Finquiz Cfa Mock Exams Level 1 June 2016 PDF

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CFA Level I 1st Mock Exam
June, 2016
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CFA Level I Mock Exam 1 – Questions (AM)
FinQuiz.com – 1st Mock Exam 2016 (AM Session)
Questions Topic Minutes

1-18 Ethical and Professional Standards 27
19-32 Quantitative Methods 21
33-44 Economics 18
45-68 Financial Reporting and Analysis 36
69-76 Corporate Finance 12
77-88 Equity Investments 18
89-94 Derivative Investments 9
95-106 Fixed Income Investments 18
107-112 Alternative Investments 9
113-120 Portfolio Management 12
Total 180
FinQuiz.com © 2016 - All rights reserved. 2

Questions 1 through 18 relate to Ethical and Professional Standards
1. According to Standard I-A ‘Knowledge of Law’, members and candidates are

required to:
A. maintain readily accessible current reference copies of applicable statutes,

rules and regulations.
B. dissociate from the activity if they have reasonable grounds to believe that
employer’s or client’s activities are unethical.
C. report potential violations of the Code and Standards committed by fellow
members and candidates to regulatory organizations.
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.
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:
A. violate Standard I-C ‘Misrepresentation’ by relying on work not prepared

by himself for his clients.
B. violate Standard IV-A ‘Loyalty to employers’ as he is not allowed to use
the report prepared by Gemma Brokerage.
C. not violate any standard if he makes reasonable efforts to determine that
research is sound and uses the information in good faith.

4. By complying with GIPS standards firms cannot:
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.
5. In conversation with a prospective client, a portfolio manager stated

“I cannot guarantee that you will earn 18% on equities this year but I can provide
you a range within which your return will lie. My range is quite popular among
my clients and has a history of ten years. Each year, I develop the range by using
financial models, economic forecasts and accredited reports. Based on the CFA
Institute Standards, the portfolio manager:
A. did not violate any standard.

B. violated standard I-C ‘Misrepresentation’.
C. violated standard III-D ‘Performance Presentation’.
6. Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is

responsible for managing the High Beta Mutual Fund (HBMF). Curtis Fowler,
aged 56 and dependent on his portfolio returns, is W&WS’s client. His portfolio
will now be managed by Chavez, who has been asked to invest 20% of his
portfolio funds in HBMF. Chavez fills the request forms and immediately
purchases shares of HBMF for Fowler. Is Chavez in compliance with codes and
standards, and if not, what should be the recommended course of action for
Chavez?
A. Yes, she is in compliance with codes and standards.

B. No, she should consult Fowler’s existing investment policy statement
(IPS) and should judge the suitability of his investments in the context of
his total portfolio.
C. No, she should make reasonable inquiry about Fowler’s risk and return
objectives and financial constraints prior to taking investment action
requested by Fowler.

7. Gilbert Love worked as financial analyst at Milton Securities. During his

employment at Milton, Love covered Indigo Corp and developed detailed
financial models, assumptions and supporting reports. When Milton switched his
job, his new employer assigned him to analyze Indigo Corp. Milton developed a
new model with improved assumptions and specifications and re-created the
supporting records by gathering data from the covered company. Has Milton
violated any CFA Institute Code and Standards?
A. No, he is in compliance with the Code and Standards.

B. Yes, he has violated Standard V-C ‘Record Retention’ by re-creating the
supporting records.
C. Yes, he violated ‘Misrepresentation’ and ‘Record Retention’ by
developing the model and re-creating the supporting records for Indigo
Corp.
8. According to Standard II-A ‘Material Non-Public Information’, if a member or

candidate determines that information is material he should make reasonable
efforts to:
A. achieve public dissemination of the information.

B. alter current investment recommendations for clients.
C. protect information from those who can possibly act on that information.
9. Lauren Sims, marketing director of Karma Advisors, planned a brief performance

presentation in five different U.S states where majority of the firm’s clients are
located, in celebration of Karma’s five years of success. In his presentation, Sims
clearly includes references to the information presented and also prepared a
detailed information report to support his brief presentation. At the conclusion,
Sims provided the report only to the clients who requested it. By failing to
provide the report to all the clients who attended the session, Sims:
A. violated Standard III-B ‘Fair Dealing’

B. violated Standard III-D ‘Performance Presentation’.
C. did not violate any CFA Institute codes and standards.

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:
A. Standard VI-B ‘Priority of Transactions’.

B. Standard II-A ‘Material Non-public Information’.
C. Standard V-A ‘Diligence and Reasonable Basis’.
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
A. ‘Market Manipulation’ only.

B. ‘Material Nonpublic Information’ only
C. ‘Market Manipulation’ and ‘Material Nonpublic Information’.
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:
A. is in compliance with standards regarding timely notification and using his

own personal records.
B. violated the standards by rendering services without receiving consent
from his employer and by using records.
C. violated the standards by using records but is in compliance with standards
in notifying his employer regarding his independent practice.

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?
A. Only Enrique is in violation.

B. Only Rachael is in violation.
C. Both Rachael and Enrique are in violation.
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.
15. Reginald Fuller manages institutional portfolios on behalf of BDY Advisors.

Fuller also manages an account of a trust company named SOTO Trust. The trust
offered Fuller a $50,000 cash gift if he succeeded in achieving a 20% return this
year. The best practice for Fuller includes:
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

16. GIPS standards least likely resolve misleading practices related to:
A. survivorship bias.
B. varying time periods.
C. analyst financial statement adjustments.
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.
18. Which of the following statements is most likely correct regarding the major
sections of GIPS standards?
A. According to Section 4 ‘Disclosures’, firms are required to make negative

assurance disclosures.
B. According to Section 3’Composite Construction’, a composite return is the
asset weighted average of the performance of all portfolios in the
composite.
C. According to section 5 ‘Presentation and Reporting’, firms cannot include
in GIPS-compliant presentations information not addressed by the GIPS
standards.

Questions 19 through 32 relate to Quantitative Methods
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.
The present value of whose investment would be the lowest?
A. Sam.
B. Robert.
C. Patricia.
20. Which of the following properties of correlation and covariance is most likely
correct?
A. Correlation only deals with linear relationships.

B. As the number of securities in a portfolio increases the importance of
covariance decreases all else equal.
C. When correlation between two variables is > 0 the variables have a
perfectly positive linear relationship.
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.

22. The efficiency of an unbiased estimator is measured by its:
A. variance.
B. sample size.
C. mean value.
23. The investment performance of a fund for the year 2013 is as follows:
• On 1 January 2013, the fund had market value of $70 million.
• The holding period return for the fund from 1 January to 30 June was
18%.
• On 1 July 2013 the fund received an additional $35 million.
• On 31 December 2013 the fund received total dividends of $8 million.
• The fund’s market value on 31 December 2013 including $8 million
dividends was $134 million.
The time-weighted return computed by the manager is closest to:
A. 13.95%.
B. 22.22%.
C. 34.46%.
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.
Probability distribution for Howe’s EPS

Probability EPS ($)
0.12 7.75
0.45 6.20
0.33 5.50
0.10 3.75
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.

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.
df. p = 0.05 p = 0.10

24 1.711 1.318
25 1.708 1.316
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.
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?
A. Portfolio A is more peaked than normal distribution.

B. Distribution of portfolio A has frequent small losses and few large gains.
C. For portfolio B, more than half of the deviations from the mean are
negative.
27. For a normal random variable approximately 68% of all outcomes fall within:
A. one standard deviation of the mean.

B. two standard deviations of the mean.
C. three 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.
29. Which of the following best describes the reason for choosing the NPV rule over
the IRR rule when dealing with mutually exclusive projects?
A. NPV rankings are affected by external interest rates or discount rates.

B. The reinvestment rates used by NPV are more conservative and therefore
are economically more relevant.
C. IRR ranking assumes reinvestment at opportunity cost of capital that is
less realistic and economically less relevant.
30. A lognormal distribution:
A. is bounded below by 1 and has a long right tail.

B. is not completely described by two parameters i.e. the mean and the
variance.
C. may well describe a stock price whose continuously compounded returns
do not follow a normal 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.

32. Which of the following statements is most likely correct regarding parametric and
non-parametric tests?
A. Parametric tests are relatively unaffected by violations of assumptions.

B. In a parametric test observations are converted into ranks according to
their magnitude.
C. Nonparametric tests are considered distribution-free methods because they
do not rely on any underlying distribution assumption.

Questions 33 through 44 relate to Economics
33. An auction in which each bidder submits a price or bid to the auctioneer
simultaneously and independently is categorized as:
A. Dutch auction.
B. English auction.
C. Sealed bid auction.
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.
35. Which of the following is most likely common among the assumptions of the
Ricardian model and Heckscher-Ohlin model?
A. Labor is a variable factor of production.

B. Capital is not a variable factor of production.
C. There are homogenous products and homogenous inputs.
36. When an increase in interest rate leads to a decline in savings, it implies that:
A. individuals substitute future consumption for present consumption.

B. income effect of a higher interest rate is greater than substitution effect.
C. savings and interest rate patterns cannot be determined in terms of the
income and substitution effect.

37. Aggregate demand (AD) curve will be flatter if:
A. saving is highly sensitive to income.

B. investment expenditure is highly sensitive to interest rates.
C. money demand is highly sensitive to income and interest rates.
38. A consumer with a steeper indifference curve most likely indicates that his
marginal rate of substitution (MRSXY) is:
A. greater and he can give up more of good Y to get an additional unit of

good X.
B. lower and he can give up more of good X to get an additional unit of good
Y.
C. greater and he cannot gain from voluntary exchange with the consumer
whose MRSXY is lower.
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.
40. To determine the impact of changes in exchange rates on trade balance, the
‘absorption approach’ most likely exhibits the:
A. effect of changing the relative price of domestic and foreign goods.

B. effect of exchange rates on aggregate expenditure or saving decisions.
C. microeconomic view of the relationship between exchange rates and trade
balance.
41. Which of the following factors of production most likely include the cost of
building, equipment and interest?
Building Equipment Interest

A. Land Materials Capital
B. Capital Materials Land
C. Capital Capital Capital

42. Leading economic indicators (LEI) are variables that:
A. change before nominal GDP of economy changes.

B. provide information regarding economy’s past condition.
C. are useful for predicting economy’s near-term future state.
43. Which of the following characteristics most likely demonstrates that the firm is
operating in monopolistic competition?
Entry Barriers Sellers Long-run profits

A. Low Many None
B. High Few Positive
C. Low Few None
44. To deal with short-run stabilization, as compared to monetary policy, fiscal policy
is most likely:
A. less effective as it is very time consuming.

B. more effective as it is easy to implement.
C. equally effective as both policies work well in combination.

Questions 45 through 68 relate to Financial Reporting and Analysis
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 $56,000 starting from 1st January 2011. The carrying amount
is equal to its purchase price and the relevant discount rate is 12%.
On 1st January 2012, the reduction in lease receivable is closest to:
A. $23,720.
B. $79,720.
C. $112,000.
46. Under IFRS cash receipt of interest cannot be classified as a (n):
A. investing activity.
B. financing activity.
C. operating activity.
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:
A. $26 million as cost of construction.

B. $26 million as an increase in inventory account.
C. $0 in any account until the project has completed.
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.

49. Which of the following statements is most likely correct regarding the audit of
financial statements?
A. Disclaimer of opinion occurs when an auditor issues an opinion despite

scope limitations.
B. When an auditor has concerns regarding some unreported pending
contingent liabilities he might issue a qualified opinion.
C. Auditors can provide absolute assurance about the accuracy and precision
of financial statements if the opinion is unqualified.
50. When securities are classified as ‘available for sale’ securities in U.S. GAAP
unrealized gains and losses are:
A. reported in the income statement.

B. not reported in the income statement but are recognized in equity.
C. neither reported in the income statement nor 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:
A. accounts receivable and revenue increased by $27,750 and inventory

decreased by $26,250.
B. revenue increased by $5,550, cost of goods sold decreased by $26,250 and
cash remains unchanged.
C. accounts receivable and revenue increased by $27,750 and inventory and
cost of goods sold decreased by $26,250.
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.

