CFA Level1 2017 Mock Exam PDF
CFA Level1 2017 Mock Exam PDF
CFA Level1 2017 Mock Exam PDF
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CFA Level I 1st Mock Exam
June, 2017
Revision 1
1
CFA Level I Mock Exam 1 – Solutions (AM)
A. clients.
B. industry.
C. own behavior.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 1, LOS-c.
2. Alonzo Myers manages accounts at GRTY Securities. Jerry Reed, one of his
clients, e-mailed Myers to buy 300 shares in the IPO of JJKS Corp’s stock. Few
days later, despite being a hot issue, Myers succeeded prorating 500 shares of
JJKS Corp. for his clients. After purchasing 500 shares for his clients and 300
shares for Reed as per request, he purchased remaining 200 shares for his wife.
Myers:
A. did not violate the standards by purchasing 200 shares for his wife and 300
shares for Reed.
B. violated the standards by purchasing 200 shares for his wife and only 300
shares for Reed.
C. violated the standards by purchasing 200 shares for his wife but is in
compliance for purchasing 300 shares for Reed as per his request.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
3. McKinney Alpha is an accredited research firm that only hires experienced and
competent analysts offering them training and financial courses from time to time.
The firm allows analysts to either prepare their own research or rely on secondary
sources. Tyler Klein, an analyst at McKinney uses a research report prepared at
Gemma Brokerage. If Klein will use that report, he will:
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Klein will violate Standard IV-A ‘Loyalty to employers’ because the firm only
allows secondary research (research prepared by another employee at the same
firm). Using a report prepared by another firm is considered third party research ,
which is not allowed by McKinney Alpha.
A. eliminate the need for in-depth due diligence on the part of the investor.
B. participate in competitive bids against other compliant firms throughout
the world.
C. assure prospective clients that the reported historical track record is
complete and fairly presented.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 4, LOS-a.
However, GIPS standards certainly do not eliminate the need for in-depth due
diligence on the part of the investor.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Milton did not violate any CFA Institute code or standard because he developed a
new model and re-created supporting records by directly gathering information
from Indigo Corp.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-c.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
10. Mathew Chambers manages individual accounts, including his father’s, at Harvey
Securities. During a Sunday lunch at a restaurant with his friend Neil Rojas,
Chambers noticed the directors of Navarro Motors sitting at the adjacent table.
Rojas stated, “I believe Navarro has hired a new CEO as the firm is undertaking
many positive amendments in its production process”. On Monday Chambers
noticed a $1 increase in Navarro’s share price and purchased 500 shares for his
father’s account. Chambers least likely violated:
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
An opinion of his friend without actual knowledge does not make the information
material. Chambers violated Standard V-A ‘Diligence and Reasonable Basis’
because he purchased the stocks of Navarro without appropriate research and
investigation. Chambers also violated Standard VI-B ‘Priority of Transactions’ by
purchasing stocks for his father’s account only and treating the account differently
from his other clients’ accounts.
11. Blanco Shell Investments (BSI) is a small family owned investment bank and its
shares are relatively illiquid. In a casual meeting Brett Palmer, managing director
at BSI, told his friend, Leon Fox, that BSI is going to earn substantial profits in
its commodities business. In the next few days Fox purchases BSI shares while
Palmer disposes his position in BSI and switches his job. Two months later BSI
announces huge losses in its commodities business and the share price decreases
by $2. Palmer has violated the CFA Institute Standards of Professional Conduct
concerning
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
12. After 5-years of service with Jacob Securities as a financial planner, Shane
Alvarado planned to start his own practice in his hometown. He informed his
employer through email three days before starting his independent practice. The
employer was on a business trip for a week and on his return he accepted his
resignation. Alvarado always maintained his personal records related to training
programs that he conducted at Jacob Securities, and he used that material in his
new project. Alvarado:
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Alvarado violated the standard IV-A ‘Loyalty’. Members and candidates should
not render services until they receive consent from their employer to all of the
terms of the arrangement. All the work performed on behalf of the firm is the
property of the firm and should be erased or returned to the employer unless the
employer gives permission to keep those records after the cessation of
employment.
13. During the morning section of the CFA Level 1 exam, when the proctor made the
final 5 minutes announcement, Enrique, a candidate next to Rachael noticed and
told Rachael that she was not filling her answers on the sheet provided. Rachael
immediately started transferring answers on to the answer sheet. When the proctor
made the final announcement Rachael succeeded filling 100 circles and by the
time proctor reached at her table, she had only 5 circles left to fill. Rachael
instantly handed her sheet to the proctor. Is Rachael or Enrique in violation of the
standard relating to conduct as members and candidates in the CFA Program?
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Both Enrique and Rachael violated the Standard VII-A ‘Conduct as members and
candidates in the CFA Program’ Enrique violated the standard by assisting
Rachael on the CFA examination. Rachael disregarded the rules and regulations
related to the CFA program by writing after the final announcement was made.
