CFA LEVEL I

MOCK TEST PAPER

Exam Date : 01-12-2019

Time:-90 minutes. Full Marks:- 60

The question paper comprises :
Statistical Concepts and Market Returns, Probability Concepts
& Common Probability Distributions

Questions 1-20 relate to Statistical Concepts and Market Returns

1. If stock X's expected return is 30% and its expected standard deviation is 5%, Stock X's expected
coefficient of variation is:
A. 0.167.
B. 1.20.
C. 6.0.
2. Given the following annual returns, what is the mean absolute deviation?

A. 3.0%.
B. 22.0%.
C. 5.6%.
3. Consider the following statements about the geometric and arithmetic means as measures of
central tendency. Which statement is least accurate?
A. The difference between the geometric mean and the arithmetic mean increases with an
increase in variability between period­to­period observations.
B. The geometric mean calculates the rate of return that would have to be earned each year to
match the actual, cumulative investment performance.
C. The geometric mean may be used to estimate the average return over a one­period time
horizon because it is the average of one­period returns.
4. Which of the following statements concerning skewness is least accurate? A distribution with:
A. positive skewness has a long left tail.
B. a distribution with skew equal to 1 is not symmetrical.
C. negative skewness has a large number of outliers on its left side.
5. If a distribution is positively skewed, then generally:
A. mean < median < mode.
B. mean > median > mode.
C. mean > median < mode.

Page 1
6. Statistical inference least likely involves which of the following steps?
A. Forecasting.
B. Estimation and judgment.
C. Description of a data set.
7. Which of the following graphical tools for displaying data require the mid points to be plotted
for each interval?
A. Frequency polygon.
B. Histogram.
C. Cumulative frequency curve.
8. An analyst computes the geometric mean of a portfolio that has yearly returns of: -8%, 2%, - 4%,
7%, and 12%. The geometric mean computed by the analyst is closest to:
A. 1.50%.
B. 1.80%.
C. 2.10%.
9. Which of the following statements about arithmetic mean is most accurate?
A. Deviations from the arithmetic mean indicate risk.
B. The product of the deviations around the mean is equal to 0.
C. The disadvantage of an arithmetic mean is it fails to make use of all data.
10. Which of the following statements is least likely accurate?
A. The median is the 50th percentile.
B. Quintiles divide the distribution into fifths.
C. Linear interpolation is used when the location, L, is a whole number.
11. Which of the following groups best illustrates a sample?
A. UK shares traded on Wednesday of last week that also closed above £120/share on the
London Stock Exchange
B. The set of all estimates for Exxon Mobil’s EPS for next financial year
C. The FTSE Eurotop 100 as a representation of the European stock market
12. Published ratings on stocks ranging from 1 (strong sell) to 5 (strong buy) are examples of which
measurement scale?
A. Nominal
B. Interval
C. Ordinal
13. In descriptive statistics, an example of a parameter is the:
A. standard deviation of a sample of observations.
B. median of a population.
C. mean of a sample of observations.
14. The owner of a company has recently decided to raise the salary of one employee, who was
already making the highest salary in the company, by 40%. Which of the following value(s) is
(are) expected to be affected by this raise?

Page 2
 A. mean only.
B. mean and median only.
C. median only.
15. Given the following annual returns, what is the range?

A. 15.0%
B. 22.0%.
C. 3.0%.
16. Which of the following statements regarding the Sharpe ratio is most accurate? The Sharpe ratio
measures:
A. total return per unit of risk.
B. excess return per unit of risk.
C. peakedness of a return distrubtion.
17. In a frequency distribution histogram, the frequency of an interval is given by the:
A. width of the corresponding bar.
B. height multiplied by the width of the corresponding bar.
C. height of the corresponding bar.
18. For the investments shown in the table below, what are the respective mean, median, and mode
of the returns?
Investment A B C D E F G
Return (%) 12 14 9 13 7 8 12

A. 10.71%; 9%; 13%.

B. 12.00%; 12%; 12%.
C. 10.71%; 12%; 12%.
19. What is the main difference between descriptive statistics and inferential statistics? Descriptive
statistics are:
A. used to summarize data while inferential statistics are used to obtain precise information
about a large data set.
B. used to summarize a large data set while inferential statistics involves procedures used to
make forecasts or judgments about a large data set by examining a smaller sample.
C. used to make forecasts about the likelihood of upcoming events while inferential statistics
are used to summarize any data set.
20. An investor has a $15,000 portfolio consisting of $10,000 in stock A with an expected return of
20% and $5,000 in stock B with an expected return of 10%. What is the investor's expected
return on the portfolio?
A. 12.2%.
B. 7.9%.
C. 16.7%.