53. An analyst gathered the following information from a company’s 2013 financial
statements.
Net income = $24 million

Non cash charges = $6 million
Cash flow from operations = $12 million
After tax interest paid = $2.6 million
Capital expenditure = $9.5 million
Tax rate = 35%
The free cash flow for the firm (FCFF) is closest to:
A. $5.1 million.
B. $8.7 million.
C. $11.1 million.
54. Which of the following statements least likely represents the correct treatment of
impairment loss?
A. It reduces investing cash flow in the year loss is reported.

B. It reduces the net income and carrying amount of assets.
C. It is considered a non-cash item and thus does not affect the cash flow
statement.
55. Earnings smoothing can result from conservative choices to:
A. overstate earnings in periods when a company’s operations are struggling.

B. understate earnings in periods when a company’s operations are
struggling.
C. understate earnings in periods when a company’s operations are
performing well.

56. Which of the following is least likely an (International Organization of Securities

Commissions) (IOSCO) principle for issuers? Issuers should:
A. prepare their financial statements using internationally acceptable

accounting standards.
B. timely, fully and accurately disclose financial results, risks and other
material information to investors.
C. make consistent choices with respect to accounting standards and their
financial statements should be comparable.
57. The elements directly related to measurement of financial performance least likely
include:
A. liabilities.
B. expenses.
C. capital maintenance adjustments.
58. An analyst gathered the following information for a firm:
Net income for the year = $8 million

Beginning shareholders’ equity = $25 million
Unrealized gain on trading securities = $1.5 million
Unrealized loss on available for sale securities = $2 million
Foreign currency translation gain = $1.5 million
Cash dividends for the year = $1 million
The ending shareholders’ equity of the company is closest to:
A. $30.0 million.
B. $31.5 million.
C. $33.0 million.

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%
If the major portion of the growth in net income is attributed to non-recurring

items, the analyst will least likely conclude that Hunt PAL Inc.:
A. has increased its efficiency.

B. has failed to increase its profitability.
C. cannot easily attract equity capital.
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.
61. An investor asked two questions from an analyst regarding the goodwill of a
company.
Question 1: Which goodwill is reflected in the stock price of a company?
Question 2: Which goodwill is recognized when an acquisition takes

place?
The most appropriate response of the analyst to questions 1 and 2, respectively,

is:
Question 1: Question 2:
A. Economic Accounting
B. Accounting Economic
C. Economic & Accounting Economic

62. Regarding business segments, companies are not required to provide:
A. full financial statements for segments.

B. factors used to identify reportable segments.
C. disclose segment information under both IFRS and U.S, GAAP.
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.
64. A publishing firm contributed $250,000 to support some philanthropic projects.

The firm immediately expensed that amount in its income statement for the
current fiscal year. According to applicable tax legislation such contributions are
not tax-deductible.
Which of the following statements is most likely correct?
A. A temporary difference of $250,000 gives rise to a deferred tax liability.

B. A deferred tax asset arises, as taxable income is greater than accounting
profit.
C. The treatment of $250,000 for accounting and tax purposes represents a
permanent difference.

65. Under IFRS the definitional criteria for identifiable intangible assets most likely
includes:
A. the cost of the asset can be reliably measured.

B. it is probable that the expected future economic benefits of the asset will
flow to the company.
C. the asset must be identifiable, under the control of company and expected
to generate future economic benefits.
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.
67. Pension expense for employees directly related to production is reflected by an

increase in:
A. salaries and other administrative expenses.

B. the net pension liability account in the balance sheet.
C. the inventory account and is expensed through cost of sales.
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:
A. with poor profitability.

B. with excessive financial risk.
C. that are expensive for good reason.

Questions 69 through 76 relate to Corporate Finance
69. The cash flows of projects A and B are given below:
Year Cash flows

Project A Project B
0 -1,500 -1,500
1 400 500
2 300 500
3 600 500
4 800 500
For a 12% internal rate of return, as compared to project B, the discounted

payback period of project A is approximately:
A. equivalent.
B. 0.93 years higher.
C. 1.25 years higher.
70. Net present value method assumes that cash flows are reinvested at the:
A. internal rate of return.

B. accounting rate of return.
C. opportunity cost of capital.
71. Which of the following is most likely a correct implication of stock dividends to
the shareholders?
A. Generally stock dividends are taxable.

B. Stock dividends positively affect the market value of shareholders’ wealth.
C. When stock dividends are paid shareholders’ cost per share held
decreases.

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:
A. 7.97% and 18.51% respectively.

B. 9.48% and 19.83% respectively.
C. 7.97% and 22.67% respectively.
73. When a company finances share repurchases with cash:
A. assets and shareholders’ equity decrease and leverage increases.

B. assets and shareholders’ equity decrease and leverage remains -
unchanged.
C. leverage increases, shareholders’ equity decreases and assets remain
unchanged.
74. When a reliable current market price for a firm’s debt is not available, the cost of
debt can be estimated using the:
A. matrix pricing model.

B. coupon rate of the same bonds.
C. interest expense of the firm’s income statement.
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:
A. 24.69% lower if the credit is paid on the net day.

B. 48.92% lower if the credit is paid on the net day.
C. 24.21% higher if the credit is paid on 15th day.

76. An analyst gathered the following financial information from Daniel Inc.
2013 Expected 2014

Units Sold 1300 1400
Revenue ($) 130,000 140,000
Operating income ($) 38,000 52,000
Interest cost ($) 12,000 12,000
Other financing cost ($) 8,000 8,000
Tax ($) 6300 11,200
Net Income ($) 11,700 20,800
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.

Questions 77 through 88 relate to Equity
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.
78 Which of the following statements is most likely correct regarding the

fundamental weighting method?
A. It is not biased towards shares of firms with largest market capitalization.

B. It is similar to momentum investment strategy where securities’ weights
are reduced when their relative investment values are increased.
C. It is biased towards highest priced stocks as they receive highest weights
in the index.
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:
A. 500 votes to members in any desired proportion.

B. a maximum of 500 votes only for each member of board.
C. 5,000 votes and can spread them across candidates in any proportion.
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:
A. the order may be filled at a low price.

B. it would be very difficult to execute the order.
C. the trade would be very expensive to execute.
81. The performance of commodity indices can be quite different from their
underlying commodities because
A. commodity returns are more volatile than commodity index returns.

B. returns of commodity indices are influenced by more than one factor.
C. commodity indices are relatively illiquid and depict less information
transparency.

82. Which of the following statements is most likely correct? Enterprise value:
A. is incapable of reflecting the real economic value of a company.

B. is prone to the negative earnings problem because of the use of EBITDA.
C. is applicable to the comparisons of companies with significantly different
capital structures.
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.
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.
85. Which of the following most accurately illustrates the pricing rule used by the
type of order driven market?
Uniform Discriminatory Derivative

pricing rule pricing rule Pricing rule
A. Call market Continuous market Crossing network

B. Continuous market Call market Crossing network
C. Crossing network Call market Continuous 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.

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:
Purchase price $45/share

Sale price $42/share
Dividend $1/share
Commission $0.1/share
Leverage ratio 1.5
Call money rate 4%
The investor’s total loss is closest to:
A. 7%.
B. 9%.
C. 10%.
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.

Questions 89 through 94 relate to Derivatives
89. Value of a forward contract at expiration is the value of the asset:
A. plus the forward price.

B. minus the forward price.
C. minus the present value of the forward price.
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:
Maximum profit to the buyer: Breakeven price at expiration:

A. $66 $66.
B. $71 $78.
C. Unlimited $71.
91. Derivative price least likely depends on:
A. risk free rate.

B. investor’s risk aversion.
C. Characteristics of the underlying.
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:
A. total return swap.

B. credit linked note.
C. credit default swap.
93. The cost of protective put can most likely be reduced by:
A. selling a call option and this strategy is known as ‘collar’.

B. selling the stock and this strategy is known as ‘insurance’.
C. taking a short call position and this strategy is known as ‘covered call’.

94. Information can flow into the derivative before it gets into the spot market due to
the fact that derivative markets:
A. require less capital.

B. are highly centralized.
C. are operated by more professional traders.

Questions 95 through 106 relate to Fixed Income
95. Which of the following is the highest ranked unsecured debt?
A. First lien loan.

B. Senior unsecured.
C. Senior subordinated.
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.
97. In repurchase agreements, repo margin provides a margin of safety to the:
A. dealer, if the lender of the cash defaults.

B. cash lender, if the collateral’s market value declines.
C. security lender, 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.

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
The firm(s) not suitable for deleveraging is (are):
A. firm A only.
B. firm B only.
C. firms A and B.
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.
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.
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.

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.
104. Current forward curve for one-year rates is given below:
Time Period Forward Rate

0y1y 1.90%
1y1y 2.25%
2y1y 3.50%
3y1y 4.41%
The three-year implied spot rate is closest to:
A. 2.55%.
B. 3.18%.
C. 4.41%.
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.

106. Consider a 2-year 5% semiannual coupon-paying bond and the following

sequence of spot rates:
Term to maturity Spot Rates

6-months 0.50%
12-months 1.25%
18-months 2.00%
24-months 2.25%
The yield to maturity of the bond is closest to:
A. 2.2%.
B. 3.0%.
C. 4.5%.

Questions 107 through 112 relate to Alternative Investments
107. Mezzanine financing is capital provided:
A. for major expansion.

B. to prepare for an IPO.
C. to initiate commercial manufacturing.
108. During periods of financial crises, the correlation between hedge funds and
financial market performances may:
A. increase.
B. decrease.
C. become 0.
109. The four broad categories of hedge fund strategies identified by HFRI are:
A. Equity-driven, Market neutral, Arbitrage and Hedge strategies.

B. Event-driven, Relative value, Equity hedge and Macro strategies.
C. Event-driven, Equity driven, Relative value and Market neutral strategies.
110. For venture capital investing, later stage financing is the capital provided for a
company:
A. to prepare for an IPO.

B. to plan for major expansion.
C. to initiate commercial manufacturing and sales.
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

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%.

Questions 113 through 120 relate to Portfolio Management
113. Which of the following quantifies and allocates the tolerable risk by specific
metrics?
A. Risk tolerance
B. Risk Budgeting
C. Enterprise risk management
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.
115. The intercept of security characteristic line (SCL) is:
A. Beta.
B. RM – RF.
C. Jensen’s alpha.
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.
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%.

118. Which of the following two measures are based on the total risk and provide
similar rankings?
A. M2 and Sharpe ratio.

B. Sharpe and Treynor ratios.
C. Treynor ratio and Jensen’s alpha.
119. Generating higher returns from security selection most likely depends upon:
A. lower index turnover and passive management.

B. higher informational efficiency and lower index turnover.
C. lower informational efficiency and higher skills of investment managers.
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.

FinQuiz.com
CFA Level I 1st Mock Exam
June, 2016
Revision 1

CFA Level I Mock Exam 1 – Questions (PM)

FinQuiz.com – 1st Mock Exam 2016 (PM Session)

33-44 Economics 18
Total 180


1. An analyst’s investment recommendation and opinions with regard to selling,

purchasing and holding securities, disseminated to customers through oral
communication is:
A. not allowed according to CFA Institute Standards of Practice Handbook.

B. only allowed if the information has already been disseminated through
other communication channels as well.
C. is allowed according to CFA Institute Standards of Practice Handbook if
the firm has such a dissemination policy for its customers.
2. Which of the following is least likely required by the CFA Institute Code of
Ethics? Members and candidates must:
A. strive to maintain and improve the competence of their clients.