14. Dan Fisher is an investment manager at Rotterdam Securities and often uses
Topaz brokerage services for his clients. Corey Foster, Fisher’s client, has
directed him to use the services of Luna Brokerage House for him. Fisher believes
that Topaz offers best price and better research reports compared to Luna. The
best course of action for Fisher is to use the services of:
A. Topaz for all of his clients as he is obligated to seek best price and best
execution.
B. Luna for Foster and should disclose to him that he may not be getting best
execution.
C. Topaz for all his clients as brokerage commission is the asset of the
Rotterdam and will be used to maximize the value of client’s portfolio.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
Brokerage commission is an asset of the client and is used to benefit the client.
Although members and candidates are obligated to seek best price and best
execution, in the case of client directed brokerage arrangements, the client directs
the manager to use services of a specific broker. The member or candidate should
disclose to the client if the member or candidate believes that the brokerage is not
offering best price and/or execution.
A. refusing the offer of SOTO trust to avoid a conflict of interest with his
employer.
B. accepting the offer and achieving the target without compromising his
objectivity towards other clients.
C. making an immediate written report to his employer specifying the$50,000
cash offer proposed by the trust
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 3, LOS-b.
16. GIPS standards least likely resolve misleading practices related to:
A. survivorship bias.
B. varying time periods.
C. analyst financial statement adjustments.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 4, LOS-a.
Misleading practices resolved by following GIPS standards include (but are not
limited to):
• survivorship bias,
• varying time periods and
• representative accounts.
17. Sullivan Investments, an asset management firm, complied with the GIPS
standards on 1 January 2006. Can Sullivan link its non-GIPS compliance
performance for periods beginning on or after 1 January 2000 with its GIPS
compliance performance?
A. No.
B. Yes.
C. Only if it discloses periods of non-compliance.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 5, LOS-b.
Firms must not link its non-GIPS compliant performance for periods beginning on
or after 1 January 2000 to GIPS complaint performance.
18. Which of the following statements is most likely correct regarding the major
sections of GIPS standards?
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 5, LOS-d.
19. Three friends Sam, Patricia and Robert will receive equal dollar amounts in two
years, however they invested in such a way that:
• the interest rate offered to Patricia and Sam is same but compounding for
Patricia is monthly and for Sam is quarterly.
• compounding for Robert and Patricia is same but the interest rate offered
to Robert is higher.
A. Sam.
B. Robert.
C. Patricia.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 6, LOS-d.
For a given discount rates, the greater the number of periods the smaller will be
the present value. (The present value of Patricia’s will be lower than Sam’s).
For a given number of periods, the higher the discount rate the smaller will be the
present value. (The present value of Robert’s will be lower than Patricia’s).
20. Which of the following properties of correlation and covariance is most likely
correct?
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 9, LOS-k.
Option A is correct.
21. An analyst calculated the average return of a hedge fund by taking a random
sample of 6 years’ return. The hedge fund has been in existence for last 20 years.
Assume the hedge fund return is normally distributed with a population mean and
standard deviation of 34% and 42% respectively.
The 99% confidence interval around the population mean for the analyst’s sample
of hedge fund return is closest to:
A. -0.0039 – 0.3361.
B. -0.0977– 0.5823.
C. -0.1024 – 0.7824.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 11, LOS-h.
The sample has come from the population with a known standard deviation and
the critical z-value for a 99% confidence interval is 2.58.
( -.%
Confidence Interval = 𝜇
± 2.58
= 34% ± 2.58
= -0.1024 – 0.7824.
) /
A. variance.
B. sample size.
C. mean value.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 11, LOS-g.
23. The investment performance of a fund for the year 2013 is as follows:
A. 13.95%.
B. 22.22%.
C. 34.46%.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 7, LOS-d.
24. An analyst calculated the expected value of Howe Inc.’s EPS as $5.91 based on
the probability distribution of Howe’s EPS for the current fiscal year.
The standard deviation of the Howe’s EPS for the current fiscal year is closest to:
A. 0.9662.
B. 0.9829.
C. 2.8816.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 9, LOS-l.
25. A professor is practicing a new method of teaching and is unsure about its impact
on students’ performance. His students generally maintained an average 3.2 GPA
throughout the semester. He selects a sample of 25 students with a mean GPA of
3.0 and standard deviation of 0.62. The professor is concerned whether the sample
results are consistent with the average GPA results of 3.2.
Determine whether the null hypothesis is rejected or not at the 0.10 level of
significance.
A. The null hypothesis is rejected as the t-value of 1.6129 is > 1.318 at the
0.10 significance level.
B. The null hypothesis is not rejected as -1.6129 does not satisfy either t >
1.711 or t < -1.711.
C. The null hypothesis is not rejected as the calculated t value of 0.322 is less
than 1.318 at the 0.10 significance level.
Correct Answer: B
This is a two tailed test therefore we will use 0.05 column and 24 degrees of
freedom.
121..
t24 = A.BC = -1.6129
CD
-1.6129 does not satisfy either t > 1.711 or t < -1.711 and we do not reject the null
hypothesis.
26. An analyst gathered the following information about return distributions of two
portfolios.