Page 3
Questions 21-40 relate to Probability Concepts
21. Which of the following is a joint probability? The probability that a:
A. stock increases in value after an increase in interest rates has occurred.
B. company merges with another firm next year.
C. stock pays a dividend and splits next year.
22. Each lottery ticket discloses the odds of winning. These odds are based on:
A. a priori probability.
B. past lottery history.
C. the best estimate of the Department of Gaming.
23. Given P(X = 20, Y = 0) = 0.4, and P(X = 30, Y = 50) = 0.6, then COV(XY) is:
A. 125.00.
B. 120.00.
C. 25.00.
24. Kelly Diaz, financial planner, recently obtained his CFA Charter and is considering multiple
job offers. Diaz devised the following four criteria to help him decide which offers to pursue
most aggressively.
Criterion % Expected to Meet the Criteria
1. Within 75 miles of San Francisco 0.85
2. Employee size less than 50 0.50
3. Compensation package exceeding $100,000 0.30
4. Three weeks of vacation 0.15
If Diaz has 20 job offers and the probabilities of meeting each criterion are independent, how
many are expected to meet all of his criteria? (Round to nearest whole number).
A. 1.
B. 3.
C. 0.
25. Bonds rated B have a 25% chance of default in five years. Bonds rated CCC have a 40% chance
of default in five years. A portfolio consists of 30% B and 70% CCC­rated bonds. If a randomly
selected bond defaults in a five­year period, what is the probability that it was a B­rated bond?
A. 0.625.
B. 0.250.
C. 0.211.
26. True Advisers, Inc., has determined four possible economic scenarios and has projected the
portfolio returns for two portfolios for their client under each scenario. True's economist has
estimated the probability of each scenario, as shown in the table below. Given this information,
what is the standard deviation of returns on portfolio A?

Scenario Probability Return on Portfolio A Return on Portfolio B

A 15% 18% 19%
B 20% 17% 18%
C 25% 11% 10%
D 40% 7% 9%

Page 4
 A. 4.53%.
B. 1.140%.
C. 5.992%.
27. There is a 40% probability that the economy will be good next year and a 60% probability that it
will be bad. If the economy is good, there is a 50 percent probability of a bull market, a 30%
probability of a normal market, and a 20% probability of a bear market. If the economy is bad,
there is a 20% probability of a bull market, a 30% probability of a normal market, and a 50%
probability of a bear market. What is the probability of a bull market next year?
A. 32%.
B. 20%.
C. 50%.
28. Which of the following is an a priori probability?
A. For a stock, based on prior patterns of up and down days, the probability of the stock
having a down day tomorrow.
B. The probability the Fed will lower interest rates prior to the end of the year.
C. On a random draw, the probability of choosing a stock of a particular industry from the
S&P 500.
29. For a stock, which of the following is least likely a random variable? Its:
A. stock symbol.
B. current ratio.
C. most recent closing price.
30. If two events are mutually exclusive, the probability that they both will occur at the same time
is:
A. Cannot be determined from the information given.
B. 0.50.
C. 0.00.
31. The probability of any event can be best defined as a number between:
A. negative one and positive one.
B. zero and positive infinity.
C. zero and positive one.
32. If an analyst estimates the probability of a stock earning at least the 5-year market
average return using relative frequency from historical data, then the resulting probability
is best known as:
A. a priori.
B. empirical.
C. subjective.
33. A and B are independent events. P(AB), the joint probability of events A and B is best
denoted by:
A. P(A).
B. P(A) + P(B).
C. P(A) * P(B).

Page 5
34. A fund manager has noted that during the past five years 70 percent of the stocks in
her portfolio have paid a cash dividend and 20 percent of the stocks have paid a stock dividend.
If 80 percent of the stocks have paid a dividend of any kind, the joint probability of a stock
paying a cash dividend and a stock dividend is closest to:
A. 10%.
B. 15%.
C. 20%.
35. At a charity fundraiser there have been a total of 342 raffle tickets already sold. If a person then
purchases two tickets rather than one, how much more likely are they to win?
A. 1.99.
B. 0.50.
C. 2.10.
36. Given the following table about employees of a company based on whether they are smokers or
nonsmokers and whether or not they suffer from any allergies, what is the probability of both
suffering from allergies and not suffering from allergies?

A. 0.00.
B. 1.00.
C. 0.50.
37. If the outcome of event A is not affected by event B, then events A and B are said to be:
A. conditionally dependent.
B. mutually exclusive.
C. statistically independent.
38. The probability of a new Wal­Mart being built in town is 64%. If Wal­Mart comes to town, the
probability of a new Hungry's restaurant being built is 90%. What is the probability of a new
Wal­Mart and a new Hungry's restaurant being built?
A. 0.675.
B. 0.306.
C. 0.576.
39. For assets A and B we know the following:
E(RA) = 0.10, E(RB) = 0.10, Var(RA) = 0.18,
Var (RB ) = 0.36 and the correlation of the returns is 0.6.
What is the variance of the return of a portfolio that is equally invested in the two assets?
A. 0.1500.
B. 0.1102.
C. 0.2114.