B. practice and encourage others to practice in a professional and ethical
manner.
C. place the integrity of investment profession and interests of clients above
their own personal interests.
3. Marc Bowen, executive vice president at Ramon Brokerage, a large broker/dealer

firm, is responsible for directing and leading 50 associates, to manage the
compliance of regulatory requirements and to mitigate financial risks. Bowen
delegated his responsibilities among his associates and instructed them about
methods to prevent and detect violations of laws and regulations clearly. Due to
his preoccupation with other projects Bowen never had sufficient time to review
their work. According to the Code and standards, will Bowen be held responsible
if an associate fails to fulfill regulatory requirements?
A. No, because he clearly instructed the methods to prevent and detect

violations.
B. Yes, because he should decline in writing to delegate the responsibilities
to his associates.
C. Yes, because he fails to make reasonable efforts to ensure that the
procedures are monitored and enforced.


4. Which of the following statements is most likely correct regarding GIPS

standards?
A. Compliance with the GIPS standards is typically required by legal and

regulatory authorities.
B. Plan sponsors and consultants can make a claim of compliance if they are
actually managing assets.
C. An investment management firm complying with a majority of the
requirements of GIPS can make reference to the GIPS standards.
5. Amanda is an equity analyst with Dennis Securities and is analyzing the stocks of
Pearl Inn Corp. In her research, Amanda observed that:
• Pearl Inn is a company with bright future prospects.

• Pearl Inn’s current stock price is fully valued.
• Compensation of Pearl Inn’s managers is dependent on stock
performance; therefore any negative report can further affect managers’
performances and can hurt the company’s future growth.
Keeping in view all these facts she concluded that a buy recommendation for
Pearl Inn Corp.’s stock is appropriate. Amanda
A. Violated the standard relating to independence and objectivity by issuing a

buy recommendation.
B. is in full compliance with the standards due to her foresight and long term
vision for Pearl Inn.
C. violated the standards because she lack reasonable and adequate basis for
her recommendation.
6. According to CFA Institute Standards of Practice Handbook, recommended

procedures for block trade and new issues least likely include:
A. processing and executing bundling orders on FIFO basis for efficiency

purposes.
B. giving same execution price and charging same commission for all clients
participating in block trade.
C. prohibiting partial fills when trades are grouped and requiring cancellation
of orders to be documented and time stamped.


7. For an investment management firm, the responsibility to maintain records that

support investment action generally falls with:
A. the firm.
B. a regulatory authority.
C. employees of the firm.
8. Jason Lee is a junior equity analyst at TR-Securities. For the last two weeks
during his lunchtime he has been consulting an attorney for bankruptcy filing as a
result of his failure to pay debts. He has not discussed his financial situation with
any of his colleagues or his employer. Is Lee in violation of any CFA Institute
Standards of Professional Conduct?
A. No, he has not violated any standard.

B. Yes, he has violated standard I-D ‘Misconduct’.
C. Yes, he has violated standard IV-‘Duties to Employer’.
9. The key features of GIPS standards most likely include:
A. addressing every aspect of performance measurement and covering unique

characteristics of each asset class.
B. requiring firms to include all actual, discretionary or non-discretionary, fee
paying portfolios in at least one composite defined by investment
mandate, objective or strategy.
C. complying with all requirements of GIPS standards including any updates,
guidance statements, interpretations, questions and answers (Q&A) which
are available on the GIPS website as well as in the GIPS Handbook.
10. Sandra Hall, CFA is an analyst with Indus Securities and covers the oil and gas
industry. In a meeting with the CEO of B2S Corp., a firm covered by her, she
found that the firm’s major clients are residents of the country Cote D’lovire.
Hallis expects the CFA franc (currency of Cote D’lovire) to depreciate by 15%.
Based on this information and her analysis, Hall believes that B2S Corp.’s next
quarter’s earnings will drop substantially and therefore issues a sell
recommendation. Hall:
A. is in full compliance with the standards.

B. violated the standard by acting on material nonpublic information.
C. has failed to satisfy the requirement of Standard V-A, ‘Diligence and
reasonable basis’.


11. Sidney Garza is hired by CRT Securities and is responsible for managing several
portfolios with net worth greater than $25 million. While inspecting the clients’
previous financial records, Garza found several suspicious transactions and some
questionable practices involving Alan Hart, CFA, CRT’s former manager. The
applicable laws are strict and require maintaining confidentiality. Under such
circumstances Garza should:
A. reveal confidential information about clients and should inform the CFA
Institute professional conduct program (PCP) about Hart’s questionable
activities.
B. not reveal confidential information about clients but should inform the
CFA Institute professional conduct program (PCP) about Hart’s
questionable activities.
C. not reveal confidential information about clients and should not inform the
CFA Institute professional conduct program (PCP) about Hart’s
questionable activities.
12. Jacquelyn Kramer is a portfolio manager at a local advisory firm. One of her
friends, Wallace Bob, is an independent research analyst and manages his own
blog. From time to time Bob refers his subscribers, who need investment advice
and want to build portfolios, to Kramer and in return Kramer pays Bob some
nominal fees and research reports prepared by her firm. Kramer has never
disclosed this arrangement to anyone in her firm. Kramer most likely is in
violation by failing to disclose the arrangement:
A. to her employer and the clients.

B. to her employer only as clients are not required to pay any additional fess
to Bob or Kramer.
C. to her clients and not obtaining written consent from her employer prior to
making such arrangement.
13. If a firm opts for verification of its claim of compliance with the GIPS standards ,
the firm:
A. must hire investment management firm only.

B. is required to use an independent third party only.
C. can either use an independent third party or can voluntarily perform its
own verification.


14. If members and candidates have custody of client’s assets they must manage them
in accordance with:
A. some benchmark indices.

B. terms of governing documents.
C. each asset’s risks and return characteristics.
15. In preparing an investment policy statement and suitability analysis, if a client

refuses to provide complete information regarding his financial position, the most
suitable action for a member or candidate is to:
A. consult the legal and compliance advisors for guidance.

B. disclose in writing the impact of withholding information and obtain client
approval.
C. develop an investment policy statement on the basis of information
provided.
16. Kristin Harper, CFA manages individual client portfolios at Lucas Trust
Advisory. One of her clients, Nicholas Hanson, is owner of five hotel brands with
approximately 800 hotels in Europe. For her vocation, Hanson offered Harper a
25% discount and free meals if she stayed in his hotels. Harper informed her
employer about the discount offered by her client over the phone. According to
CFA Institute Standards of Practice Handbook, if Harper gets that deal she will:
A. be in compliance with CFA Institute codes and standards.

B. violate ‘Additional Compensation Arrangements’ by failing to disclose
free meals and not inform her employer in writing.
C. violate ‘Independence and Objectivity’ as accepting a substantial gift can
reasonably be expected to compromise her performance for other clients.


17. Rick Mueller is a junior analyst at Morris & Clifton Advisors (M&CA), a large
brokerage and advisory firm with more than 500 analysts. Majority of the analysts
at M&CA are either CFA charterholders or are enrolled in different levels of CFA
exam program. When the firm asked Mueller, why he wants to become a
charterholder, he wrote the following lines, “I have passed Level 2 of the CFA
exam. In the field of investment management the CFA designation is globally
recognized, it is a rigorous and comprehensive study program, and CFA
charterholders achieve better performance results.”
Mueller is most likely in violation of the Standards of Professional Conduct with

reference to the statement:
A. “I have passed Level 2 of the CFA exam.”

B. “It is a rigorous and comprehensive study program.”
C. “CFA charterholders achieve better performance results.”
18. In complying with the GIPS standards, if existing laws and regulations already
impose requirements related to the calculation and presentation of investment
performance:
A. firms are required to comply with laws and regulations and disclose the
fact in its compliant presentation.
B. firms’ compliance with applicable laws and regulations leads to
compliance with the GIPS standards.
C. firms are strongly encouraged to comply with GIPS standards in addition
to applicable regulatory requirements.


19. An analyst is comparing the performance of a dividend-paying stock for the last
seven years. During that time period the central bank has announced a new
monetary policy. The results of the analyst are most likely subject to:
A. survivorship bias.
B. time period bias.
C. look ahead bias.
20. A pharmaceutical firm has submitted a new drug application(NDA)to FDA. An

analyst estimates that the odds for the successful approval of the drug are 1 to 4
and the firm’s estimated EPS for the FY2014 is $15 if FDA accepts NDA and $7
if FDA rejects NDA.
Firm’s expected EPS for FY2014 is closest to:
A. $8.6.
B. $9.0.
C. $11.2.
21. A U.S firm will receive four annual payments of £60,000 from its subsidiary in
U.K and the firm will invest these payments at the 12% annual interest offered by
a U.K bank. If the first payment will be received three years from now, how much
will the payments be worth in ten years?
A. £451,222.
B. £530,563.
C. £605,341.
22. Which of the following premiums is not incorporated in the nominal risk-free
interest rate?
A. liquidity premium.
B. inflation premium.
C. default-free premium.


23. When a person wants to assign every member of a group of size n to one of n
slots, he will most likely use:
A. n factorial.
B. multinomial formula.
C. combination formula.
24. What is the probability that a portfolio’s return will exceed 35%, if its mean
return is 25% and the standard deviation of return is 37%, assuming normal
distribution?
A. 27.03%
B. 39.36%
C. 60.64%
25. An investment of $96,700 will pay $100,000 in 145 days. The money market
yield of the investment is closest to:
A. 8.19%.
B. 8.47%.
C. 8.52%.
26. Which of the following best describes the advantages of Monte Carlo simulation?
Monte Carlo simulation:
A. is grounded in actual data like historical simulation.

B. can be used to perform “what if” analysis unlike historical simulation.
C. provides better insight into cause-and-effect relationships compared to
analytical methods.


27. How would a technician seek to generate profit in a reverse head and shoulder
pattern if the price at the bottom of the head was $156 and neckline price was
roughly $187?
A. By taking a long position in the stock and by setting the price target at
$218.
B. By taking a short position in the stock and by setting the price target at
$125.
C. By short selling the stock and anticipating a profit of $31 excluding
transaction cost.
28. Technical analysis is least likely based on the factor that:
A. future price movements are predictable.

B. prices are determined by economic factors.
C. changes in supply and demand cause changes in prices.
29. Table below gives statistics relating to three portfolios for the year 2013.
Portfolio Mean Annual Standard Deviation Skewness Excess

Return (%) of Return (%) Kurtosis
A 14.31 23.67 +0.02 +0.01
B 12.65 14.52 -0.01 -0.03
C 10.06 9.66 -0.02 +0.02
*Risk-free rate for 2013 = 6%
Based on the information provided above, the portfolio with superior risk-
adjusted performance is:
A. Portfolio A.
B. Portfolio B.
C. Portfolio C.
30. Harmonic mean is a special type of weighted mean in which each observation’s
weight is inversely proportional to:
A. its magnitude.
B. a fixed amount.
C. n (total observations).


31. An analyst is assessing the performance of a portfolio manager. The mean return
of his portfolio (gross of fees) is 27%, the standard deviation is 35%, and the
mean return of the benchmark index is 18%. The portfolio’s tracking error is
closest to:
A. 9.0%.
B. 25.7%.
C. 44.4%.
32. Which of the following statements is least likely correct regarding the p-value
approach to hypothesis testing?
A. According to the p-value decision rule, reject Ho when p-value is ≥ 𝛼.

B. p-value is the smallest level of significance at which the null hypothesis
can be rejected.
C. p-value is also known as marginal significance level and this approach is
considered more efficient relative to the rejection points approach.


33. According to exhibit 1 (given below) up to how many units of labor, will the firm
achieve increasing marginal returns?
Exhibit 1
Labor Total Average Marginal
Product Product Product
0 0 - -
10 1,000 1,000 1,000
20 2,700 1,300 1,700
30 4,800 1,400 2,100
40 6,000 1,325 1,200
50 6,300 1,200 300
A. 30
B. 40
C. 50
34. A change in technology will most likely cause a:
A. shift in the supply curve.

B. movement along the supply curve.
C. shift in the supply and demand curve.
35. Which of the following most likely represents the ‘top dog’ approach used by the
leader in a ‘Stackelberg model’?
A. The leader firm overproduces to force the follower firms to scale back
their production.
B. The leader firm takes the first mover advantage by choosing its output
before the follower firms.
C. The leader firm determines its profit maximizing output by assuming no
change in the follower firms’ output.