Kurtosis Skewness
Portfolio A 2.5 -3.7
Portfolio B 1.3 +4.2
Which of the following statements is most likely correct regarding portfolio A and
B?
Correct Answer: C
Option C is correct.
27. For a normal random variable approximately 68% of all outcomes fall within:
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 10, LOS-l.
For a normal random variable approximately 68% of all outcomes fall within one
standard deviation of the mean.
28. Given below are the sample monthly returns for ATD stocks.
January 18.5%
February 6.6%
March -3.5%
April -11.4%
May 5.4%
June -17%
With the target return of 6.0%, the target semi-variance is closest to:
A. 184.47.
B. 215.80.
C. 307.45.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 8, LOS-e.
EF 2G C
Target semivariance = HIJ
KLL
E>MG )20
Where B is the target return and Xi represents values of monthly returns and n is
the total number of observations.
29. Which of the following best describes the reason for choosing the NPV rule over
the IRR rule when dealing with mutually exclusive projects?
Correct Answer: A
Reference
CFA Level I, Volume 1, Study Session 2, Reading 7, LOS-b.
The NPV rule’s assumption about reinvestment rates is more realistic and more
economically relevant because it incorporates market determined opportunity cost
of capital as a discount rate.
IRR assumes that cash flows are reinvested at IRR and thus IRR rankings are not
affected by any external interest rate or discount rate.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 10, LOS-o.
A lognormal distribution:
31. The type of chart drawn on a grid, which consists of column X’s alternating with
column O’s and does not represent time or volume is most likely the:
A. bar chart.
B. candlestick chart.
C. point and figure chart.
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 13, LOS-b.
Point and figure charts are always drawn on graph paper, consist of columns X’s
alternating with column of O’s and neither time nor volume is plotted on the
graph.
32. Which of the following statements is most likely correct regarding parametric and
non-parametric tests?
Correct Answer: C
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 12, LOS-k.
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 4, Reading 14, LOS-i.
Option B & C are incorrect. Under perfect competition, a firm breaks even when
marginal revenue equals average total cost. A firm should should down
production when marginal revenue is les than average variable cost.
34. An analyst gathered the following national data (in millions of U.S dollars) for a
country for the year 2013.
Exhibit:
Consumer $461,580 Personal disposable $555,790
spending (m) income
Government $392,676 Interest paid by $13,400
spending consumers
Personal $906,230 Consumer transfers to $1,500
Income foreigners
Using the data provided in exhibit 1, the household saving (in millions) is closest
to:
A. $37,074.
B. $68,904.
C. $79,310.
Correct Answer: C
Reference:
CFA Level I, Volume 2, Study Session 5, Reading 16, LOS-d.
35. Which of the following is most likely common among the assumptions of the
Ricardian model and Heckscher-Ohlin model?
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 6, Reading 19, LOS-d.
36. In 2016, a firm earned $500,000 for selling 1,000 units. However, if 1,500 units
were sold, revenue would be total $720,000. The marginal revenue per unit
associated with selling 1,500 units instead 1,000 units would be closest to:
A. $440
B. $480
C. $500
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 4, Reading 14, LOS-e.
Correct Answer: B
Reference:
CFA Level I, Volume 2, Study Session 5, Reading 16, LOS-i.
38. Which of the following indicator measures the price of the basket of goods and
services produced within an economy in a given year?
A. GDP deflator.
B. Producer price index.
C. Consumer price index.
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 4, Reading 17, LOS-i.
GDP deflator measures the price of the basket of goods and services produced
within an economy in given year.
39. Which of the following most likely represents valid criticisms concerning the
neoclassical and Austrian schools?
A. Neoclassical and Austrian policies are focused on the short term only.
B. Economic forecasts are imperfect as fiscal policies are implemented with a
time lag.
C. It is difficult to achieve market equilibrium through reduction in
generalized price and wage.
Correct Answer: C
Reference:
CFA Level I, Volume 2, Study Session 5, Reading 17, LOS-c.
Options A and B are practical criticisms of the Keynesian fiscal policy, which
takes a short-term perspective.
40. To determine the impact of changes in exchange rates on trade balance, the
‘absorption approach’ most likely exhibits the:
Correct Answer: B
Reference:
CFA Level I, Volume 2, Study Session 6, Reading 20, LOS-j.
The impact of changes in exchange rates on the trade balance can be analyzed
through two different approaches:
i. Elasticities approach
ii. Absorption approach.
The Elasticities approach focuses on the effect of changing the relative price of
domestic and foreign goods. Thus it exhibits a microeconomic view of the
relationship between exchange rates and trade balance.
41. Over the last week, the Japanese yen has appreciated 15.7% against pound
sterling (GBP). The depreciation of GBP against the Japanese yen will be closest
to:
A. 14.4%
B. 15.7%.
C. 18.6%
Correct Answer: C
Reference:
CFA Level I, Volume 2, Study Session 4, Reading 20, LOS-c.
