large.
Explanation
Duration is a linear measure, but the relationship between bond price and yield for an option-free bond is convex. For a given
decrease in yield, the estimated price increase using duration alone will be smaller than the actual price increase. (Study
Session 15, Module 46.1, LOS 46.b)
Three companies in the same industry have exhibited the following average ratios over a 5-year period:
5-Year Averages Alden Barrow Collison
Operating margin 13.3% 15.0% 20.7%
Debt/EBITDA 4.6× 0.9× 2.8×
EBIT/interest 3.6× 8.9× 5.7×
FFO/debt 12.5% 14.6% 11.5%
Debt/capital 60.8% 23.6% 29.6%
Based only on the information given, the company that most likely has the highest credit rating is:
A) Alden.
B) Barrow.
C) Collison.
Explanation
Four of the five credit metrics given indicate that Barrow should have the highest credit rating of these three companies. Barrow
has higher interest coverage and lower leverage than either Alden or Collison. (Study Session 15, Module 47.2, LOS 47.h)
38
The difference between a convertible bond and a bond with warrants is that a bondholder who exercises warrants:
A) does not pay cash for the common stock.

B) obtains common stock at a lower price per share.
C) continues to hold the bond after exercising the warrants.
Explanation
Warrants give holders the option to buy shares of the issuer's common stock at a predetermined price. A bondholder who
exercises warrants pays the exercise price to the issuer and receives common shares but continues to hold the bond. With
convertible bonds, a bondholder who exercises the conversion option exchanges the bond for a predetermined number of
common shares. Exercise prices of warrants and conversion prices of convertible bonds are not necessarily related. (Study
Session 14, Module 42.2, LOS 42.f)
Which of the following is least likely a common form of external credit enhancement?
A) Overcollateralization.
B) A corporate guarantee.
C) A letter of credit from a bank.
Explanation
External credit enhancements are financial guarantees from third parties that generally support the performance of the bond.
Overcollateralization is a form of internal credit enhancement. (Study Session 14, Module 42.1, LOS 42.d)
Nonconforming mortgage loans may be securitized by:
A) government-sponsored enterprises, but not by private companies.
B) private companies, but not by government-sponsored enterprises.

C) neither private companies nor government-sponsored enterprises.
Explanation
Nonconforming mortgages are those that do not meet the requirements to be included in agency RMBS such as those issued by
government-sponsored enterprises. Private companies may securitize nonconforming mortgages. (Study Session 14, Module
45.1, LOS 45.d)
Question #6 of 14 39 Question ID: 1210978

Which of the following bonds would appreciate the most if the yield curve shifts down by 50 basis points at all maturities?
A) 4-year 8%, 8% YTM.

B) 5-year 8%, 7.5% YTM.
C) 5-year 8.5%, 8% YTM.
Explanation
The bond with the highest duration will benefit the most from a decrease in rates. The lower the coupon, the lower the yield to
maturity, and the longer the time to maturity, then the higher the duration will be. (Study Session 15, Module 46.2, LOS 46.e)
Which of the following provisions would most likely increase the required yield to maturity on a debt security?
A) Call option.
B) Put option.
C) Floor on a floating-rate security.
Explanation
Call options favor the issuer and increase the required YTM. A put option or a floor protects the bondholder against falling rates,
which reduces a bond's required YTM. (Study Session 14, Module 42.2, LOS 42.f)
Other things equal, a corporate bond's yield spread is likely to be most volatile if the bond is rated:
A) AA with 5 years to maturity.

B) AAA with 3 years to maturity.
C) BBB with 15 years to maturity.
Explanation
Spread volatility is typically greatest for lower quality and longer maturities. The BBB rated 15-year corporate bond has the
lowest credit quality and longest maturity of the three choices. (Study Session 15, Module 47.2, LOS 47.i)
In a repurchase agreement, the repo rate is likely to be higher:
A) if delivery to the lender is required.

B) when the quality of the collateral is high.
40
C) for longer-dated repos.
Explanation
The repo rate tends to be higher for longer-dated repos than for shorter-dated repos. High quality collateral or delivery of the
collateral reduces the repo rate. (Study Session 14, Module 43.2, LOS 43.j)
An investor in longer-term coupon bonds who has a short investment horizon is most likely:
A) more concerned with market price risk than reinvestment risk.