36. When the demand for money balances increases without any change in interest
rates and the money demand becomes infinitely elastic, the impact is most likely
known as:
A. liquidity trap.
B. demand shock.
C. quantitative easing.
37. For a product that is considered to be a necessity, its price and total expenditure:
A. move in same direction.

B. move in opposite direction.
C. are not associated with each other.
38. A decrease in which of the following factors causes the AD curve to shift
rightward?
A. Taxes
B. Money supply
C. Bank reserves
39. A German company is expected to receive $25 million from a U.S based client in
92 days. The company gathered the following information from a dealer in order
to assist in hedging the foreign exchange risk.
Spot exchange rate $/€ = 1.38

One month forward points = -15
Three month forward points = -109
The firm could hedge the foreign exchange risk by:
A. buying €18.12 million (selling $25 million) at a forward rate of 1.3691.

B. buying €34.50 million (selling $25 million) at a forward rate of 1.3676.
C. selling €18.12 million (buying $25 million) at a forward rate of 1.3924.


40. Which of the following statements most likely represents the property of
indifference curves?
A. Indifference curves are always downward sloping.

B. Indifference curves intersect with each other at one single point only.
C. Consumers remain indifferent between higher and lower indifference
curves.
41. During the economic peak of a business cycle inflation most likely:
A. accelerates further.
B. picks up moderately.
C. decelerates with a lag.
42. A dealer quotes following rates:
Spot exchange rate (SUSD/CAD) = 0.89

Annual risk-free rate (USD) = 5.25%
Annual risk-free rate (CAD) = 3.25%
Suppose the domestic currency is CAD and dealer quote of the 12-month forward
rate is (FUSD/CAD) 0.9172. As compared to the annual return on a domestic only
investment, the annual return on the hedged foreign investment is:
A. 1.09% lower.
B. 1.12% lower.
C. 2.12% higher.
43. Which of the following statements is least likely correct regarding different profit
measures?
A. Accounting profits are always greater than or equal to economic profits.

B. It is not necessary for a firm earning positive economic profit to have
covered its opportunity cost of resources.
C. For a publicly traded company, economic profit can be calculated by
subtracting the required return on equity capital from the accounting
profit.


44. Which of the following is the most appropriate reason for hyperinflation?
A. Excess supply of goods during or after war times.

B. Increase in government spending without any increase in taxes.
C. Failure of central bank to increase money supply to support government
spending.


Questions 45 through 68 relate to Financial reporting and Analysis
45. When a third party pays the suppliers of a company on its behalf, the firm’s:
A. investing cash inflows increase.

B. financing cash inflows decrease.
C. operating cash outflows increase.
46. When valuation allowance increases:
A. net income remains unchanged.

B. deferred income tax expense increases.
C. reported deferred tax asset remains unchanged.
47. For a firm operating under U.S. GAAP, the future lease payments are most likely
disclosed:
A. for the first year and then in aggregate for the next 2-5 years.
B. on a year-by-year basis for the first two years and in aggregate for all
subsequent years.
C. on a year-by-year basis for the first five years and then aggregated for all
subsequent years.
48. Under both IFRS and U.S. GAAP, companies are required to disclose:
A. circumstances that resulted in inventory reversals.

B. accounting policies applied to inventory measurements.
C. amount of inventory recovery due to previous write down.
49. A company’s year-end net income is $5,255,200 and common shares outstanding
are 325,000. The company paid $2,250,000 dividends on its 150,000 shares of
convertible preferred and each share is convertible into 1.75 shares of its common
stock. The company also paid after-tax interest of $71,250 on its $950,000
convertible bonds convertible into 52,000 shares. The company’s diluted and
basic EPS are closest to:
A. $8.32 and $9.02 respectively.

B. $8.33 and $9.25 respectively.
C. $11.84 and $9.02 respectively.


50. Under U.S. GAAP companies are:
A. permitted to use only the revaluation model to report identifiable

intangible assets.
B. not allowed to capitalize the costs associated with internally created
intangible assets.
C. allowed to report identifiable intangible assets either using cost model or
revaluation model.
51. Management’s commentary must:
A. provide an overview of specific business lines.

B. highlight uncertainties that may affect the liquidity position of the
company.
C. provide information regarding the accounting methods and policies used
by management in developing financial statements.
52. A firm purchases machinery on January 1st 2012 for $52,000. The machine’s fair
value is determined to be $53,500 at the end of 2012 and $42,700 at the end of
2013. If the firm uses the revaluation model, under IFRS, the firm will least likely
report a:
A. loss of $9,300 in its income statement at the end of year 2.

B. revaluation surplus of $1,500 in the equity section at the end of year 1.
C. revaluation loss of $10,800 in other comprehensive income at the end of
year 2.
53. In periods of falling prices and assuming no liquidation, LIFO reports the lowest:
A. income taxes.
B. ending inventory.
C. cost of goods sold.


54. An analyst observed that the demand of Lynch Inc., a manufacturing firm has
decreased, the company has relatively newer assets and the company is not
making full use of its available credit lines. Based on these facts, which of the
following ratios of Lynch Inc. would most likely be higher as compared to
industry averages?
A. Payables turnover ratio

B. Fixed asset turnover ratio
C. Receivables turnover ratio
55. The elements directly related to measurement of financial position most likely
include:
A. equity.
B. income.
C. capital maintenance adjustments.
56. An analyst gathered the following data from a company’s financials:
CFO $50 million

WC changes $18 million
Dividends $7 million
Total debt $78 million
He obtained retained cash flow (RCF) by deducting WC changes and dividends

from cash flow from operations. Assuming no capital expenditures, the company
will be able to pay off its debt from cash retained in the business in
approximately:
A. 4.0 months.
B. 1.5 years.
C. 3.0 years.
57. Which of the following is initially recorded as a prepaid asset and then reflected
as an expense over time?
A. Advertising.
B. Equipment.
C. Rent expense.


58. Employing aggressive pension plan assumption can least likely result in:
A. misstatement of both earnings and financial leverage.

B. lower pension expense and liability due to the assumption of a higher
discount rate.
C. lower pension expense and liability due to the assumption of a higher
expected return on plan assets.
59. Which of the following is typically prepared at the end of an accounting period as
a first step in producing financial statements?
A. T-accounts.
B. Trial balance.
C. General ledger.
60. Under U.S. GAAP foreign firms that prepare their financial statements in
accordance with IFRS are:
A. obligated to provide reconciliation statements.

B. not required to provide reconciliation statements.
C. required to provide details of major sections in U.S. GAAP if differences
are significant.
61. In periods of falling prices and increasing inventory quantities the operating profit
of a firm using the weighted average cost method will be:
A. higher compared to a firm using the LIFO method.

B. lower compared to a firm using the FIFO method.
C. indeterminate due to increasing inventory quantities.
62. When a company writes off its uncollectible receivables, the accounting treatment
most likely includes a decrease in:
A. cash and an increase in the allowance for doubtful accounts.
B. account receivable and the allowance for doubtful accounts.
C. the allowance for doubtful accounts and the cash, and no change in the
accounts receivables.


63. For an analyst interested in the ratio analysis of a diversified company, it is more
appropriate to:
A. use industry specific ratios for different lines of business.

B. use the weighted average ratios of the respective industries.
C. avoid comparing the company’s ratios with industry averages.
64. Compared to an operating lease, a lessee that makes use of a finance lease will
most likely report higher:
A. total net income.

B. operating income.
C. cash flows from financing.
65. An analyst is comparing the financials of two firms given below:
Firm: Reporting Standard: Available for sale debt securities Gains/losses:

ABC IFRS $6,000 gain (from exchange rate)
XYZ U.S GAAP $4,500 loss (from exchange rate)
In order to adjust the income statements, the analyst will most likely report:
A. $4,500 loss for XYZ.

B. $6,000 gain for ABC.
C. $1,500 gain for ABC.
66. Cruz Corp. reported $52,480 as salary expense and $22,000 as other operating
expenses for the year ended December 2013. If the beginning and ending salaries
payable are $38,500 and $22,670 respectively, the cash paid to the employees by
Cruz Corp. is closest to:
A. $36,650.
B. $46,310.
C. $68,310.
67. Which of the following is least likely classified as a financing activity under
IFRS?
A. Payment of interest.
B. Repayment of debt.
C. Purchase of debt securities.


68. An analyst is calculating the depreciation expense for the year ended 31
December 2011. The analyst has gathered the following information:
Cost of machinery (acquired on 1January 2011) = £4,450,000.

Estimated residual value = £225,000.
Remaining useful life = 11 years.
Production in FY 2011 = 255 units.
Expected production (for remaining years) = 2,354 units.
Productive capacity (total) = 2,500 units.
Under units of production method, the depreciation expense reported by the

analyst in FY 2011 is closest to:
A. £16,568.
B. £430,950.
C. £453,900.


69. Greek Lime Inc. is a small firm currently operating in Ohio and is planning a new
project in Illinois. The CEO of the firm gathered the following data to estimate
the project’s cost of capital:
Comparable Public Firm Greek Lime Inc.’s

Project
Market value of debt $220 m $82 m
Market value of equity $340 m $145 m
Marginal tax rate 36% 34%
Beta 1.7
The asset beta of Greek Lime Inc. is closest to:
A. 1.20.
B. 1.65.
C. 2.33.
70. A company will not be able to use higher degrees of financial leverage if its:
A. ratio of tangible assets to total assets is lower.

B. ratio of long term debt to total debt is higher.
C. sensitivity of revenues to business cycle is below average.
71. The following data is related to Peyton Brick Inc. for the year ended June 2012.
Total units sold = 52,000

Sale price (per unit) = $80
Variable cost (per unit) = $32
Fixed operating costs = $1.5 m
Interest paid = $600,000
The number of units Peyton sold beyond its breakeven quantity QBE is closest to:
A. 8,250.
B. 20,750.
C. 43,750.


72. Which of the following is least likely a limitation of the average accounting rate
of return?
A. It is not adjusted for risk.

B. It ignores time value of money.
C. It requires complex calculations.
73. Which of the following is most likely an advantage of dividend reinvestment plans
(DRP) to a company?
A. Obtaining additional shares through DRPs involve no transaction costs.

B. DRPs promote long-term investment in the company by increasing
shareholders’ loyalty.
C. DRPs require no extra record keeping in computing gains/losses when
shares are sold.
74. An analyst observed the following practices of the executive committee of Lamp
Black Inc.
Exhibit 1
1. Major portion of total compensation award includes bonuses,
stock options and grants of restricted shares.
2. Salary and perquisites awards constitute a small portion of
total compensation awards.
3. Compensation is reported as an expense in the income
statement.
4. Equity based awards vest over a series of years.
5. Reprising of stock options is allowed.
Using the information in Exhibit 1, how many activities of Lamp Black Inc.’s
executive committee are in the best interest of shareowners?
A. 2
B. 3
C. 4


75. MaryMore Inc. is planning to issue bonds to finance a new project. It offers
$1,000 par 5-year, 7% semi-annual coupon payment bond. The bond is currently
trading at $1,150. The firm’s current costs of preferred equity and common equity
are 4% and 5.5% respectively and marginal tax rate is 34%. The firm’s project
cost is closest to:
A. 2.43%.
B. 3.98%.
C. 11.93%.
76. Lora Inc. is planning to repurchase 0.8 million shares through borrowing. The
before tax cost of borrowing is 8.07%.The current EPS of the firm is $1.92 and
the share is currently trading in the market for $34. The firm is in a 30% tax
bracket.
After the share repurchase, EPS of the firm will most likely:
A. increase.
B. decrease.
C. remain unchanged.


Questions 77 through 88 relate to Equity Investments
77. When a market is semi-strong form inefficient current security prices:
A. reflect information of company specific events.