The depreciation of GBP will simply be the inverse of the 15% appreciation of the
0
Japanese yen. In this case, − 1 = 18.62%
02V.0N3
Correct Answer: C
Reference:
CFA Level I, Volume 2, Study Session 5, Reading 17, LOS-i.
Leading indicators are variables that change before real GDP changes. They are
useful for predicting the economy’s future state, usually near-term.
43. Which of the following characteristics most likely demonstrates that the firm is
operating in monopolistic competition?
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 4, Reading 15, LOS-a.
44. To deal with short-run stabilization, as compared to monetary policy, fiscal policy
is most likely:
Correct Answer: A
Reference:
CFA Level I, Volume 2, Study Session 5, Reading 18, LOS-s.
Fiscal policy is less effective than monetary policy to deal with short-run
stabilization fiscal policy as it is very time consuming to implement and it is
politically easier to loosen fiscal policy than to tighten it.
45. On 1st January 2011, Arnold Inc. purchases a machine for $325,000 and
immediately leases the machine through a direct finance lease that requires five
annual payments of $80,498 starting from 1st January 2011. The carrying amount
is equal to its purchase price and the relevant discount rate is 12%.
A. $51,158.
B. $79,720.
C. $112,000.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 31, LOS-h.
A. investing activity.
B. financing activity.
C. operating activity.
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS-a.
47. EBB Inc. entered into a three-year contract to construct a building with an
estimated total cost of $32 million. Due to limitations, project costs are uncertain
and the output of the project cannot be measured reliably. If at the end of year
1EBB spent $26 million, under U.S. GAAP EBB would most likely recognize:
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 24, LOS-b.
Under U.S. GAAP at the end of year 1, EBB would recognize $0 revenue, $0 cost
of construction and $0 income. The $26 million expenditure would be recorded as
an increase in inventory account and decrease in cash (if EBB paid cash for all
expenditures).
48. Which of the following measures initially decrease as a result of a firm’s decision
to capitalize its expenditure instead of expensing them?
A. Total assets.
B. Debt-to-equity.
C. Cash outflows from operations.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 29, LOS-a.
49. Which of the following statements is most likely correct regarding the audit of
financial statements?
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 7, Reading 21, LOS-d.
50. When securities are classified as ‘available for sale’ securities in U.S. GAAP
unrealized gains and losses are:
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 10, Reading 33, LOS-e.
When securities are classified as ‘available for sale’ securities in U.S. GAAP (or
securities measured at fair value through ‘other comprehensive income’ in IFRS)
unrealized gains and losses are not reported in the income statement rather they
are recognized in equity
51. Gloria Inc. ships 5 machines to a customer at $5,550 per machine. The total cost
for Gloria Inc. is $26,250 and payment is due in 60 days. No cash changes hands
at delivery. The accounting treatment related to this transaction at the time of
shipment most likely includes:
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 7, Reading 22, LOS-c.
At the time of shipment the accounting treatment for Gloria Inc. is as follows:
52. Which of the following statements is most likely correct regarding the
depreciation of property, plant and equipment under IFRS and U.S. GAAP?
A. Both IFRS and U.S. GAAP require an annual review of residual value and
useful life.
B. Unlike IFRS, U.S. GAAP requires an annual review of residual value and
useful life.
C. Unlike U.S. GAAP, under IFRS each component of an asset must be
depreciated separately.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 24, LOS d.
• Unlike U.S. GAAP, IFRS requires an annual review of residual value and
useful life.
• Unlike U.S. GAAP, under IFRS each component of an asset must be
depreciated separately.
53. An analyst gathered the following information from a company’s 2013 financial
statements.
The free cash flow for the firm (FCFF) is closest to:
A. $5.1 million.
B. $8.7 million.
C. $11.1 million.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 26, LOS-i.
54. Which of the following statements least likely represents the correct treatment of
impairment loss?
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 29, LOS-h.
Options B and C are correct. Impairment loss reduces net income and carrying
value of asset. It is considered to be a non-cash charge and therefore does not
affect the cash flows statement.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 10, Reading 32, LOS-c.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 7, Reading 23, LOS-b.
• Issuers should timely, fully and accurately disclose financial results, risks
and other material information to investors.
• Issuers should prepare their financial statements using internationally
acceptable accounting standards.
57. The elements directly related to measurement of financial performance least likely
include:
A. liabilities.
B. expenses.
C. capital maintenance adjustments.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 7, Reading 23, LOS-d.
• Income
• Expenses
• Capital maintenance adjustments
• Assets
• Liabilities
• Equity
A. $30.0 million.
B. $31.5 million.
C. $33.0 million.
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 24, LOS-k.
59. An analyst observed the following percentage changes in Hunt PAL Inc.’s
financials from 2012 to 2013:
Revenue +33%
Net Income +38%
Assets +27%
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 27, LOS-c.
Based on the data the analyst can conclude that the firm:
If the growth rate of revenue is greater than assets growth rate it may indicate that
company is increasing efficiency.
When net income is growing at a faster rate than revenue it may indicate that
company’s profitability is increasing but as the major portion of net income is due
to non-recurring items then it means company has failed to improve its
profitability.