B) more concerned with reinvestment risk than market price risk.
C) equally concerned about market price risk and reinvestment risk.
Explanation
Over a short investment horizon, an increase in interest rates is likely to decrease the return on a coupon bond because the
decrease in price more than offsets the increase in reinvestment income. Over a long investment horizon, a decrease in interest
rates is likely to decrease the return on a coupon bond because the decrease in reinvestment income more than offsets the
increase in price. Therefore, an investor with a short horizon is more concerned with market price risk and an investor with a long
horizon is more concerned with reinvestment risk. (Study Session 15, Module 46.3, LOS 46.k)
A bank loan department is trying to determine the correct rate for a 2-year loan to be made two years from now. If current implied
Treasury effective annual spot rates are 1-year = 2%, 2-year = 3%, 3-year = 3.5%, and 4-year = 4.5%, the base (risk-free)
forward rate for the loan before adding a risk premium is closest to:
A) 4.5%.
B) 6.0%.
C) 9.0%.
Explanation
The forward rate is [1.0454 / 1.032]1/2 – 1 = 6.02%, or use the approximation [4.5(4) – 3(2)] / 2 = 6.
(Study Session 14, Module 44.4, LOS 44.j)
Coyote Corporation has an issuer credit rating of AA, but its most recently issued bonds have an issue credit rating of AA–. This
difference is most likely due to the newly issued bonds having:
A) been issued as senior subordinated debt.

41
B) been affected by restricted subsidiary status.
C) additional covenants that protect the bondholders.
Explanation
The issuer's corporate family rating (CFR) is AA, while the bond's corporate credit rating (CCR) is lower, AA–. One possible
reason for this notching difference is that the bond may have a lower seniority ranking. CFR ratings are based on senior
unsecured debt. If the newly issued bond is a senior subordinated debt, it has a lower priority of claims and hence a lower rating.
Restricted status would affect both CFR and CCR. Additional covenants that protect bondholders would enhance the issue's
CCR. (Study Session 15, Module 47.1, LOS 47.d)
An institution is most likely to be restricted from investing in which of the following fixed income classifications?
A) High yield.
B) Index-linked.
C) Floating-rate.
Explanation
High yield bonds are those that are classified as non-investment grade. Some institutions are restricted from investing in this
sector of the fixed income market. (Study Session 14, Module 43.1, LOS 43.a)
Annual-pay yields of annual-coupon sovereign bonds are as follows:
Maturity and Coupon Yield to Maturity
1-year, 5% coupon 2.342%
The 3-year, 5% annual coupon bond is most likely:
A) overvalued.
B) undervalued.
C) fairly valued.
Explanation
42
The price of the 3-year coupon bond (as a percentage of par) is:
N = 3; I/Y = 2.711; PMT = 5; FV = 100; CPT → PV = –106.51
The no-arbitrage price of the 3-year coupon bond based on spot (zero-coupon) rates is:
Because the 3-year coupon bond's price equals its no-arbitrage value, the bond is fairly valued. (Study Session 14, Modules
44.1, 44.2, LOS 44.a, 44.c)
43
CFA Level I
Which of the following derivatives positions replicates investing at the risk-free rate?
A) Holding an asset and a short position in a forward contract on the asset.

B) Holding an asset and a long position in a forward contract on the asset.
C) Selling an asset short and holding a short position in a forward contract on the asset.
Explanation
Holding an asset and a short position in a forward contract on the asset replicates investing at the risk-free rate because the
future payoff is certain. (Study Session 16, Module 49.1, LOS 49.a)
Compared to an asset with no net cost of carry, holding costs that are greater than benefits:
A) increase the no-arbitrage price of the forward contract.
B) decrease the no-arbitrage price of the forward contract.

C) have no effect on the no-arbitrage price of the forward contract.
Explanation
Costs of holding the underlying asset that are greater than the benefits increase the no-arbitrage price of a forward contract.
The value of a call option on a stock is most likely to decrease as a result of:
A) an increase in asset price volatility.

