2016 CFA Level 1 Mock Exam Morning - Answers PDF
2016 CFA Level 1 Mock Exam Morning - Answers PDF
2016 CFA Level 1 Mock Exam Morning - Answers PDF
CFA level1-Mock-113
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CFA level1-Mock-113
1. Correct answer: C.
Under Standard III(B)-Fair Dealing, members and candidates should disclose to clients and
prospective clients how they select accounts to participate in and how they determine the amount
of securities each account will buy or sell. Trade allocation procedures must be fair and equitable,
and disclosure of inequitable allocation methods does not relieve the member or candidate of this
obligation. All discretionary accounts should be treated in the same manner. Treating newer
disclosed.
CFA Level I
Standard III(B)
2. Correct answer: B.
Members should disclose all matters that reasonably could be expected to impair the member's
CFA Level I
3. Correct answer: C.
Although departing employees may not take employer property when departing, as the guidance
for Standard IV(A) – Loyalty outlines, the model Piedmont presented to his new employer was not
Branch's property. It was created by Piedmont prior to his employment with Branch. The model
was not created for Branch in the course of his employment, even though it was adopted by
Branch.
CFA Level I
Standard IV(A)
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CFA level1-Mock-113
4. Correct answer: C.
Prior to undertaking analysis with regard to expected returns, an adviser must determine the
suitability of an investment class, including whether it fits within the client's risk tolerance and
whether it is an allowable asset class as per the client's investment policy statement. Only after
these factors have been determined should she proceed, if appropriate, to analyze expected returns
CFA Level I
Standard III(C)
5. Correct answer: A.
Standard VI (A) requires disclosure of conflicts but does not prohibit members from making
CFA Level I
Standard IV(A)
6. Correct answer: A.
Standard I(A) because copyrighted materials are protected by law. Candidates and members must
comply with all applicable laws, rules, and regulations and must not knowingly participate or
CFA Level I
Standard I(A)
7. Correct answer: C.
objectives and/or strategies. Terminated portfolios must be included in the historical returns of
CFA level1-Mock-113
CFA Level I
8. Correct answer: B.
Firms must provide investors with a comprehensive view of their performance in terms of risk and
CFA Level I
Section: Overview
9. Correct answer: C.
Under Standard I(B), members and candidates must protect their independence and objectivity.
Agreeing to provide objective research coverage of a company does not constitute a violation of
this standard, provided the analyst writing the report is free to come up with his own independent
conclusion. Smith can agree to provide research coverage but cannot commit Granite's research
CFA Level I
Standard I(B)
A composite must include all actual fee-paying, discretionary portfolios managed in accordance
with the same investment mandate, objective, or strategy (Standard IV–Composites). By including
both the value and growth portfolios, the composite is made up of portfolios with different
CFA Level I
Composites
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CFA level1-Mock-113
Historically, the GIPS standards focused primarily on returns. In the spirit of fair representation
and full disclosure, and in order to provide investors with a more comprehensive view of a firm's
performance, the current GIPS standards includes new provisions related to risk.
CFA Level I
Section: Overview
Making full and fair disclosure of all matters that could reasonably be expected to impair one's
independence and objectivity or interfere with respective duties to one's clients is required by
CFA Level I
Prior-clearance processes guard against potential and actual conflicts of interest; members are
CFA Level I
Jones has used the mosaic theory to combine nonmaterial, nonpublic information with material
public information.
CFA Level I
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CFA level1-Mock-113
Punishing abuse in the financial markets is not one of the six components of the Code of Ethics.
CFA Level I
After a firm presents a minimum of five years of GIPS-compliant performance, the firm must
GIPS-compliant performance.
CFA Level I
Lan's actions do not violate Standard IV (A) – Duties to Employers. Lan does not use company
time to make arrangements for his new venture, nor does he misappropriate any information
(financial models or client contacts) from his former employer. All of Lan's actions are permissible
CFA Level I
Standard IV(A)
Members and candidates are required to disclose any compensation arrangement to their
employers that involves performing tasks or services that their employers can charge for.