Page 6
40. A bond portfolio consists of four BB­rated bonds. Each has a probability of default of 24% and
these probabilities are independent. What are the probabilities of all the bonds defaulting and
the probability of all the bonds not defaulting, respectively?
A. 0.96000; 0.04000.
B. 0.04000; 0.96000.
C. 0.00332; 0.33360.
Questions 41-60 relate to Common Probability Distributions

41. Assume an investor purchases a stock for $50. One year later, the stock is worth $60. After one
more year, the stock price has fallen to the original price of $50. Calculate the continuously
compounded return for year 1 and year 2.
Year 1 Year 2
A. ­18.23% ­18.23%
B. 18.23% 16.67%
C. 18.23% ­18.23%
42. Over a period of one year, an investor's portfolio has declined in value from 127,350 to 108,427.
What is the continuously compounded rate of return?
A. ­13.84%.
B. ­14.86%.
C. ­16.09%.
43. Which of the following is NOT an assumption of the binomial distribution?
A. The expected value is a whole number.
B. Random variable X is discrete.
C. The trials are independent.
44. The probability density function of a continuous uniform distribution is best described by a:
A. line segment with a curvilinear slope.
B. line segment with a 45­degree slope.
C. horizontal line segment.
45. The safety­first criterion focuses on:
A. margin requirements.
B. shortfall risk.
C. SEC regulations.
46. A drawback of historical simulation is it:
A. may not accurately reflect possible outcomes.
B. may not account for very rare events.
C. depends on the accuracy of the random number generator.
47. Assume 30% of the CFA candidates have a degree in economics. A random sample of three
CFA candidates is selected. What is the probability that none of them has a degree in
economics?
A. 0.900.
B. 0.027.
C. 0.343.

Page 7
48. Which of the following portfolios provides the best "safety first" ratio if the minimum
acceptable return is 6%?

A. 1.
B. 2.
C. 3.
49. Multivariate distributions can describe:
A. continuous random variables only.
B. either discrete or continuous random variables.
C. discrete random variables only.
50. A probability distribution is least likely to:
A. have only non­negative probabilities.
B. contain all the possible outcomes.
C. give the probability that the distribution is realistic.
51. The probability function for a discrete random variable is denoted by g(y) = g(Y = y). Which of
the following is most likely true?
A. The probability that a random variable Y takes on the value y.
B. Sum of the probabilities g(y) over all values of Y equals 0.
C. The probability g(y) is a number between -1 and 1.
52. A six sided biased dice has the probability of landing on its edge twice out of 50 throws. The
probability of any number showing up is equal. When the dice is rolled, the prize is equal to the
number it lands on, i.e. $1 for showing 1, $2 for showing 2 and so on. The prize of
landing on its edge is $10. What is the expected value of the prize on a single roll of dice?
A. 3.76.
B. 3.91.
C. 3.81.
53. Discrete uniform probability distribution of net profits for a currency option on EURO (€) is as
follows:

The probability of a net profit greater than €2 and less than or equal to €6 is closest to:
A. 1.00.
B. 0.75.
C. 0.50.

Page 8
54. An investor charts the movement of a stock‟s price over the next three years as follows:

The initial price of the stock is $45. The probability of the price increasing at any given point is
55% and that of the price decreasing is 45%. The probability, using the binomial model,
that the stock‟s price would be $36.45 two years later is closest to:
A. 20.25%.
B. 24.75%.
C. 30.25%.
55. Assume that a stock‟s price over the next two periods is as shown below:

The initial value of the stock is $60. The probability of an up move in any given period
is 60% and the probability of a down move in any given period is 40%. Using the
binomial model, the probability that the stock‟s price will be $58.65 at the end of two periods is
closest to:
A. 24%.
B. 32%.
C. 48%.
56. Which of the following statements about a normal distribution is most accurate? A normal
distribution:
A. has an excess kurtosis of 3.
B. is partially described by two parameters.
C. can be the linear combination of two or more normal random variables.
57. In a normal distribution, approximately what percent of all observations fall in the interval μ ±
σ?
A. 68 percent.
B. 50 percent.
C. 99 percent.
58. Given that X follows a normal distribution with a mean of 4.5 and standard deviation of 1.5, the
standardized value corresponding to X=8.9 would be closest to:
A. 1.64.
B. 2.93.
C. 5.93.

Page 9
59. Given Y is lognormally distributed, then in Y is:
A. a lognormal distribution.
B. the antilog of Y.
C. normally distributed.
60. A multivariate normal distribution that includes three random variables can be completely
described by the means and variances of each of the random variables and the:
A. correlations between each pair of random variables.
B. conditional probabilities among the three random variables.
C. correlation coefficient of the three random variables.

Page 10