B) a decrease in the risk-free rate of interest.
C) a decrease in the exercise price of the option.
Explanation
44
A decrease in the risk-free rate of interest will decrease call values. The other changes will tend to increase the value of a call
option. (Study Session 16, Module 49.3, LOS 49.k)
In which of the following ways is an interest rate swap different from a series of forward rate agreements (FRAs)?
A) The FRAs that replicate an interest rate swap may be off-market contracts.
B) The fixed rate is known at initiation for an interest rate swap but not for a series of
FRAs.
C) An interest rate swap may have a nonzero value at initiation, while FRAs must have a
value of zero at initiation.
Explanation
An interest rate swap may be replicated by a series of off-market FRAs (i.e., FRAs with nonzero values at initiation), if their
present values sum to zero at initiation. The fixed rate is known at initiation for either an interest rate swap or a series of FRAs.
Parties to both FRAs and interest rate swaps may agree to off-market prices at initiation. (Study Session 16, Module 48.2, LOS
48.d)
It is least likely that a forward contract:
A) has counterparty risk.

B) can be settled in cash.
C) requires a margin deposit.
Explanation
Forward contracts typically do not require a margin deposit. They are custom instruments that may require settlement in cash or
delivery of the underlying asset, and they have counterparty risk. (Study Session 16, Module 48.1, LOS 48.c)
With respect to European and American options, cash flows from the underlying asset may make:
A) a European put more valuable than an otherwise identical American put.
B) an American put more valuable than an otherwise identical European put.

C) an American call more valuable than an otherwise identical European call.
Explanation
45
For call options, early exercise is valuable only if the underlying asset pays a cash flow during the life of the option. If early
exercise is valuable, an American call can be more valuable than an otherwise identical European call. Cash flows on the
underlying asset do not make early exercise of a put option valuable. A European option cannot be more valuable than an
otherwise identical American option. (Study Session 16, Module 49.4, LOS 49.o)
Cash flows related to futures margin least likely include:
A) interest on the margin loan.
B) deposits to meet margin calls.

C) interest received on collateral.
Explanation
Futures margin is satisfied by posting collateral and does not involve a loan. A futures investor may post interest-bearing
securities as collateral and earn interest (collateral yield) on these securities. Faced with a margin call, a futures investor must
either post additional margin to restore the account to the initial margin requirement or close the position. (Study Session 16,
46
CFA Level I
Survivorship bias in reported hedge fund index returns will most likely result in index:
A) returns and risk that are biased upward.

B) returns and risk that are biased downward.
C) risk that is biased downward and returns that are biased upward.
Explanation
Surviving firms are more likely to have had good past returns and have taken on less risk than the average fund, leading to
upward bias in index returns and downward bias in index risk measures. (Study Session 17, Module 50.2, LOS 50.e)
A hedge fund with a 2 and 20 fee structure has a hard hurdle rate of 5%. If the incentive fee and management fee are calculated
independently and the management fee is based on beginning-of-period asset values, an investor's net return over a period
during which the gross value of the fund has increased 22% is closest to:
A) 16.4%.
B) 16.6%.
C) 17.0%.
Explanation
The management fee is 2% of the beginning asset value, which reduces an investor's gross return by 2% to 22 − 2 = 20%. The
incentive fee is 20% of the excess gross return over the hurdle rate, or 0.20(0.22 – 0.05) = 3.4%. The investor return net of fees
is 22% − 2% − 3.4% = 16.6%. (Study Session 17, Module 50.2, LOS 50.d)
The least appropriate measure of risk for alternative investments is:
A) value at risk (VaR).
B) the Sortino ratio.