CFA Level I
CFA level1-Mock-113
The EBIT-to-interest ratio is equal to 2.0 when the EBIT is $40 million. Given that the values
between $36 million and $48 million are equally likely, the probability of the ratio being equal to
or less than 2.0 is 33.3% (= [$40 million – $36 million]/[$48 million – $36 million]).
Consequently, the probability of the ratio being greater than 2.0 is 66.7% (i.e., 1 – Probability of
CFA Level I
Section 3.1
First the outcome of interest, –0.40, is standardized for the given normal distribution:
Then use the table to find the probability of a Z value being 2.70 standard deviations below the
mean (i.e., when z ≤ 0). The value is 1 – P(Z ≤ +2.70). In this problem, the solution is: 1 – 0.9965
= 0.0035 = 0.35%.
CFA Level I
Section 3.2
Because the screens are independent, the probability of passing all four simultaneously is the
where
CFA level1-Mock-113
Given 1,200 potential investments, approximately 1,200 × 0.0351 = 42.12 ~ 42 will pass the
screens.
CFA Level I
"Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 2
"Financial Statement Analysis: Applications," Thomas R. Robinson, Jan Hendrik van Greuning,
Section 5
Odds are calculated as P(Z)/[1 – P(Z)]. In this problem, 0.14/0.86 = 0.16279 ~ 0.163.
CFA Level I
"Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 2
Across two periods, there are four possibilities: an up move followed by an up move ($121.00 end
value), an up move followed by a down move ($101.20 end value), a down move followed by an
up move ($101.20 end value), and a down move followed by a down move ($84.64 end value).
The probability of an up move followed by a down move is 0.40 × 0.60 = 0.24. The probability of
a down move followed by an up move is 0.60 ×0.40, which also = 0.24. Both of these sequences
result in an end value of $101.20. Therefore, the probability of an end value of $101.20 is 48%.
n
pX pX x p x 1 p p x 1 p Equation 1
n x n! n x
x (n x)! x!
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CFA level1-Mock-113
Where
n = 2 (number of periods)
2
p1 0.401 1 0.40
2 1 2!
0.401 0.61 2 0.40 0.60 0.48
1 2 1!1!
CFA Level I
Section 2.2
Where R p is the mean return to the portfolio, R f is the mean return to a risk-free asset, and
S p is the standard deviation of return on the portfolio. In this instance, 2 = (20% - 4%)/Sp ,
Solving for Sp : Sp 20% 4% / 2 8% .
CFA Level I
"Statistical Concepts and Market Returns," Richard A. DeFusco, Dennis W. McLeavey, Jerald E.
Section 7.8
A Type I error is the mistake of rejecting the null hypothesis when it is, in fact, true.
CFA Level I
"Hypothesis Testing," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 2
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CFA level1-Mock-113
Using a financial calculator: N = 60; the discount rate, I/Y = (6.5%/12) = 0.54166667; PMT =
€1,200; Future value = €0; Mode = Begin; Calculate present value (PV): PV = €61,662.62.
Alternatively: Treat the stream as an ordinary annuity of 59 periods and add the current value of
€1,200 to the derived answer. Using a financial calculator: N = 59; the discount rate, I/Y =
(6.5%/12) = 0.54166667; PMT = €1,200; Future value = €0; Mode = End; Calculate PV: PV =
CFA Level I
"The Time Value of Money," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 6.1
A positive "hoped for" condition means that the null will be rejected (and the alternative accepted)
only if the evidence indicates that the population parameter is greater than θ0. Thus, H0: θ ≤ θ0
versus Ha: θ > θ0 is the correct statement of the null and alternative hypotheses, respectively.