B. do not reflect information on financial market data.
C. incorporate past information about prices and volumes.
78. 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:
Purchase price $45/share

Sale price $42/share
Dividend $1/share
Commission $0.1/share
Leverage ratio 1.5
Call money rate 4%
The investor’s return on equity (ignoring commission, interest and dividends) is

closest to:
A. – 10.00%.
B. -9.00%.
C. – 6.67%.
79. A firm that has compromised its current profitability to achieve a major market
share is most likely using:
A. offensive pricing.
B. defensive pricing.
C. predatory pricing.


80. A group of investors purchased 3 million shares of Buddies Inc., a publicly traded
corporation, at a price of $14 per share. The shares are trading in the market for
$20. The firm needs proceeds on an urgent basis for expansion purposes. This is
most likely an example of a:
A. PIPE transaction.
B. leveraged buyout.
C. venture capital investment.
81. An investor owns 2-year duration credit default swap (CDS) of Greenz Inc. He
asked an analyst how his investment will perform if market interest rates remain
the same but the credit spread of the firm widens.
The most reasonable response of the analyst to the investor would be that:
A. you may benefit from an increase in the company’s credit spread.

B. your investment value will decrease as the default probability of the firm
will increase.
C. there will be no any change in your investment value as CDS provides
protection against firm’s credit spread widening.
82. An analyst gathered the following information for an index with the initial value
set to 100.
Period Price Return Income Return

1 6.2% 1.5%
2 4.7% 2.5%
3 5.5% 3.0%
The value of the total return index at the beginning of period 3 is closest to:
A. 115.45.
B. 123.40.
C. 125.27.


83. According to efficient market hypothesis:
A. investors may have heterogeneous beliefs regarding asset values.

B. analysts assess future probabilities on the bases of recent outcomes.
C. abnormal returns are due to some statistical problems with analyzing the
stocks.
84. Information about the arrangement of the final settlement of the trade are found
under:
A. validity instructions.
B. clearing instructions.
C. execution instructions.
85. A portfolio manager wants to sell 5 million shares of GEM Electric Power Inc. He
observes that generally at the end of trading day share prices lower as many
investors close their positions. The most suitable validity instruction for him is:
A. good on close order.

B. good-till-canceled order (GTC).
C. immediate or cancel order (IOC).
86. An analyst gathered the following data for an equally weighted index.
Security Beginning period Ending Period

Price Shares Price Shares
A 10 100 12 100
B 18 180 17 180
C 25 250 21 250
The index return over the period is closest to:
A. -5.66%.
B. -1.55%.
C. -0.55%.


87. The return on equity and expected payout ratio of a firm is 14% and 30%
respectively while investor’s required return is 15%. Based on the information
provided, the price-to-earnings multiple for the firm is closest to:
A. 0.46.
B. 2.78.
C. 5.77.
88. A share of ELY Inc. is currently trading for $87. An analyst calculated the
estimated intrinsic value of ELY Inc.’s share to be $102.67 by using the following
data:
Most recent dividend Do = $5.5

Growth rate g = 12%
Required return = 18%
The contribution of the dividend growth assumption to the intrinsic value estimate
is closest to:
A. $15.67.
B. $30.55.
C. $72.11.


89. An analyst made the following statements.
Statement 1: Sellers of options in both exchange traded and OTC markets are not
subject to the risk of default of buyers.
Statement 2: In contrast to forwards, futures and swaps, options do have value at

the start.
The analyst is most likely correct with respect to:
A. Statement 1 only.
B. Statement 2 only.
C. Statement 1 and Statement 2.
90. As compared to over the counter derivatives, exchange traded derivatives are:
A. more private and less regulated

B. less customized and less flexible.
C. subject to a greater risk of default.
91. In an asset back securities (ABSs), which of the following tranches have the
lowest expected returns?
A. Senior tranches.
B. Junior tranches.
C. Mezzanine tranches.
92. Which of the following statements is most likely correct for a 3 × 9 FRA?
A. The contract will expire in 270 days.

B. The underlying rate will be 180 day LIBOR.
C. The underlying loan will be settled in 90 days.
93. Which of the following strategies reduces both the overall risk and the expected
return compared to simply holding the underlying?
A. Covered call
B. Protective put
C. Collar strategy


94. For European call options the lower bound is either 0 or:
!! !!
A. (!!!)!
, whichever is greater.
!
B. (!!!)!
− 𝑆! , whichever is lower.
C. intrinsic value, whichever is greater.


Questions 95 through 106 relate to Fixed income
95. A 7-year 6% annual coupon payment bond priced at 100 of par value is trading in
the market for 103. The modified duration and convexity of the bond is 6.5 and 86
respectively. The approximate return impact on the bond from 150 basis points
spread widening is closest to:
A. -8.78%.
B. -9.75%.
C. -10.72%.
96. An investor is choosing a money market instrument with a higher expected rate of
return. Both the instruments have the same credit risks.
i. 180-day commercial paper at a discount rate of 7.85% for 360-day year.

ii. 180-day bank time deposit quoted at an-add on rate of 8.15% for 365-day
year.
He will most likely choose:
A. bank time deposit as it offers 10 bps more in annual return than

commercial paper.
B. commercial paper as it offers 13 bps more in annual return than bank time
deposit.
C. bank time deposit as it offers 30bps more in annual return than
commercial paper.
97. Constant yield price trajectory illustrates:
A. that there is a constant change in price of a fixed income bond as time

passes.
B. how the bond prices remain constant as time passes when market discount
rates remain the same.
C. the pull to par effect on bond price trading at a premium or discount to par
value.


98. When a national government runs a budget deficit, the primary source of funds for
making interest payments and repaying the principal for sovereign bonds are:
A. excess tax revenues over expenditures.

B. borrowing funds from interbank market.
C. rolling over existing debt into new debt.
99. Callable but can be called every October 10 one year from now till maturity.
The call provision is most likely a (n):
A. Bermuda call.
B. European call.
C. American call.
100. Which of the following statements is most likely correct regarding credit spreads?
A. During financial crises, a flight to quality can cause benchmark yields to

rise.
B. More thinly traded corporate bonds have much narrower difference
between the bid and offer prices.
C. An unexpected credit downgrade on a corporate bond can result in greater
credit as well as liquidity risk.
101. Which of the following source of financing is least expensive for a highly rated
company?
A. Bilateral loan
B. Syndicated loan
C. Bond issued in financial market.
102. An investor purchased a 2-year bond at 1,050 with par value of 1,000 in a
country, which lacks an issue premium tax provision in its tax code. He has not
paid or deducted any tax on that bond for two years. Now when the bond is
redeemed at maturity he can:
A. declare a capital loss of 50.

B. declare a capital gain of 50.
C. deduct 25 from his taxable income for year-2 only.


103. The internal rate of return on the cash flows assuming the payments are made on
the scheduled dates is referred to as:
A. true yield.
B. street convention.
C. government equivalent yield.
104. A bond portfolio consists of following three fixed rate bonds trading in different
markets.
Time-to-maturity Coupon Yield-to-maturity

Bond A 6 7% 9
Bond B 4 8% 10
Bond C 5 5% 10
The bond with the lowest convexity would be:
A. bond A.
B. bond B.
C. bond C.
105. Which of the following bond structures attracts the more conservative classes of
investors?
A. Putable bond
B. Callable bond
C. Option-free bond
106. At the time of financial crises banks:
A. reduce funding to other banks as interbank deposits are unsecured.

B. increase funding to other banks and hoard less liquidity in anticipation of
expected payoffs.
C. increase interbank funding as corporations’ use of credit lines decrease.


107. A manger seeking to generate returns from a merger arbitrage will most likely:
A. sell the stocks of target company and buy the stocks of the acquiring
company.
B. buy sufficient equity with an attempt to have control on the company.
C. buy the stocks of target company and take a short position in the acquiring
company.
108. Jerry invested $15 m in EV Fund of funds (EV FOF) 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 based on beginning of period
capital and both management and incentive fees are computed independently.
THF earned 17% annual return before management and incentive fees. The total
fees paid by Jerry is closest to:
A. $435,038.
B. $856,500.
C. $1,134,000.
109. A hedge fund that uses “Reporting NAV” most likely represents NAV:
A. adjusted for liquidity discounts based on quoted market price.

B. based on quoted market price and does not incorporate liquidity discounts.
C. adjusted for liquidity discounts based on the size of the position held
relative to the total amount outstanding.
110. For valuing a large and mature private company, the multiple most commonly
used under the market or comparable approach is:
A. Revenue multiple.
B. EBITDA multiple.
C. Net income multiple.
111. Returns to commodity investing are based on:
A. income stream.
B. change in prices.
C. both income stream and change in prices.


112. Which of the following risk measure take into account in its measurement the low
correlation of alternative investments with traditional investments?
1. Sharpe ratio
2. Sortino ratio
3. Value at risk
4. Safety-first risk
A. None.
B. 1 and 3 only.
C. 1, 3 and 4 only.


113. With respect to portfolio management process construction of a client’s portfolio

most likely occur in the:
A. planning step.
B. execution step.
C. feed back step.
114. An analyst made the following statements regarding passive and active portfolios.
Statement 1: Passive portfolios are based on the assumption of unbiased market

prices.
Statement 2: In an actively managed portfolio undervalued assets are over

weighted relative to the market weight in the benchmark index.
The analyst is most likely correct with respect to:
A. Statement 1 only
C. .both Statement 1 and Statement 2.
115. Wesley is preparing the IPS of Aaban Masri. Masri prohibits Wesley from
investing in the shares of:
• GreenX Inc. for certain periods in the year as he is director at GreenX and
cannot trade shares before financial results are published.
• Casinos and bonds due to his compliance with Islamic law.
In which section of the IPS, will Wesley most likely document Masri’s
instructions regarding:
GreenX Inc.? Casinos & bonds?

A. Unique circumstances Unique circumstances
B. Legal and regulatory factors Unique circumstances
C. Legal and regulatory factors Legal and regulatory factors


116. Which of the following best describes the outcome of the portfolio approach?
A. Portfolios generally reduce risk more than they increase returns.

B. Portfolio diversification provides better risk-reduction benefits during
severe market turmoil.
C. The standard deviation of an equally weighted portfolio can be greater
than the average of the standard deviation of the individual components.
117. The sensitivity of the derivative price to a small change in the value of the
underlying asset is called:
A. delta.
B. vega.
C. gamma.
118. Which of the following least describes the implications of separation theorem?
Under separation theorem:
A. optimal risky portfolio is same for all investors.

B. investors cannot separate their risk aversion from choice of market
portfolio.
C. optimal portfolio selection is separated into investing and financing
decisions and both are independent of each other.
119. Tom Dixon, CFA wrote the following statement in his article:
“An investor’s expected income and time horizon helps in determining his
willingness to take risk and his level of wealth relative to liabilities helps in
determining his ability to take risk.”
Dixon is most likely correct with respect to:
A. his statement.
B. factors determining the ability to take risk.
C. factors determining the willingness to take risk.


120. Which of the following is not one of the principles on which the strategic asset
allocation is based?
A. Similar assets have similar exposures to certain sets of systematic factors.

B. Changes in portfolio value over the long term are primarily determined by
portfolio’s systematic risk.
C. When an asset class or subset of an asset class represents an efficient
market, passive management is preferred.

FinQuiz.com
CFA Level I 2nd Mock Exam
June, 2016
Revision 1

FinQuiz.com – 2nd Mock Exam 2016 (AM Session)

33-44 Economics 18
Total 180

1. Lance Theodore is a portfolio manager at Trescott Alliance. Theodore always

ensures he maintains regular communication with his clients. For the current
quarter Theodore has utilized $10 million of client funds to purchase high-risk,
illiquid, but high return emerging equities. The purchase was made for the
accounts of risk-averse clients who do not have an imminent or foreseeable need
for portfolio funds. During a conversation with a fellow manager, Theodore
stated, ‘I am presently studying the characteristics of emerging market equities as
this is my first time in dealing with the asset class.’ Theodore posts information
about the recent equity purchase on Trescott Alliance’s website without
mentioning which client accounts the purchase was made for and identifies
himself as Trescott’s ‘emerging market specialist’.
Theodore is in violation of the CFA Institute Standards of Professional Conduct

because:
A. he has misrepresented information on the firm’s website.