When a company grows at a rate greater than that of overall market in which it
operates it is regarded as positive sign and indicates that the company is easily
able to attract equity capital. There is insufficient market data to arrive at this
conclusion.
60. The financial leverage ratio of a firm, whose total debt ratio is 54% and debt-to-
equity is 1.15, is closest to:
A. 0.47.
B. 0.62.
C. 2.13.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 25, LOS-i.
61. An investor asked two questions from an analyst regarding the goodwill of a
company.
Question 1: Question 2:
A. Economic Accounting
B. Accounting Economic
C. Economic & Accounting Economic
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 25, LOS-e.
Option A is correct.
Accounting Goodwill:
It is based on the accounting standards and is recognized only when acquisitions
take place.
Economic Goodwill:
It is based on the economic performance of the company. It is not reflected on the
balance sheet rather it is reflected in the stock price of the company (at least
theoretically).
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 8, Reading 27, LOS-f.
Companies are required to provide segment information under both IFRS and
U.S. GAAP although companies are not required to provide full financial
statements for segments.
Companies must disclose the factors used to identify reportable segments and the
types and products and services sold by each reportable segment.
63. In 2012, the cost of ending inventory reported by T&M, a manufacturer of office
equipment, was $22 million. T&M compiles its financial statements in accordance
with IFRS.
Exhibit1
Replacement $20.5 million
cost
NRV $21.2 million
NRV less $19.7 million
profit margin
Based on the data shown in Exhibit 1, T&M would most likely write its inventory
down by:
A. $0.8 million.
B. $1.5 million.
C. $2.3 million.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 28, LOS-f.
Under IFRS T&M would write down its inventory to $21.2 million and record f
$0.8 million as an expense in the income statement.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 30, LOS-f.
As contributions are not tax deductible, no temporary difference results from the
$25,000 contribution. This constitutes a permanent difference and thus no
deferred tax asset or liability will be recognized.
65. Under IFRS the definitional criteria for identifiable intangible assets most likely
includes:
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 29, LOS-b.
Under IFRS identifiable intangible asset must meet three definitional criteria.
The asset must be:
i. identifiable,
ii. under the control of company and
iii. expected to generate future economic benefits.
In addition the following two recognition criteria which must be met is:
i. it is probable that the expected future economic benefits of the asset will
flow to the company and
ii. the cost of the asset can be reliably measured.
66. Knin Inc. issued a 6 year, 7% annual-coupon paying bond issue with a face value
of $10 million on 1st January 2011 when the market interest rate was 7.7%. Using
the effective interest rate method, the interest expense on bonds reported in 31
December 2012 is closest to:
A. $700,000.
B. $744,854.
C. $748,308.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 31, LOS-b.
The bonds were issued at a discount and sales proceeds were $9,673,432 (see
below). Under the effective interest rate method, interest expense is calculated as:
bonds’ carrying value x market interest rate.
Interest expense for the year ended 2011 is $9,673,432 x 7.7% = $744,854.
Interest expense for the year ended 2012 is $9,718,286 x 7.7% = $748,308.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 31, LOS-k.
68. An investor uses simple stock screen criteria based on a P/E ratio of less than 5
and financial leverage ratio of less than 0.5. The investor will least likely exclude
stocks of companies:
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 10, Reading 33, LOS-d.
Simple criteria based on a P/E ratio of less than 5 may result in the selection of
stocks with lower prices justified by reasons including lower profitability and/or
higher financial leverage. However, the limitation of financial leverage serves as a
check on financial risk. In order to avoid stocks of poor profitability the investor
should further include a check on positive net income, i.e. NI/Sales> 0.
A. equivalent.
B. 0.93 years higher.
C. 1.25 years higher.
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS-d.
The discounted payback period for project A and B are almost equal. The
calculations are given below:
For Project A
Year 0 1 2 3 4
Cash flow (CF) -1500 400 300 600 800
Cumulative CF -1500 -1100 -800 -200 600
Discounted CF -1500 357.14 239.15 427.07 508.41
Cumulative -1500 -1142.86 -903.71 -476.64 31.77
discounted CF
For Project B
Year 0 1 2 3 4
Cash flow (CF) -1500 500 500 500 500
Cumulative CF -1500 -1000 -500 0 500
Discounted CF -1500 446.43 398.60 355.89 317.76
Cumulative -1500 -1053.57 -654.97 -299.08 18.68
discounted CF
70. Net present value method assumes that cash flows are reinvested at the:
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS-e.
Net present value method assumes that cash flows of a project are reinvested at
‘r’, that is the opportunity cost of capital, which is a more realistic discount rate.
71. Which of the following is most likely a correct implication of stock dividends to
the shareholders?
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 38, LOS-a.
Option C is correct. Stock dividends do not affect the shareholders’ total cost
basis however the cost per share held decreases when stock dividends are paid.
Generally, stock dividends are not taxable and do not affect the market value of
shareholders’ wealth.
72. An analyst gathered the following information to estimate the cost of equity for JI
Inc. located in Fiji.