CFA Level I
"Hypothesis Testing," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 2
The covariance between Fund A and B, given the standard deviation of returns and the correlation
Where
CFA level1-Mock-113
R portfolio W A2 2 R A W B2 2 R B 2W AW B CovR A ,R B 0.5
σ R portfolio 0.702 0.072 0.302 0.132 2 0.70 0.30 0.00728
0.5
8.35%
Alternatively , correlation is used directly in the formula for portfolio standard deviation:
R portfolio W A2 2 R A W B2 2 R B 2W AW B R A ,R B R A R B
0.5
σ R portfolio 0.702 0.072 0.302 0.132 2 0.70 0.30 0.80 0.07 0.13 0.5
8.35%
CFA Level I
"Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 3
Given that X and Y are independent, their joint probability is equal to the product of their
CFA Level I
"Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 2
With a sample size of 10, there are 9 degrees of freedom. The confidence interval concept is based
on a two-tailed approach. For a 95% confidence interval, 2.5% of the distribution will be in each
tail. Thus, the correct t-statistic to use is 2.262. The confidence interval is calculated as:
X t0.025S / n
Where X is the sample mean, s is the sample standard deviation, and n is the sample size. In this
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CFA level1-Mock-113
CFA Level I
―Sampling and Estimation,‖ Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 4.2
This scenario provides an example of a discrete random variable. The paired outcomes for the dice
are indicated in the following table. The outcome of the dice summing to six is the most likely to
occur of the three choices because it can occur in five different ways, whereas the summation to
6 (1, 5), (2, 4), (3, 3), (4, 2), and (5, 1) 5
CFA Level I
Section 2
2. The sum of the probabilities of any set of mutually exclusive and exhaustive events equals one.
CFA Level I
"Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E.
Runkle
Section 2
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CFA level1-Mock-113
The loss in consumer surplus because of higher prices is represented by area E+F+G+H. This
exceeds the gains from producer surplus (E) and government revenues on imports (G). Hence the
net welfare effect to the country is a deadweight loss of [E+F+G+H] – [E] – [G] = F+H.
CFA Level 1
―Demand and Supply Analysis: Introduction,‖ Richard V. Eastin and Gary L. Arbogast, CFA
―International Trade and Capital Flows,‖ Usha Nair-Reichert, PhD, and Daniel Robert
Section 3.1
An increase in capacity utilization will cause an increase in aggregate demand through higher
CFA Level I
"Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz
Section 3.3.1
The Fisher effect states that the nominal interest rate is the sum of the real rate of interest and the
expected rate of inflation over a given time horizon. An increase in expected inflation will result in
CFA Level I
Section 2.1.7
The sum-of-value-added method involves summing the value added (or income created) at each
CFA level1-Mock-113
CFA Level I
"Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz
Section 2.1
CFA Level I
"Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz
Section 3.4.5
Veblen goods violate the fundamental axioms of demand theory, whereas Giffen goods do not.
CFA Level I
"Demand and Supply Analysis: Consumer Demand," Richard V. Eastin and Gary L. Arbogast
A boom in the stock market increases the value of financial assets and household wealth. An
increase in household wealth increases consumer spending and shifts the aggregate demand curve
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CFA level1-Mock-113
to the right.
CFA Level I
"Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz
Section 3.3.1
QDPizza = 11 0.70 PPizza + 0.009 $500 0.20 1.25 = 15.25 – 0.70 PPizza
QDPizza = 11 0.70 PPizza + 0.009 $700 - 0.20 1.25 = 17.05 – 0.70 PPizza ,
The slope of her demand curve for pizza will still be -1.43 even with the higher income of $700
as the increase in income has shifted the demand curve outward and upward but has not affected
its slope.
CFA Level I
"Demand and Supply Analysis: Introduction," Richard V. Eastin and Gary L. Arbogast
Section 3.2
If demand is elastic, a 1% reduction in price increases the quantity sold by more than 1%.
CFA Level I
"Demand and Supply Analysis: Introduction," Richard V. Eastin and Gary L. Arbogast
Section 4.1
A recessionary gap arises when equilibrium GDP is below potential GDP. Decreased confidence
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CFA level1-Mock-113
lowers aggregate demand, which, in turn, leads to economic contractions. As demand declines,
CFA Level I
"Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz
Section 3.4.2
Consumer surplus arises when a consumer pays less for a good than the maximum price that she
or he was willing to pay for it. Consumer surplus is the value (or marginal benefit) of a good
minus the price paid for it, summed over the quantity bought. Because no consumer will (willingly)
pay a price greater than the marginal value or benefit, consumer surplus is always positive.
CFA Level I
"Demand and Supply Analysis: Introduction," Richard V. Eastin and Gary L. Arbogast
Section 3.9
A Giffen good is an inferior good. All inferior goods have a negative income effect (less is
purchased as income rises). Although the substitution effect is always positive for all goods, for a
Giffen good, the income effect is so strong and so negative that it overpowers the substitution
effect. The result is that as its price declines, less of it is purchased; this relationship results in a
positively sloped individual demand curve. Therefore, it is least likely that the substitution effect
is negative.