B. the investment is unsuitable given his client’s risk tolerance.
C. he does not have sufficient experience in dealing with emerging market
equities.
2. Howard Chance is an equity analyst at Lockwood & Jill, a research firm. He is

building a return forecasting model which will predict the returns of stocks in
volatile equity markets. Chance has created his model using methodology
developed by his subordinate, Sasha Walters. Walters derives her methodology
using historical stock returns in the requisite emerging markets. Historical returns
are simulated and future economic and political factors are incorporated to build a
forecasting equation. In the company’s newsletter, Walters identifies Chance as
one of the model’s designers and specifies that historical equity returns were used
to build the model.
Which of the following CFA Institute Standards of Professional Conduct have

been violated?
A. Performance presentation
B. Independence and objectivity
C. Diligence and reasonable basis

3. According to the Standards of Professional Conduct, a responsible supervisor:
A. may delegate their supervisory duties to their subordinates to distribute

their work load.
B. should deal with any employee regulatory violation by reporting it up the
chain of command.
C. does not bear the responsibility of enforcing policies related to non-
investment-related activities.
4. On January 1, 2013 Rictor Associates opened a new branch in Argentina. In the

past, the firm has always operated from its US headquarters. Mark Watson has
been assigned as the chief investment officer of the new branch. Watson requests
Mary Jacob, the U.S. chief investment officer, to shift ten client accounts to the
Argentinean division whereby all trades will be directed to a local broker which
charges a low commission fee and has a historical record of achieving above-
average portfolio returns. Jacob transfers the accounts without informing firm
clients but implies that clients should expect Rictor to generate its best account
performance in the coming months. Six months later, the accounts generate
substantial portfolio losses due to a nationwide economic crisis.
Which individual is least likely in violation of the CFA Institute Standards of

Professional Conduct?
A. Jacob; because she has made an implicit performance guarantee.

B. Jacob; because she has transferred accounts without informing clients.
C. Watson; because the brokerage arrangement did not deliver the expected
performance.
5. A fund manager has fulfilled his duty of loyalty, prudence and care with respect
to client accounts if he:
A. seeks client approval prior to making investment decisions.

B. has considered individual investor risk and return requirements when
managing funds to a stated mandate.
C. directs trades to a broker with a suboptimal performance record following
a client’s written statement instructing him not to seek best execution.

6. An investment manager uses nonmaterial nonpublic information combined with

material public information as the basis for recommendations and decisions.
Is this practice considered a violation of the CFA Institute Standards of

A. No.
B. Yes, if obtained from an analyst conference call.
C. Yes, if the information is obtained through contacts with corporate
insiders.
7. CFA Institute Standards of Professional Conduct require members and candidates

to maintain their independence and objectivity by:
A. disclosing the receipt of any gift which compromises their independence.

B. placing the protection of market integrity prior to that of employer’s
interests.
C. disclosing potential conflicts of interest when undertaking issuer paid
research.
8. A firm possessing material nonpublic information should most likely consider:
A. prohibiting proprietary activity.

B. prohibiting employees from engaging in personal trades.
C. placing securities on a restricted list and distributing the list to firm
employees.

9. Joyce Richards operates from the South African branch of a portfolio

management firm headquartered in Brazil. Along with managing domestic (South
African) client accounts, Richards manages the accounts of offshore Brazilian
clients. Local Brazilian laws permit investment managers to undertake portfolio
trades twenty minutes after disseminating an investment recommendation. On the
contrary South African laws prohibit investment managers from undertaking
personal trades on stocks for which an investment recommendation is made
regardless of when the trade is conducted.
In order to comply with the CFA Institute Standards of Professional Conduct,

with respect to undertaking personal trades for which an investment
recommendation is made, Richards is required to:
A. avoid undertaking personal trades.

B. wait for a minimum of twenty minutes after making recommendations.
C. wait for a maximum of twenty minutes after making recommendations.
10. Leslie Uga is a senior portfolio manager at Westgate who represents the firm at
investment conferences. During an investment conference Naomi Walsh, a guest
speaker, makes an announcement inviting attendees to make donations to a
charitable cause run by her. At the conclusion of the conference Uga converses
with Walsh, ‘One of my clients has earmarked portfolio funds for donating to a
charitable cause. If you would like, I can arrange for a meeting for you with my
client.’ Uga takes care not to reveal the identity of the client or the amount of
funds set aside for donation.
Is Uga in violation of the CFA Institute Standards concerning Preservation of

Client Confidentiality?
A. No.
B. Yes; by revealing her client’s intentions.
C. Yes; by offering to arrange a meeting with her client.

11. Anne Miguel is AM Associates’ equity fund manager, a European portfolio

management firm. She manages the accounts of 25 high net worth clients with
significant allocations to Latin American and domestic equities. This year several
of her clients have requested for an allocation to North American equities.
Lacking expertise in the requested securities, she contacts her friend Dan
Harrison, a leading North American equity specialist and delegates the
responsibility of managing the new securities to Harrison. In a recent report on
client account performance, Miguel solely discloses the overall portfolio
performance providing a breakdown of all constituent security returns.
Miguel is most likely in violation of the CFA Institute Standards of Professional

Conduct concerning:
A. Fair Dealing
B. Conflicts of interest
C. Diligence and reasonable basis
12. Rosa Lee is a futures trader serving a derivatives dealership firm. During her
employment period she receives an employment offer from a competing firm
which offers the position of senior futures trader as well as funding for a
professional study program; the second offer is conditional upon accepting the
first. She declines both offers stating that following the resignation of the firm’s
senior futures trader is a vacancy and that there are significant chances of her
being promoted to the position. She does not disclose the competitor’s offer to her
employer.
Is Lee in violation of the standard concerning employer loyalty?
A. No.
B. Yes, by sharing information concerning the vacant position.
C. Yes, by not disclosing the details of the offer to her employer.

13. The senior compliance officer at Trinity Associates is developing a compliance

policy for his firm, which aims to strengthen the firm’s adherence to the CFA
Institute’s Standards of Professional Conduct. Of particular interest to the officer
are the standards concerning transaction priority and client communication. The
officer includes a brief description of both standards in the firm’s manual.
Priority of Transactions: Ensuring client account transactions are given priority is

essential and should supersede transactions undertaken for beneficial and fee-
paying family member accounts.
Communication with Clients and Prospects: When communicating with clients

and prospects, members and candidates should ensure that any limitation of
statistically developed projections are identified. Failing to do so may result in
violation.
With respect to his descriptions of the two standards, the officer is most likely:
A. correct.
B. incorrect regarding his description of priority of transactions.
C. incorrect regarding his description of communication with clients and
prospects.
14. To address the conflicts of interests created by personal investing, recommended

procedures for compliance most likely include:
A. public disclosure of personal holdings.

B. total trading ban for a large portfolio management firm.
C. making a disclosure to the client stating, “investment personnel are subject
to personal trading policies.”
15. Which of the following record retention practices are in compliance with the CFA
Institute Standards of Professional Conduct?
A. A firm maintains only electronic copies of records.

B. Given that no regulatory requirements exist, records are kept for a period
of five years.
C. Departing employees use historical recommendations prepared at their
former employer ensuring they recall any information used in the analysis
solely from memory.

16. A research analyst is writing a report on an automobile manufacturer. Based on

his own analysis he has devised a buy recommendation for the manufacturer.
When reviewing the research analyst’s report, his supervisor requests a revision of
the recommendation to ‘sell’. The supervisor’s request is based on a conversation
he overhears between two company executives in the cafeteria of the
manufacturer’s premises. The executives discuss the company’s unannounced
decision to shut down a key division in the wake of substantial losses.
The analyst’s best course of action is to:
A. revise the recommendation.

B. request for a different assignment.
C. issue the report using his recommendation but disclose the difference in
opinion.
17. A member of candidate violates the duty of loyalty to clients if (s) he:
A. does not vote all proxies.

B. relieves his duty to seek best execution with respect to client directed
brokerage arrangements.
C. fails to inform of a change in recommendation prior to accepting an order
contrary to the recommendation.
18. In addition to the standard relating to the preservation of client confidentiality,

which of the following standards require the firm to adopt policies which ensure
members and candidates preserve client confidentiality?
A. Suitability
B. Fair Dealing
C. Loyalty, prudence and care

Questions 19 to 32 relate to Quantitative Methods
19. North Western Associates manages the portfolios of several private wealth
clients. Martina Gayle is one of the firm’s clients with a $600,000 investment
portfolio. Gayle would like to liquidate $25,000 from her portfolio to fund her
daughter’s college education. She has expressly stated that any funds withdrawn
should be generated from portfolio returns and the initial capital should not be
utilized. Her portfolio manager has short-listed three portfolio alternatives for
Gayle (exhibit).
Exhibit: Portfolio Alternatives for Gayle (In Percent)

A B C
Expected return 3.5 5.2 7.4
Standard Deviation 4.4 6.8 22.0
Based on the Gayle’s preferences and the information provided in the

Exhibit, the most suitable portfolio is:
A. A.
B. B.
C. C.
20. Marshall Hick is an equity analyst following the stock of Dover Inc. If Dover
earns an EPS of $45.50, its share price is forecasted to rise by 4%. The probability
of earning an EPS of $45.50 is 0.55 while the probability that the share price rises
by 4% is 0.50. The probability of both events occurring is 0.45.
Using the above information, the probability that the share price rises by 4%
given an EPS of $45.50 is earned is closest to:
A. 25%.
B. 60%.
C. 82%.

21. The maturity premium most likely:
A. is insensitive to changes in market interest rates.

B. compensates investors for the risk of loss relative to an investment’s fair
value if the investment needs to be converted to cash quickly.
C. compensates investors for the increased sensitivity of the market value of
debt to a change in market interest rates as maturity is extended.
22. Martin Edgar, a research analyst from the pharmaceutical industry, is performing
statistical analysis in an attempt to determine the effectiveness of chamomile tea
on patients suffering from anxiety. To perform his analysis, he has collected data
on patients in the U.S. who have successfully used the tea to overcome anxiety.
Using this data, he aims to derive a conclusion for such patients on a global scale,
adjusting his analysis for each country’s local and environmental factors.
For the purposes of his analysis, Edgar is most likely using:
A. differential statistics.
B. descriptive statistics.
C. statistical interference.
23. A positively skewed distribution is characterized by:
A. an equal median and mean.

B. a mode greater than the mean.
C. a median greater than the mode.

24. Lukas Turner is an equity analyst conducting research on Norwegian small-cap

stocks. He has collected average stock return data over the past five years sorted
in ascending order. Turner will categorize the stocks in one of five calculated
return intervals. The average return data is as follows:
- 10.5%, -7.4%, - 6.3%, 3.7%, 5.1%, 7.3%, 8.9%, 12.4%, and 13.0%
Which of the following statements most accurately illustrates a calculated return

interval and the associated absolute frequency?
Absolute
Return Interval: Frequency:
A. - 10.5% ≤ observation ≤ - 6.3% 3
B. - 10.5% ≤ observation ≤ - 5.8% 3
C. - 5.5% ≤ observation ≤ - 0.5% 0
25. A binomial random variable:
A. has one of two possible outcomes.

B. is defined by a probability density function.
C. is completely described by three parameters.

26. Greenich, a supplier of timber to the furniture industry, maintains a diversified

investment portfolio. The supplier’s management has expressly stated that
existing investments should be screened for potential losses. Any asset class held
in the portfolio should be removed if not profitable (average expected return ≤
0%) thirty days following purchase. Mark Gibbons, Greenich’s chief investment
officer, has collected forecast and statistical data for an equity investment held in
the portfolio. Gibbons is using a 5% significance level.
Exhibit
Forecast Data for Greenich’s Equity Investment
Expected return 8.2%
Standard deviation of expected return 4.5%
t-critical value (one-tailed) 1.699
t-critical value (two-tailed) 2.045
Upon conducting hypothesis testing Gibbons removes the equity investment from
the portfolio. Based on the data collected and statistical analysis performed,
Gibbons has most likely:
A. committed a Type I error.