C) variance of returns. 47
Explanation
Because returns distributions of alternative investments are often leptokurtic and negatively skewed, variance is not an
appropriate risk measure. Value at risk (VaR) and the Sortino ratio based on downside deviations from the mean are measures
of downside risk that are more appropriate for alternative investments. (Study Session 17, Module 50.2, LOS 50.f)
The type of real estate index that most likely exhibits sample selection bias is:
A) REIT index.
B) appraisal index.
C) repeat sales index.
Explanation
A repeat sales index includes prices of properties that have recently sold. Because these properties may not be representative of
overall property values (may be biased toward properties that have declined or increased the most in value of the period), there
is the risk of sample selection bias. An appraisal index or a REIT index is generally constructed for a sample of representative
properties or REIT property pools. (Study Session 17, Module 50.1, LOS 50.e)
With respect to mezzanine-stage financing in venture capital investing and mezzanine financing of a leveraged buyout:
A) mezzanine-stage financing refers to a type of security but mezzanine financing does

not.
B) mezzanine financing refers to a type of security but mezzanine-stage financing
does not.
C) both terms refer to financing by issuance of securities that have both debt and equity
characteristics.
Explanation
Mezzanine financing in an LBO refers to the issue of securities that have both debt and equity features so that they are on the
balance sheet between debt and equity. Mezzanine-stage financing refers to financing of different types that is employed during
the period just prior to an IPO of a firm funded by venture capital. (Study Session 17, Module 50.1, LOS 50.b)
A hedge fund that engages primarily in distressed debt investing and merger arbitrage is best described as using:
A) a macro strategy.
B) an event-driven strategy. 48
C) a relative value strategy.
Explanation
Event-driven strategies attempt to capitalize on unique events or opportunities such as distressed debt or mergers and
acquisitions. Relative value strategies involve taking long and short positions in related securities to exploit pricing inefficiencies.
Macro strategy funds make directional trades on markets, currencies, interest rates, or other factors. (Study Session 17, Module
50.2, LOS 50.b)
The type of investment most often used to gain exposure to commodity prices is a portfolio of:
A) derivative securities.
B) physical commodities.
C) commodity producing companies.
Explanation
The most commonly used instruments to get exposure to commodity prices are commodity derivative securities, such as futures
contracts. (Study Session 17, Module 50.2, LOS 50.b)
49
CFA Level I
Which of the following activities is most likely to be performed as part of the execution step of the portfolio management
process?
A) Completion of the investment policy statement.
B) Top-down analysis based on macroeconomic conditions.

C) Rebalancing the portfolio to the desired asset class exposures.
Explanation
The execution step of the portfolio management process typically begins with a topdown analysis of economic variables. The
investment policy statement is completed during the planning step. Asset class rebalancing is part of the feedback step. (Study
Session 18, Module 51.1, LOS 51.d)
A manager who evaluates portfolios' investment performance adjusted for systematic risk is most likely to rank portfolios based
on their:
A) Sharpe ratios.
B) Treynor measures.
C) M-squared measures.
Explanation
The Treynor measure is stated in terms of systematic (beta) risk. The Sharpe ratio and M-squared measure are defined in terms
of total risk (standard deviation). (Study Session 18, Module 53.2, LOS 53.i)
Neural networks are an example of:
A) machine learning.
B) artificial intelligence.
C) algorithmic trading applications. 50
Explanation
Artificial intelligence refers to systems that can be programmed to simulate human cognition. Neural networks are one example
of this type of system. (Study Session 19, Module 57.1, LOS 57.b)
Which of the following risk management strategies is most accurately described as shifting a risk?
A) A retail store owner buys a fire insurance policy on the building.