CFA Level I
"Demand and Supply Analysis: Consumer Demand," Richard V. Eastin and Gary L. Arbogast
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CFA level1-Mock-113
Common size statements offer a convenient way to compare companies of different magnitudes.
Company X reports better (higher) gross margin performance. Company Y reports better (higher)
Administrative costs 17 15
CFA Level I
Section 7.1
U.S. GAAP requires that long term contracts whose outcomes can be reliably measured should be
accounted for using the percentage-of-completion method, based on the stage of completion.
Under the original assumptions, the company would have recognized $15 million of revenue.
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CFA level1-Mock-113
Now that the company is unclear on the appropriate design and thus the cost, the outcome cannot
be reliably measured. The completed contract method is used. Under this approach, no revenue
($ 0) is recognized until the contract is substantially complete. The difference in reported revenue
CFA Level I
Section 3.2.1
Whether the company sells or leases the asset, inventory will be reduced. For sales, the company
would report an accounts receivable classified as a current asset (assuming sales terms are not in
question). If the leases qualify as finance leases, then the company will report a lease receivable,
which is primarily long term. Therefore, compared with selling units outright, the company's
current assets are lower under leasing and its liquidity position will decrease.
CFA Level I
Section 9.2.2
Section 3.2.2
The general journal records transactions in the order in which they occur (chronological order) and
CFA Level I
"Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen
Section 6.1
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CFA level1-Mock-113
The costs to include in inventories are all costs of purchase, costs of conversion, and other costs
incurred in bringing the inventories to their present location and condition. It does not include
Cost ¥Millions
CFA Level I
Section 2
If the leases were capitalized, both total assets and liabilities would increase by the present value
The lease commitments after 2019 are assumed to be the same as in 2019, so there are estimated
The present value of the operating lease payments can be calculated as the sum of the present
(beginning of 2015) and another four-year annuity starting in four years (2019)
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CFA level1-Mock-113
by at Start of
2015
required
beyond 1.06 4
Total 710.2
PV
years
Total 710.1
CFA Level I
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CFA level1-Mock-113
Section 9.2.1
Section 3.2.1
The IFRS Conceptual Framework specifies a number of general features underlying the
preparation of financial statements, including materiality and accrual basis. Matching is not one of
CFA Level I
"Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning, and Thomas R.
Robinson
Section 4.1
For a publicly traded firm in the United States, the auditor must express an opinion as to whether
the company's internal control system is in accordance with the Public Accounting Oversight
Board, under the Sarbanes–Oxley Act. The opinion is given either in a final paragraph in the
CFA Level I
Section 3.1.7
The two fundamental qualitative characteristics that make financial information useful are
relevance and faithful representation. Materiality relates to the level of detail of the information
CFA Level I
"Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning, and Thomas R.
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CFA level1-Mock-113
Robinson
Section 5.2
Metric (£’000)
CFA Level I
Section 8
Because both the preferred shares and the bonds are dilutive, they should both be converted to
calculate the diluted EPS. Diluted EPS is the lowest possible value.
Converted Converted
outstanding
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CFA level1-Mock-113
CFA Level I
An effective framework should enhance the transparency of the underlying economics through the
financial statements; transparency arises through full disclosure and fair presentation.
CFA Level I
"Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning and Thomas R.
Robinson
Section 6.1
The periodic and perpetual systems result in the same inventory and cost of goods sold values (and
thus gross profit margin) using both FIFO and specific identification valuation methods but not
CFA Level I
Section 3.6
A liquidity-based presentation can be used when it provides information that is reliable and more
CFA Level I
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CFA level1-Mock-113
Relevance and faithful representation are the two fundamental qualitative characteristics that make
CFA Level I
"Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning, and Thomas R.