Exhibit 1
Risk free rate 3.2%
Market risk premium 5.5%
Beta 1.3
U.S. 10-year T-bond yield 2.84%
Fiji’s 10-year dollar denominated Govt. 10.81%
bond yield
Annualized SD of Fiji’s stock market 44%
Annualized SD of Fiji’s dollar 37%
denominated bond
The sovereign yield spread and JI Inc.’s cost of equity are closest to:
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 36, LOS-j.
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 38, LOS-d.
When a company finances share repurchases with cash its assets and
shareholders’ equity decrease and leverage increases.
74. When a reliable current market price for a firm’s debt is not available, the cost of
debt can be estimated using the:
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 36, LOS-f.
When a reliable current market price for a company’s debt is not available, the
cost of debt can be estimated using the current rates based on the bond rating we
expect when we issue new bonds. This approach is referred to as matrix pricing.
75. A manager is computing the cost of trade credit for the terms 1.5/5 net 30. The
account is paid on either the 15th day or the net day. The cost of credit is:
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 39, LOS-f.
wBD
th 0.N% xA
Cost of trade if credit paid on 15 day = 1 + – 1 = 73.61%
020.N%
wBD
th 0.N% CD
Cost of trade if credit paid on net day (30 )= 1 + − 1 = 24.69%
020.N%
The cost of credit is 48.92% (73.61 – 24.69) lower if the credit is paid on the net
day.
76. An analyst gathered the following financial information from Daniel Inc.
The degree of operating leverage of Daniel Inc. from 2013 to expected 2014 is
closest to:
A. 2.11.
B. 3.68.
C. 4.79.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 37, LOS-b.
DC,AAAywz,AAA
wz,AAA
= x,{AAyx,wAA = 4.78
x,wAA
77. For short selling purposes if a security is extremely hard to borrow, the short
rebate rate may be:
A. very high.
B. negative or very low.
C. 10 basis points more than the overnight rate.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 45, LOS-e.
For short selling purposes if a security is hard to borrow, the rebate rate may be
very low or even negative. Such securities are said to be on special. Otherwise
rebate rate is usually 10 basis points less than the overnight rate in the interbank
funds market.
78. Which of the following statements is most likely correct regarding the
fundamental weighting method?
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 46, LOS-d.
79. Smith owns 500 shares of Wood Craft Inc. and the firm is going to elect 10 board
directors. Under statutory voting Smith can cast:
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 14, Reading 48, LOS-b.
Under a statutory voting, each share represent one vote therefore Smith can cast
maximum of 500 votes for each candidate i.e. he has to allocate his voting rights
evenly among all candidates.
80. An investor placed a market buy order for thinly traded shares of G.Z.T Inc. The
main drawback for the investor would be that:
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 45, LOS-h.
Market orders generally execute immediately if other traders are willing to take
other side of the trade, however they can be very expensive to execute especially
when the order is placed in the market for a thinly traded security or when the
order is large relative to normal trading activity. In such cases market buy order
may fill at high prices.
81. The performance of commodity indices can be quite different from their
underlying commodities because
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 46, LOS-k.
82. Which of the following statements is most likely correct? Enterprise value:
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 14, Reading 50, LOS-i.
Options A and B are incorrect. EV reflects the real economic value of a company
and does not have the negative earnings problem because EBITDA is usually
positive.
83. A firm will start paying dividends four years from now and thereafter that will be
expected to grow 5% into perpetuity. Expected dividend in year 4 is $5. If an
investor’s required rate of return is 7%, the intrinsic value of the stock is closest
to:
A. $200.
B. $204.
C. $227.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 14, Reading 49, LOS-e.
N(0ON%)
V4 = = 262.50
(3%2N%)
./..N
Part 1: V0 = = 200.26
(0O3%){
N
Part 2: V0 = = 3.81
(0O3%){
Sum of part 1and 2 = 200.26 + 3.81 = 204.07
Method 2
N
V3 = = 250
3%2N%
.NV
V0 = = 204.07
(0O3%)w
84. Which of the following is least likely a macroeconomic influence that affects an
industry’s growth? Changes in:
A. inflation.
B. interest rates.
C. technologies.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 14, Reading 49, LOS-h.
The five influences that affect an industry’s growth, revenues and profits are:
i. Macroeconomic influences
ii. Technological influences
iii. Demographic influences
iv. Governmental influences
v. Social influences
• GDP
• Interest rates
• Inflation
• Availability of credit
85. Which of the following most accurately illustrates the pricing rule used by the
type of order driven market?
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 45, LOS-j.
Option A is correct.
• Call markets generally use uniform trading rule where all trades execute at
the same price.
• Crossing networks use derivative pricing rule because the price is derived
from another market.
86. Asset based valuation models work well for companies that do not have a high
proportion of:
A. intangibles.
B. fixed assets.
C. current assets.
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 14, Reading 50, LOS-j.
Asset based valuation models work well for companies that do not have a high
proportion of intangibles or off the book assets and that have a high proportion of
current assets and current liabilities.