B. committed a Type II error.
C. adequately rejected a false null hypothesis.

27. Carla Mathews is a portfolio manager at Horizon Associates, a wealth

management firm. She is managing the portfolios of two clients, Janet Wilson and
Eliza Homer. The expected return and standard deviation of the two clients’
portfolios is summarized in the exhibit. The threshold return for both investors is
1.5%.
Exhibit: Portfolio Expected Return and Standard Deviation (%)
Wilson Homer
Expected Return 8.9 7.5
Expected Standard Deviation 7.3 6.0
The probability that their portfolio returns will be less than 1.5% is respectively
closest to:
Wilson Homer
A. 0.1562 0.1587.
B. 0.8438 0.8413.
C. 1.0137 1.0000.
28. Alexis Morgan, CFA, is a stock analyst at Walsh Associates, an asset

management firm. She is forecasting the performance of a technology stock held
in several client portfolios based on historical data. The share price rose in three
of the previous four quarters. The underlying probability of an increase in price is
0.65.
Based on the data collected and using a Bernoulli trial, the probability that the
stock price will rise in three or fewer quarters is closest to:
A. 3.1%.
B. 27.5%.
C. 42.2%.

29. Kyla Cox, a portfolio manager serving WestTime, is managing an equity index
fund that is benchmarked to the S&P500 equity index. WestTime’s performance
appraisal manager expects Cox to keep tracking error within a band of 60 basis
points (bps) of the benchmark’s return, on a quarterly basis. WestTime will be
satisfied with Cox if she stays within the 60 bps band 80% of the time.
The probability that tracking error is within the band in two or fewer quarters is
closest to:
A. 3%
B. 18%
C. 79%.
30. Trisha Dawson is an independent equity analyst. She is attempting to determine

how a new government regulation relevant to the software industry will influence
the market price of industry players’ shares of stock. Due to a lack of availability,
Dawson collects historical industry data analyzing the impact of government
regulation on the share market price of companies currently in existence. Based
on her analysis Dawson purchases the stocks of those companies, which are
forecasted to rise in price in response to the regulation.
Is Dawson’s analysis subject to sampling bias?
A. No.
B. Yes, data mining bias.
C. Yes, sample selection bias.
31. When sampling from a normal distribution, a t-test may be used to compute the
reliability factor if the variance and sample size is respectively:
variance: sample size:

A. unknown large.
B. Known small.
C. Known large.

32. In contrast to simple random sampling, stratified random sampling:
A. generates a higher sampling error.

B. produces more accurate estimates of parameters.
C. does not ensure that the population subdivisions of interest are represented
in the sample.

Question 33 to 44 relate to Economics
33. Farah Ali is a British investor seeking to redeem her $1 million investment in U.S.
corporate bonds. Ali’s investment advisor has collected relevant exchange and
interest rate data in an exhibit.
Exhibit: Exchange and Interest Rate Data
Current USD/GBP spot rate 1.6715

3-month USD/GBP forward rate 1.8500
Annualized 3-month British risk-free rate (%) 1.5000
Annualized 3-month U.S. risk-free rate (%) 2.0000
Ali’s investment advisor proposes she take advantage of the difference in risk-free
rates by investing the redemption proceeds at the U.S. risk-free rate for three
months and then convert the sum back to the GBP at the no-arbitrage forward rate
at the end of the period.
Based on the data in the exhibit, the proposed investment strategy will generate an
un-annualized domestic investment return for Ali of:
A. 0.37%.
B. 0.50%.
C. 1.50%.
34. Which of the following adjustments is most likely required when calculating
personal income from national income?
A. Add household income

B. Subtract statistical discrepancies
C. Subtract undistributed corporate profits
35. According to the quantity theory of money, holding all else constant, an increase
in:
A. the demand for real money is an increasing function of real income.

B. the demand for real money is an increasing function of interest rate.
C. real income must be accompanied by a decrease in real interest rate.

36. A consumption basket in a developing country comprises of four categories of

goods. For each good Kyle Smith has summarized data concerning quantity
consumed and price. The price index in January 2011 was 89.
Time January 2011 February 2011

Goods Quantity Price Quantity Price
Bread 20 kg $2.9/kg 20 kg $2.6/kg
Milk 40 liters $1.5/liter 35 liters $1.4/liter
Gasoline 65 liters $90/liter 62 liters $85/liter
Potatoes 50 kg $1.8/kg 50 kg $1.8/kg
Based on the data provided, the inflation rate for the period under analysis is
closest to:
A. – 98.8%.
B. – 9.9%
C. + 1.3%.
37. Risa is a developing country situated in Southeast Asia. Labor statistics for the
years 2012 and 2013 are summarized in the exhibit below by Lisa Mascot, an
economic analyst. Mascot aims to estimate the sustainable growth rate of Risa
over the time period under analysis.
Exhibit
Labor Statistics Concerning Risa
2012 2013
Long-term labor productivity growth rate (%) 1.5 2.4
Aggregate hours worked (in millions) 7,500 8,100
Long-term growth rate of labor force (%) 5.3 4.9
The percentage change in Risa’s rate of sustainable economic growth between

2012 and 2013 is closest to:
A. 7.35%.
B. 7.40%.
C. 15.94%.

38. Rightway Inc. has reported an accounting profit and abnormal profit of $450,000
and $405,000 respectively, for the financial year 2013. The difference between
abnormal and accounting profits is expected to widen over the long-term. The
firm has a cost of capital equal to 10%.
Based on the data provided, which of the following conclusions is most likely
correct? Rightway Inc. (‘s):
A. market value of equity is unaffected by economic profit.

B. implicit opportunity costs are lower than economic profit.
C. ability to access capital is adversely impacted over the long run.
39. Which of the following costs can least likely be classified as being fixed in
nature?
A. Sunk costs
B. Inventory costs
C. Real estate lease payments
40. The exhibit below illustrates the production and cost schedule for Elta Corp, a
manufacturer of diving equipment, during its first month of operations.
Exhibit
Elta Corp’s Production and Cost Schedule
Average Total Average
Total fixed fixed cost variable variable
Quantity (Q) costs ($) ($) cost ($) cost ($)
5 45,000 9,000 32,100 6,420
6 53,320 8,867 35,580 5,930
7 62,250 8,893 40,500 5,786
8 70,500 8,813 55,780 6,973
Based on the data in the exhibit, which of the following conclusions is most likely
appropriate?
A. The cost of producing an additional unit beyond the 6th is $13,850.

B. Elta’s average total costs are minimized at a production level of 7 units.
C. Elta consumes a greater proportion of its production capacity for each unit
produced beyond the 7th unit.

41. When markets are in perfect competition economic profits are:
A. zero in the short and long run.

B. generated if price is greater than average total costs in the short run.
C. generated in the long run only if price is at the minimum efficient scale
point on the long run average total cost curve.
42. An oligopoly is characterized by:
A. high barriers to entry.

B. participating firms having no pricing power.
C. firms placing less importance to non-price competition.
43. A market analyst is comparing two products, A and B, sold by the food
processing industry in an attempt to ascertain whether they are substitutes or
complements. An individual consumer’s monthly demand for product A is given
by the equation QdA = 8 – 1.0PA + 0.008I + 0.30PB, where QdA equals the number
of units of A demanded each month, I equals the monthly household income, PA
equals the price of product A, and PB equals the price of product B. The price of
product A is $10.50, household income is $3,500, and the price of product B is
$7.25.
The cross-price elasticity of the two products and the nature of the two products
are most likely:
cross-price elasticity: nature:

A. - 0.38 complements.
B. + 0.08 substitutes.
C. + 1.15 substitutes.
44. The government of a particular country has required companies to increase

worker safety in the electric component industry. This will increase the costs of
production, which will be passed on to consumers in the form of higher selling
prices. If there is no change in consumer income, the increase in selling prices
will most likely cause:
A. movement along the demand curve.

B. cause the demand curve to shift upwards and to the right.
C. cause the demand curve to shift downwards and to the left.

Questions 45 to 68 relate to Financial Reporting and Analysis
45. A company’s flexibility in taking advantage of business opportunities is measured

by its:
A. solvency.
B. profitability.
C. magnitude of operating cash flows.
46. Accounting accruals:
A. do not take the timing of related cash movements into account.

B. are required when the timing of cash movements and accounting
recognition coincide.
C. are required when the timing of cash movements and accounting
recognition do not coincide.
47. On September 1, 2013 a company prepaid $40,500 for an item of machinery

acquired for a one-year lease term. $1,500 of the rental amount paid represented a
refundable deposit to be repaid at the end of the lease term.
If the company’s financial year concludes on December 31, 2013, the amount to
be transferred from its balance sheet to income statement at year end is closest to:
A. $3,250.
B. $13,000.
C. $13,500.
48. A supplier has received $30,000 in cash from one of its customers for an electric
component, which is to be delivered at the end of the month.
At the time of cash receipt, the supplier will record the revenue as:
A. realized.
B. unbilled.
C. deferred.

49. Which of the following transactions are included in other comprehensive income?
A. Repurchasing shares from owners.

B. Payment of dividends to common shareholders.
C. Unrealized gains and losses on available for sale securities.
50. Skyline Limited reported $300,000 net income for the year ended June 30, 2013
and had a weighted average of 150,000 shares outstanding. At the beginning of
the year, the company had 20,000 stock options outstanding with an exercise price
of $40. The company’s average market price averaged $50 per share. The
company had no other dilutive security.
Skyline’s diluted EPS using the treasury stock method is closest to:
A. 1.76.
B. 1.95.
C. 2.00.
51. Miller Processing Inc. is a book publisher operating in the U.S. In the most recent
financial year, one of Miller’s production plants was completely destroyed by a
factory fire. Total losses attributable to the incident amounted to $1.2 million.
Miller complies with U.S. GAAP.
Miller Processing Inc. will account for the loss as:
A. an extraordinary item.
B. a discontinued operation.
C. part of its continuing operations.

52. Recordia is a music production company operating in the U.S. The company
intends to sell one of its operating divisions generating substantial losses for the
company over the previous two years. The division is to be sold to another record
producing company, which is paying a high price for the division, $15 million,
due to its strategic fit. The carrying value of the division prior to sale is $12
million. The applicable tax rate is 30%. Recordia complies with U.S. GAAP.
In its income statement, Recordia will record a transaction gain of:
A. $3.0 million as part of operating profit.

B. $2.1 million as part of discontinued operations.
C. $2.1 million as a separate component below discontinued operations.
53. Ascillio Tech has a weighted average of 500,000 shares of common stock
outstanding in 2013. Ascillio has $300,000 of 5% convertible bonds with each
convertible into 4,000 shares. The company has reported net income of $750,000
while the applicable tax rate is 30%.
Ascillio’s diluted EPS is closest to:
A. 1.05.
B. 1.47.
C. 1.50.
54. Which inventory accounting method will report the highest number of days of
inventory on hand assuming rising inventory costs and units?
A. FIFO
B. LIFO
C. Weighted average cost
55. Assuming declining inventory costs, in contrast to the FIFO method of inventory
accounting, LIFO will produce a lower:
A. quick ratio.
B. gross profit margin.
C. debt-to-equity ratio.