Robinson
Section 5.2
Intangible assets with indefinite lives need to be tested for impairment at least annually. Property,
plant, and equipment (including land) and intangibles with finite lives are only tested if there has
CFA Level I
In periods of rising prices, FIFO results in a higher inventory value and a lower cost of goods sold
and thus a higher net income. The higher net income increases return on sales. The higher reported
net income also increases retained earnings and thus results in a lower debt-to-equity ratio, not a
higher one. The combination of higher inventory and lower cost of goods sold (CGS) decreases
CFA Level I
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CFA level1-Mock-113
There would be no effect on the accounting equation because the company has exchanged one
asset for another. Cash has decreased and office equipment, a capital asset, has increased.
CFA Level I
"Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen
Section 4.2
Under IFRS, the recovery of a previous write-down is limited to the amount of the original
CFA Level I
Section 6
The notes disclose information about the accounting policies, methods, and estimates used to
CFA Level I
Section 3.1.5
The used aircraft that the manufacturer buys and leases back are classified as operating leases. For
the lessor, these assets under operating leases would be classified in property, plant, and
equipment in capital assets and thus would lead to an increase in capital assets. With payments in
advance, there would be no lease receivable arising from the operating lease; long-term lease
receivables arise from financing leases, not operating leases. Although revenues will increase by
the lease payments, the leased assets are depreciated, and therefore EBIT will increase by the lease
CFA level1-Mock-113
CFA Level I
Section 9.2.2
Section 3.2
The role of financial reporting is to provide information about the performance of a company, its
financial position, and changes in financial position that is useful to a wide range of users in
CFA Level I
Sections 2, 3.1.7
The statement about accrued expenses is correct. A valuation adjustment for an asset converts its
historical cost to current market value; accrued revenue arises when revenue has been earned but
CFA Level I
"Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen
Section 5.1
The expensing of the previously capitalized interest is a non-cash amount and does not affect cash
flow from operations. Under US GAAP, cash flow from operations is higher as a result of the
initial capitalizing of interest but not its subsequent expensing. If the interest had not been
capitalized, interest expense would have been greater and net income and cash from operations
lower.
CFA Level I
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CFA level1-Mock-113
Section 2.1
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CFA level1-Mock-113
The annual after-tax cost of debt is the after tax annual yield to maturity (YTM). Find the YTM by
Present value (PV) = –1,030.34; Future value (FV) = 1,000; N = 40 (20 × 2); Payment (PMT) = 31
i = 2.97 semiannually.
CFA Level I
―Cost of Capital,‖ Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 3.1.1
The optimal capital budget occurs when the marginal cost of capital (MCC) intersects with (is
CFA Level I
"Cost of Capital," Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 2.3
Note: 60% debt financing is equivalent to a debt-to-equity ratio of 1.50 = 0.60/(1 – 0.60).
CFA Level I
―Cost of Capital,‖ Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 4.1
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CFA level1-Mock-113
In this instance, times interest earned can be found as the correct answer by process of eliminating
the other choices as potential correct answers. Keep in mind, however, that even when companies
have equal times interest earned ratios, it does not mean that the amount of interest expense is the
same for both because the companies may not be of equal size.
CFA Level I
―Financial Analysis Techniques,‖ by Elaine Henry, Thomas R. Robinson, and Jan Hendrik van
Greuning
Sections 4.2–4.3
―Measures of Leverage,‖ by Pamela Peterson Drake, Raj Aggarwal, Cynthia Harrington, and
Adam Kobor
Section 3.4
Renegotiating debt contracts is a secondary source of liquidity because it may affect the
CFA Level I
―Working Capital Management,‖ Edgar A. Norton, Jr., Kenneth L. Parkinson, and Pamela
Peterson Drake
Incorrect.
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CFA level1-Mock-113
Financing costs are not included in a cash flow calculation but are considered in the calculation of
CFA Level I
Section 3
D1
re g
P0 1 f
$0.32
0.1229 0.10
$14.691 0.05
where
D1 = Expected dividend
P0 = Current price
f = Flotation costs
g = Growth rate
CFA Level I,
―Cost of Capital,‖ Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
423.11
The PI is: 1 1.026
16,253
CFA Level I,
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CFA level1-Mock-113
Information-motivated traders expect to earn returns in excess of market returns because they
trade on securities they believe the market has over- or undervalued. Unlike pure investors, they
expect to earn a return on their information in addition to the normal return expected for bearing
risk. Excess returns are generated when the market recognizes and corrects the valuation error on
such a security.