87. An investor holds 500 shares of Siena Inc. for one year on margin. Both the
interest on loan and dividends on shares are paid at the end of the year. The other
details are as follows:
A. 7%.
B. 9%.
C. 10%.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 45, LOS-f.
-.2-N
Change in market price = = -6.667%
-N
Other adjustments (dividend, interest & commission)= 500 – 50 – 300 = 150
Other adjustments % =other $ adjustments/equity = 150/15,000 = 1%
88. The £40 par value of a non-callable non-convertible preferred stock with maturity
in two years and £5 semi-annual dividend is trading for £53.22. If the required
rate of return for the investor is 7%, the preferred stock is:
A. over-valued.
B. fairly valued.
C. under-valued.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 14, Reading 50, LOS-a.
Preferred stocks are treated like fixed income securities. The intrinsic value can
be calculated through calculator as:
As the preferred stock is trading at a price equal to its intrinsic value therefore the
stock is fairly valued.
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 58, LOS-c
90. A put option is selling for $6 for which the exercise price is $72 and the price of
the underlying is $77. The maximum profit to the buyer and the breakeven price
of the underlying at expiration is:
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 59, LOS-a.
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 58, LOS-a.
92. A type of credit derivative in which credit protection buyer makes a series of
regularly scheduled payments to credit protection seller while the seller makes no
payment until a credit event occurs is categorized as a:
Correct Answer: C
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 57, LOS-c.
In a CDS (credit default swap), the credit protection buyer makes a series of
regularly scheduled payments to the credit protection seller. The seller makes no
payments until a credit event occurs.
93. The cost of protective put can most likely be reduced by:
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 59, LOS-b.
The cost of protective put can be reduced by selling a call option and this strategy
is known as ‘collar’.
94. Information can flow into the derivative before it gets into the spot market due to
the fact that derivative markets:
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 57, LOS-d.
By virtue of the fact that derivative markets require less capital, information can
flow into the derivative markets before it gets into the spot market. The difference
may well only be a matter of minutes or seconds but it can provide the edge to
astute traders.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 55, LOS-b.
96. A U.S. based firm has a position in a European bond for a par value of €50
million. For a 1 basis point increase in yield the market value of the investment
changes to €49.85 million and for a 1 basis point decrease in yield investment
value changes to €51.23 million. The price value of basis point for the investment
is closest to:
A. 0.013.
B. 0.027.
C. 0.690.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 54, LOS-f.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 15, Reading 52, LOS-h.
The difference between market value of the security used as collateral and the
value of the loan is known as repo margin. Repo margin allows for some
worsening in market value and provides the cash lender a margin of safety if the
collateral’s market value declines.
98. An investor purchases a 2-year zero-coupon bond with par value of $1,000 at
$960. The implied interest earned on the bond is closest to:
A. $0.
B. $21.
C. $40.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 15, Reading 51, LOS-a.
Par value of the bond is $1,000 and purchase price is $960. The implied interest
earned in the bond in equal to the difference of par value and purchase price.
99. An analyst observed the profitability and cash flows of firms A and B and
collected the results below.
Firm A Firm B
Earnings before interest and tax 104 million 96.5 million
Free cash flow before dividends -12.5 million 8.5 million
Free cash flow after dividends N/A - 0.5 million
A. firm A only.
B. firm B only.
C. firms A and B.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 55, LOS-e.
Both firm A and B have negative free cash flows after dividends. A firm with
positive free cash flow after dividend can use its cash flow to pay down debt or
build up cash on the balance sheet; either outcome is a form of deleveraging and
is favorable from credit risk stand point.
100. An investor buys a 10-year, 7% annual coupon payment bond and sells the bond
after 3 years. Assuming that the coupon payments are reinvested at 11.5% for 3
years. The interest on interest gain from compounding the coupon payments is
closest to:
A. $2.51.
B. $5.21.
C. $23.5.
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 54, LOS-a.
If all the three coupon payments are reinvested at 11.5%, the future value of
coupon payments is $34.16 as calculated below:
101. A recently issued sovereign bond for a given maturity is also referred to as:
A. floating issue.
B. of the run issue.
C. benchmark issue.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 15, Reading 52, LOS-d.
The latest sovereign bond issue for a given maturity is also referred to as
‘Benchmark Issue.’
102. A high yield bond issuer has offered the ‘change of control put’ to its
bondholders. Under this covenant in the event of acquisition, the bondholder has a
(n):
A. right to put limits on how much secured debt an issuer can have.
B. option to change a certain percentage of his bond value with the equity of
the issuer.
C. right to require the issuer to buy back their debt at par or at some premium
to par.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 55, LOS-j.
Under the change of control put, in the event of acquisition, bondholders have the
right to require the issuer to buyback their debt often at par or at some premium to
par value.
103. An annual modified duration of a fixed rate bond is 5.75. Although there is no
change in benchmark yields but due to improved financial reporting quality and a
ratings upgrade, the flat price of the bond has increased from 98.10 to 101.65 per
100 of par value. The estimated change in the credit spread of the bond is closest
to:
A. -62.93 bps.
B. -20.75 bps.
C. 361.88 bps.
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 54, LOS-k.