B) A farmer takes a short position in a futures contract to deliver wheat.
C) A portfolio manager diversifies her investments across different industries.
Explanation
Shifting a risk is changing the distribution of possible outcomes. An example of shifting a risk is hedging price risk with a
derivatives contract. Insurance is an example of transferring a risk. Diversification is best described as a method for bearing a
risk efficiently. (Study Session 19, Module 55.1, LOS 55.g)
An analyst has estimated that the returns for an asset, conditional on the performance of the overall economy, are:
Return Probability Economic Growth
5% 20% Poor
10% 40% Average
14% 40% Good
The conditional expected returns on the market portfolio are:
Return Probability Economic Growth
2% 20% Poor
10% 40% Average
15% 40% Good
According to the CAPM, if the risk-free rate is 5% and the risky asset has a beta of 1.1, with respect to the market portfolio, the
analyst should:
A) sell (or sell short) the risky asset because its expected return is less than equilibrium
expected return on the market portfolio.
B) buy the risky asset because the analyst expects the return on it to be higher than its
required return in equilibrium.
51
C) sell (or sell short) the risky asset because its expected return is not sufficient to
compensate for its systematic risk.
Explanation
The analyst's forecast of the expected return on the risky asset is 5(0.2) + 10(0.4) + 14(0.4) = 10.6%. The expected/equilibrium
return on the market portfolio is 2(0.2) + 10(0.4) + 15(0.4) = 10.4%. The CAPM equilibrium expected return (required return in
equilibrium) on the risky asset is 5 + 1.1(10.4 – 5) = 10.94%. Because the analyst's forecast return on the risky asset is less than
its required return in equilibrium, the asset is overpriced and the analyst would sell if he owned it and possibly sell it short. (Study
Session 18, Module 53.2, LOS 53.h)
Portfolios that plot inside the minimum-variance frontier represent:
A) efficient portfolios.
B) inefficient portfolios.
C) unattainable portfolios.
Explanation
Portfolios that plot inside the minimum-variance frontier are inefficient because another portfolio exists with a higher expected
return for the same level of risk, or a lower level of risk for the same expected return. Portfolios that plot on the minimum-
variance frontier above the global minimum-variance portfolio are efficient. Portfolios that plot above the minimum-variance
frontier are unattainable. (Study Session 18, Module 52.3, LOS 52.g)
A written investment policy statement should most appropriately:
A) establish a target asset allocation strategy.

B) focus predominantly on a long-term time horizon.
C) include risk objectives that are consistent with the investor’s return requirements.
Explanation
Strategic asset allocation is often a part of the written IPS because it helps solidify desired initial weightings to specific asset
classes. Different investors will have different applicable time horizons which must be considered and evaluated appropriately as
part of the investment policy statement. Required returns should be consistent with risk objectives, but high return requirements
should not necessarily imply high risk objectives. (Study Session 19, Module 54.1, LOS 54.a)
52

CFA L1 SCHWSR FL Test Ques+Ans - N

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CFA Level I

Question #1 of 18 Question ID: 1104308

A) protest the board’s actions in writing to the executive officer of Valley.

Question #2 of 18 Question ID: 1104310

A) did not violate the Code and Standards.

Question #3 of 18 Question ID: 1104314

Question #4 of 18 Question ID: 1104316

B) send his superior a memo outlining the problem.

Question #5 of 18 2 Question ID: 1104315

Question #6 of 18 Question ID: 1104318

A) has not violated the Code and Standards.

Question #7 of 18 Question ID: 1104321

Question #8 of 18 Question ID: 1104311

Question #9 of 18 Question ID: 1104322

C) Donovan and Yeats both violated the Code and Standards.

Question #10 of 18 Question ID: 1104317

Question #11 of 18 Question ID: 1104309

Question #12 of 18 Question ID: 1104313

Question #13 of 18 Question ID: 1104312

A) not violate the Code and Standards.

Question #14 of 18 Question ID: 1104319

A) complied with the Code and Standards.

Question #15 of 18 Question ID: 1104320

Question #16 of 18 Question ID: 1104325

Which of the following policies is required to comply with GIPS?

A) Compliance with GIPS must be verified by an independent third party.

B) Restructuring of the firm’s organization cannot be used as a basis to change the

Question #18 of 18 Question ID: 1104324

A) No, because only one party may perform GIPS verification.

Question #1 of 12 Question ID: 1210896

Question #2 of 12 Question ID: 1210898

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

Question #3 of 12 Question ID: 1210899

Question #4 of 12 Question ID: 1106390

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

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

Expected return Standard deviation

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

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?

Question #8 of 12 Question ID: 1210904

A) greater than zero.

Question #9 of 12 Question ID: 1210900

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

Question #11 of 12 Question ID: 1210903

Question #12 of 12 Question ID: 1210902

A) It has a symmetric distribution.

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

Question #1 of 12 Question ID: 1210908

Few significant barriers to entry or exit exist.

Question #2 of 12 Question ID: 1210907

A) its members adopt a common currency.