CFA Level I
Section 2.1.6
Fundamentally weighted indices generally will have a contrarian ―effect‖ in that the portfolio
weights will shift away from securities that have increased in relative value and toward securities
CFA Level I
Section 3.2.4
Instruments that are infrequently traded and expensive to carry as inventory (e.g., very large
blocks of stock, real estate properties, fine art masterpieces, and liquor licenses) are executed in
brokered markets. Organizing order-driven markets for such instruments is not sensible because
CFA Level I
Section 8.2
Behavioral biases in which investors tend to avoid realizing losses but, rather, seek to realize gains
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CFA Level I
―Market Efficiency,‖ by W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake
Section 5.3
CFA Level I
Section 3.1
Information availability (e.g., active financial news media or information regarding trading
activity and traded companies) and financial disclosure should promote or increase market
efficiency.
CFA Level I
"Market Efficiency," W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake
Section 2.3
Compared with equity indices, the large number of fixed-income securities—combined with the
lack of liquidity of some securities—has made it more costly and difficult for investors to replicate
CFA Level I
Section 6.1
Most forward contracts do not require an upfront cash outlay. Other hedging vehicles, such as
futures (which require margin accounts) and options (which must be purchased for a fee), do
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CFA Level I
Section 3.4.1
An index provider will adjust the value of the divisor as necessary to avoid changes in the index
CFA Level I
Section 2
Closed-end funds may trade at a premium (discount) to net asset value when investors believe that
CFA Level I
Section 3.2.3
Equal weighting assigns an equal weight to each constituent security at inception. Therefore, it is
the sum of the total return from each security divided by the number of securities in the portfolios.
CFA Level I
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CFA level1-Mock-113
Section 3.2.2
An embryonic industry is one that is just beginning to develop and is characterized by slow
growth, high prices, volumes not yet sufficient to achieve meaningful economies of scale,
developing distribution channels, and low brand loyalty because there is low customer awareness
CFA Level I
―Introduction to Industry and Company Analysis,‖ Patrick W. Dorsey, Anthony M. Fiore, and Ian
Rossa O’Reilly
Section 5.1.5.1
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Vt T St F0 T 1 r
T t
it follows that the value of the contract goes up as the price of the underlying goes up.
Section 3.1.3
One benefit of derivatives markets is information discovery. Implied volatility reveals information
about the risk of the underlying. Increases in implied volatility are an implication of increased
market uncertainty.
CFA Level I
Section 5.2
If the convenience yield is high, holding the underlying confers large benefits, thus the spot price
can exceed the forward price for a forward contract with a value of zero. Based on the formula
benefits explain why the spot price can exceed the forward price.
Section 2.2.5
A fiduciary call, defined as a long position in a call and in a risk-free bond, generates a payoff that
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CFA Level I
Section 4.1.9
Convenience yield is primarily associated with commodities and generally exists as a result of
CFA Level I
Section 2.2.5
The forward price is the spot price compounded at the risk-free rate over the life of the contract.
Since Contract 2 has the longer life, compounding will lead to a larger value.
CFA Level I
Section 3.1.2
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Because the security's coupon rate moves in the opposite direction (or inversely) from the risk-free
CFA Level 1
Section 4.2
The size of the spread between the bid price and the ask price is the primary measure of market
liquidity of the issue. Market liquidity risk is the risk that the investor will have to sell a bond
below its indicated value. The wider the bid–ask spread, the greater the market liquidity risk.
CFA Level I
Section 2
The forward and spot curves are interconnected to each other. The spot curve can be calculated
from the forward curve, and the forward curve can be calculated from the spot curve. Either curve
CFA Level I
Section 4
108.59 108.40
so, 0.095
2
CFA Level 1
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"Understanding Fixed-Income Risk and Return," James F. Adams and Donald J. Smith
Section 3.5
When interest rates are low, the callable bond's price will not increase as much because the
presence of the call option will limit the price increase. Because the bond is likely to be called
when interest rates are falling, the embedded call option will reduce the effective duration of the
bond.
CFA Level 1
"Understanding Fixed-Income Risk and Return," James F. Adams and Donald J. Smith
Section 3.3
An original issue discount tax provision allows the investor to increase the cost basis of the bond,
so when the bond matures, the investor faces no capital gain or loss.