Given the % price change and annual modified duration, the change in credit
spread (due to change in yield-to-maturity) is 62.93 basis points.
A. 2.55%.
B. 3.18%.
C. 4.41%.
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 15, Reading 53, LOS-h.
z3 = 2.5477 ≅ 2.55%
105. For rating agencies, the primary factor in assigning their ratings is:
A. likelihood of default.
B. potential loss severity.
C. priority of payment in the event of a default.
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 16, Reading 55, LOS-c.
For the rating agencies likelihood of default is the primary factor in assigning
their ratings. The secondary factors include the priority of payment in the event of
default and potential loss severity in the event of default.
A. 2.2%.
B. 3.0%.
C. 4.5%.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 15, Reading 53, LOS-c.
Given spot rates, the 2-year, 5% semiannual coupon paying bond is priced at
101.05 and the yield to maturity is 4.44%.
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 18, Reading 60, LOS-d.
During period of financial crises, the correlation between hedge funds and
financial market performances may increase.
108. During periods of financial crises, the correlation between hedge funds and
financial market performances may:
A. increase.
B. decrease.
C. become 0.
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 18, Reading 60, LOS-c.
During period of financial crises, the correlation between hedge funds and
financial market performances may increase.
109. The four broad categories of hedge fund strategies identified by HFRI are:
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 18, Reading 60, LOS-d.
The four broad categories of hedge fund strategies identified by HFRI are:
i. Event-driven
ii. Relative value
iii. Equity hedge
iv. Macro strategies
110. For venture capital investing, later stage financing is the capital provided for a
company:
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 18, Reading 60, LOS-d.
Later stage financing in venture capital investing is capital provided for major
expansion.
111. Which of the following is not a suitable risk return measure for alternative
investments?
A. Sortino ratio
B. Sharpe ratio
C. Safety-first risk
Correct Answer: B
Reference:
CFA Level I, Volume 6, Study Session 18, Reading 60, LOS-e.
• Their illiquidity.
• Their valuation is conducted using estimates, rather than observable
transaction prices.
• Their returns are not normally distributed.
112. Jerry invested $15 m in EV Fund of funds (EVFOF) that invested 75% with Tsar
Hedge Fund (THF). EV FOF and THF have “1 & 10” and “2 & 20” fee structures
respectively. Management fees are calculated using beginning of period capital
and both management and incentive fees are computed independently. THF
earned 17% annual return before management and incentive fees. Based on the
data provided, net of fees return to Jerry is closest to:
A. 7.08%.
B. 8.90%.
C. 9.44%.
Correct Answer: C
Reference:
CFA Level I, Volume 6, Study Session 18, Reading 60, LOS-f.
113. Which of the following quantifies and allocates the tolerable risk by specific
metrics?
A. Risk tolerance
B. Risk Budgeting
C. Enterprise risk management
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 41, LOS-e.
Risk budgeting quantifies and allocates the tolerable risk by specific metrics. Risk
tolerance on the other hand focuses on the appetite for risk and what is acceptable.
Risk budgeting specifically focuses on how that risk is taken.
114. When an investor’s ability to take risk is above average but willingness is below
average, the investor’s risk tolerance is
A. average.
B. above average.
C. below average.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 44, LOS-d.
When an investor’s ability to take risk is above average but willingness is below
average, the investor’s risk tolerance is below average.
A. Beta.
B. RM – RF.
C. Jensen’s alpha.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 44, LOS-h.
Ri – Rf = α + β (RM – RF)
116. Generating sufficient income and maintaining the real capital value of the fund
are most likely the objectives of:
A. insurance companies.
B. university endowments.
C. investment companies.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 40, LOS-b.
117. An investor earned -0.5% returns in predicting the one-week movement in the
dollar/pound exchange rate from 06/01/13 to 06/07/13. The loss an investor can
suffer by the end of June 2014 keeping the given return as representative of future
losses is closest to:
A. 1.98%.
B. 22.9%.
C. 29.6%.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 44, LOS-a.
118. Which of the following two measures are based on the total risk and provide
similar rankings?
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 43, LOS-h.
Both M2 and Sharpe ratio are based on total risk and provide similar rankings to
evaluate portfolio performances.
119. Generating higher returns from security selection most likely depends upon:
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 44, LOS-f.
Generating higher returns from security selection depends upon two factors:
i. skills of investment managers (greater the skill, higher the value added
from security selection).
ii. informational efficiency (lower information efficiency can easily generate
higher returns from security selection. Higher information efficiency
requires greater level of skill to generate higher returns and passive
management is preferred).
120. Assuming the correlation between an asset and market is 0.67 and the asset and
market have standard deviations of 0.34 and 0.19 respectively, the market beta
would be closest to:
A. 0.09.
B. 1.00.
C. 1.20.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 43, LOS-e.
V./3
×
V.1-
Asset’s beta = δi,m x σi/σm = = 1.20
V.0€