CFA Level 1
Section 3.3
A spot rate is defined as the yield to maturity on a zero-coupon bond maturing at the date of that
cash flow.
CFA Level I
Section 2.4
The duration gap is the bond's Macaulay duration minus the investment horizon, which is positive
in this case. A positive duration gap implies that the investor is currently exposed to the risk of
CFA level1-Mock-113
CFA Level I
"Understanding Fixed-Income Risk and Return", James F. Adams and Donald J. Smith
Section 4.2
Securitization allows banks to originate (or create) loans and the process results in a reduction in
the layers between borrowers and ultimate investors. The loans are repackaged into more complex,
CFA Level I
Section 2
A callable bond exhibits negative convexity at low yield levels and positive convexity at high
yield levels.
CFA Level 1
"Understanding Fixed-Income Risk and Return," James F. Adams and Donald J. Smith
Section 3.6
Face value
1 r N
where r is the market discount rate per period and N is the number of evenly spaced periods to
$1,000
$122.74
1 0.12 / 2 18 2
CFA Level I
Section 2.1
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CFA level1-Mock-113
The bank does not have a claim against the borrower for the shortfall of $150,000 on the mortgage
balance outstanding relative to the proceeds received from the property's sale indicating that the
CFA Level I
Section 4.5
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The soft hurdle rate is surpassed, because the return of the fund is 10%. For that reason, the full
Therefore, the fund assets at the end of the period after fees are $105.8 million. The return for the
investor is 5.8%.
"Introduction to Alternative Investments," by Terri Duhon, George Spentzos, and Scott D. Stewart
Section 3.3
A limited partnership that takes long and short positions in publicly traded equity is one type of
CFA Level I
"Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart
Section 2.1
Real estate investment trusts (REITs) provide investors with indirect equity real estate exposure.
Real estate investment partnerships are a form of direct real estate equity investment. Commercial
CFA Level I
"Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart
CFA level1-Mock-113
A master limited partnership (MLP) is publicly traded, whereas a private equity fund is not.
Therefore the MLP will have market pricing information to help with valuation. A brownfield
investment is an existing asset that likely has operational and financial history to aid in valuation;
CFA Level I
"Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart
Section 7
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The statement is an absolute risk objective because it expresses a maximum loss in value with an
CFA Level I
"Basics of Portfolio Planning and Construction," Alistair Byrne and Frank E. Smuddle
Section 2.2
Because the estimated return on the stock is lower than the expected return using the CAPM, the
stock does not compensate the investor for the level of risk and so it is most likely overvalued.
CFA Level I
Section 4.3
For an investor who holds a fully diversified portfolio, the Treynor ratio and Jensen's alpha are the
appropriate portfolio performance measures. They are appropriate because in a fully diversified
portfolio, only systematic risk matters; both these metrics measure performance relative to beta or
systematic risk.
CFA Level I
Section 4.3
The Treynor ratio measures the return premium of a portfolio versus the risk-free asset relative to
CFA Level I
Section 4.3.2
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An organization with a strong competitive position can recover from losses more easily than one
with a weaker competitive positive. Therefore an organization's risk tolerance should reflect its
competitive position. An organization's size does not define the risks sources it faces or the
relative losses it can absorb; therefore it should not be reflected in its risk tolerance. Neither the
risk sources affecting an organization nor the size of the losses an organization can absorb are a
CFA Level I
Section 3.2
i ,m i
We first compute the firm’s beta using: i The beta is:
m
0.80.30
i 1.6 The expected return is computed using:
0.15
CFA Level I
Investor B has a higher risk aversion coefficient, which means a lower risk tolerance and a lower
CFA Level I
Section 3.3
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A return-generating model based on such factors as earnings growth and cash flow generation is a
CFA Level I
Section 3.2.1
Insurance companies need to be relatively conservative and liquid, given the necessity of paying
CFA Level I
Section 3
The standard deviation of a two-asset portfolio is given by the square root of the portfolio's
variance:
0.252 0.1792 0.752 0.0622 2 0.75 0.25 0.5 0.179 0.062 7.90%
CFA Level I
Section 2.3.3
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