56. Under IFRS, disclosures required for property, plant and equipment least likely
include:
A. useful lives.
B. residual values.
C. measurement bases.
57. ENC Inc. is a biomedical research firm operating in the U.S. Allen Smith, the
company’s chief financial analyst, is attempting to ascertain the tax bases of two
of the company’s assets. Smith has enclosed details regarding the two assets
below:
Research costs: The total amount of research costs expensed during the year
amounted to $450,000. Local tax authorities require companies to amortize
research costs on a straight line basis over a four year term.
Accounts receivable: On its balance sheet ENC reported net accounts receivable
of $275,000. The expense related to uncollectible amounts reported in the income
statement is equal to $6,875. Local tax authorities allow 2.0% of the gross amount
for uncollectible amounts.
With respect to the information provided on the two asset classes, the tax base of
research costs and accounts receivable, respectively, is closest to:
research costs: accounts receivable:

A. $0 $269,363.
B. $112,500 $5,638.
C. $337,500 $276,238.

58. On January 1, 2013 Heather Corp expensed development costs of $250,000 in

relation to a new line of equipment. Local tax authorities require capitalization
and amortization of development costs on a straight line basis based on a four
year term. In addition, the firm received $35,500 in revenue in advance from its
customers. Tax authorities require unearned revenues to be recognized on a cash
basis.
With respect to the two accounts mentioned above, which of the following
statements is most likely correct?
A. A permanent taxable difference of ($35,500) will arise in relation to

unearned revenues.
B. A deductible temporary difference of $62,500 will arise in relation to
development costs.
C. A deferred tax asset of $187,500 will be recognized in relation to
development costs.
59. The exhibit below highlights liquidity ratios for three competing manufacturing
concerns (Alpha, Beta and Gamma) for the financial year 2013.
Alpha Beta Gamma

Cash ratio 2.0 1.8 2.2
Defensive interval ratio 38 45 29
Quick ratio 1.9 1.9 1.5
Current ratio 1.0 0.5 0.7
Based on the information provided in the exhibit, which company is in the

strongest position to continue to pay its expenses solely from its existing liquid
assets?
A. Alpha
B. Beta
C. Gamma
60. In a situation where a company’s inventory becomes illiquid and experiences a

decline in inventory turnover ratio, the quick ratio should most likely:
A. rise.
B. decline.

61. Throck is a manufacturer of home appliances. The company prepares and presents
its financial statements in accordance with IFRS. The exhibit illustrates the
classification of selective items in its cash flow statement.
Item Cash Flow Statement

Classification
Dividends paid Operating
Dividends received Investing
Interest paid Financing
Interest received Operating
Which of the following adjustments is least likely required when deriving free
cash flows to the firm (FCFF) from cash flow from operations (CFO)? Add:
A. dividends paid.
B. interest received.
C. dividends received.
62. Which of the following will not be a component of a cash flow statement prepared
using the indirect method?
A. Cash paid to suppliers.

B. Amortization of bond discount.
C. Gain from the sale of a long-term asset.

63. Lark West, CFA, is a financial analyst comparing the financial results of two
competitors in the agriculture sector, Rexus and Fields. He has collected selective
information from the companies’ financial statements to perform his analysis in
the exhibit below:
Exhibit: Financial Information Relevant to Rexus and Fields
$ millions Rexus Fields

Operating profit 65 90
Interest expense 15 65
Operating expense 22 35
Accounts payable 120 450
Deferred tax liability 32 51
Lease payments 14 20
Short-term borrowings 15 41
Long-term notes payable 22 31
Equity 150 600
Assets 342 758
West will most likely conclude that:
A. Rexus has weaker solvency.

B. Rexus has greater financial risk as measured by its debt-to-assets ratio.
C. Fields has greater financial risk as measured by its debt-to-equity ratio.
64. Which of the following conditions conducive to low quality financial reporting
can result from pressure to meet some criteria for personal or corporate reasons?
A. Motivation
B. Opportunity.
C. Rationalization
65. The ability of a company to meet its short-term obligations is measured using:
A. activity ratios.
B. liquidity ratios.
C. solvency ratios.

66. Which of the following reasons are most likely attributable to a decline in the
return-on-equity ratio?
A. A lower tax burden.

B. A decrease in borrowing costs.
C. The repurchase of common stock.
67. The exhibit below illustrates selective financial measures for Aqua Corp. for the
financial years 2012 and 2013.
Exhibit
2013 2012
Return on equity 9.0% 10.5%
Tax burden 75.3% 70.8%
Interest burden 98.0% 99.0%
EBIT margin 7.7% 6.5%
Return on assets 4.5% 5.1%
Which of the following explanations least likely supports the decline in return on
equity observed between 2012 and 2013? Aqua‘s:
A. liquidity has declined.

B. tax rate has increased.
C. solvency has declined.

68. The exhibit below highlights selective financial measures for the years 2012 and
2013 for a steel manufacturer.
Exhibit
2013 2012
ROE 15.7% 13.2%
Tax rate 35% 40%
EBT/EBIT 95.7% 95.7%
EBT margin 7.4% 6.9%
Financial leverage 1.3 0.8
Between 2012 and 2013, the efficiency of the manufacturer has most likely:
A. improved.
B. deteriorated.
C. remained unchanged.

Questions 69 to relate to 76 Corporate Finance
69. A company has recently undertaken a three-year project with annual cash flows of
$30,000 and a cash of $60,000 in the terminal year. The initial investment is
$100,000 and the required rate of return is 15%.
The NPV method makes certain assumptions regarding the reinvestment rate and
opportunity cost of funds. Based on the data provided, which of the following
A. The reinvestment rate is equal to 8.4%.

B. The opportunity cost of funds is equal to 8.4%.
C. The reinvestment rate and opportunity cost of funds are both equal to
15%.
70. Miguel Palmer is evaluating two projects, A and B. The cash flows, investment
outlays, IRRs, and NPVs for both projects are given below.
Cash Flows
Year 0 1 2 3 4 NPV IRR (%)
Project A -200 85 85 85 120 93.34 28.97
Project B -190 0 0 0 420 96.87 21.93
The discount rate at which both projects will have the same NPV is closest to:
A. 10.97%.
B. 25.45%.
C. 28.97%.
71. Which of the following components is least likely considered as part of capital
budgeting decisions?
A. Financing costs
B. Opportunity costs
C. Before-tax cash flows

72. Saxon Incorporated purchased a flour processing unit seven years ago at a price of
$600,000. The annual cash flows generated by the processing unit are constant at
$80,000. The management is considering the replacement of this unit with a more
advanced one. The advanced model is worth $1,000,000.
For capital budgeting purposes, the opportunity costs associated with the
processing unit are closest to:
A. $80,000.
B. $600,000.
C. $1,000,000.
73. A company has recently undertaken a project. When plotting its NPV profile, the
project manager identified that the profile intersects the vertical axis at an NPV of
$40 million.
The discount rate at this intersection is most likely identified as the:
A. IRR.
B. crossover rate.
C. rate at which the required rate of return is zero.
74. Which of the following statements is most likely correct regarding the impact of
taxes on the cost of capital?
A. Interest costs serve to reduce a company’s cost of debt.

B. Cost of equity may require adjustments for taxes if preferred stock is part
of the capital structure.
C. The weighted average cost of capital reflects a required rate of return after
adjusting all its components for taxation.

75. Skylark Manufacturers is situated in a developing country where equity markets

have been always been highly volatile with unstable equity market returns. In
addition, political turmoil has often mandated temporary halts in market trading.
As a consequence, the Skylark stock has rarely generated stable performance.
Carl Jung, a potential investor is attempting to determine Skylark’s cost of equity
and the most appropriate method to derive this estimate.
Which of the following statements most accurately characterizes a consequence of

the chosen method to estimate Skylark’s cost of equity?
A. The dividend discount model approach will generate the most stable
equity risk premium estimate.
B. The arithmetic mean estimate for equity risk premium generated by the
historical approach will exceed the geometric mean estimate.
C. The CAPM approach will adequately factor sources of priced risk such as
macro-economic and company-specific factors affecting the Skylark stock.
76. Ester Miguel is using data concerning a publically traded comparable to

determine the asset beta for a privately traded company. The beta of the publically
traded stock is 1.8 while debt-to-equity ratios and marginal tax rates are 0.4 and
30%, respectively. The privately traded corporation has a D/E ratio of 0.7 and a
marginal tax rate of 25%.
Using the pure play method, the beta used to estimate the cost of capital for a
project undertaken by the private entity having an identical risk and financing
structure as its company is closest to:
A. 1.41.
B. 2.10.
C. 2.14.

Questions 77 to 88 relate to Equity Investments
77. A textile manufacturer will be undertaking a loan in six months’ time. However,
management is concerned about rising borrowing costs and is contemplating
taking a position in a contract to remove any uncertainty.
The contract most suitable to the textile manufacturer is a:
A. commodity swap.
B. interest rate swap.
C. credit default swap (CDS).
78. Richard Gayle holds 500 shares of a software house’s stock. The shares of stock
were purchased at a price of $50/share at the beginning of the year. Gayle has
now decided to sell his entire holding at the end of the year when the price has
risen to $60/share. 25% of the purchase is financed on margin with a call money
rate of 2%. The stock has not paid any dividend and the purchase and sales
commission each amount to $8/share.
The total return on Gayle’s investment for the year is closest to:
A. – 14.0%
B. – 12.5%.
C. + 19.5%.
79. A market is said to be efficient if:
A. superior risk-adjusted returns are achievable on a consistent basis.

B. passive investment strategies are preferred to active investment strategies.
C. a majority of traders are able to earn profits with little risk as asset prices
adjust to reflect information.

80. An analyst has collected financial results with respect to Bridge Enterprises, a
construction firm, as well as a key competitor for the current financial year.
Exhibit
Financial Results Concerning Bridge Enterprises & Competitor
In $ millions Bridge Competitor
Enterprises
Market value of equity 350 400
Market value of long-term debt 80 100
Market value of short-term debt 80 50
Cash equivalents 45 50
Short-term investments 10 15
Long-term investments 8 8
Operating income 120 190
Based on the enterprise value to operating income (EV/OI) multiple, which of the
following statements is most likely correct?
A. The competitor is favorably valued.

B. Bridge Enterprises is favorably valued.
C. Both companies are identically valued.
81. An investor has recently purchased a share of stock, which does not currently pay
dividends. The first dividend is expected to be received six years from the date of
purchase and will amount to $5. Thereafter, dividends will grow at a rate of 2.5%
into perpetuity. The required rate of return is 10%.
The current estimated intrinsic value of the share is closest to:
A. $41.39.
B. $57.86.
C. $68.33.
82. During periodic rebalancing, portfolio weights of a fund benchmarked to a

market-capitalization-weighted index will most likely:
A. have a value-tilt.
B. favor a contrarian strategy.
C. favor a momentum strategy.

83. Dave Allen is an equity analyst who is evaluating the weighting scheme of a price
weighted equity index comprising of four stocks, A, B, C and D. The prices of the
four stocks as well as the index value are summarized in an exhibit. The issuers of
stock A have announced a 2-for-1 stock split. The values in the index are
inclusive of dividends paid.
Exhibit
Index Constituent Stocks, Values and Index Value
Security Value Before Weight Before
Split Split (%)
A 35 35
B 32 32
C 15 15
D 18 18
Total 100 100
To preserve the value of the index at 100, index providers will need to:
A. adjust the divisor to 1.3.

B. adjust the divisor to 3.3.
C. make no further adjustments as the index will self-correct for stock splits.
84 To construct a float-adjusted market capitalization weighted index, possible

adjustments include removing shares:
A. of small-cap stocks.
B. held by corporations.
C. held by foreign investors.

85. The exhibit below displays a market’s limit standing order book on a particular
trading day.
Exhibit
Market’s Standing Limit Order Book
Time of Arrival Bid/Offer Limit Price Display status
09:10:12 Bid 84.2 Displayed
09:40:00 Offer 85.6 Hidden
10:02:00 Offer 86.0 Displayed
10:02:00 Bid 83.2 Displayed
13:09:15 Bid 85.1 Hidden
Which bid and offer orders will be given order precedence?
Bid Offer
A. 13:09:15 09:40:00
B. 09:10:12 10:02:00
C. 10:02:00 10:02:00
86. The first step in index construction and management most likely involves
determining the:
A. target market.
B. index weighting scheme to employ.
C. specific securities to include in an index.
87. A trader purchased 2,000 shares of stock three months ago at a price of $40. The
trader is concerned that stock prices may fall in the near future and would like to
place a limit on falling prices by issuing a GTC stop 35, limit 30 market sell
order.
The instructions issued by the trader and the maximum loss on the position are
most likely:
Instructions maximum loss:

A. Execution $10,000.
B. Validity unlimited.
C. Validity $20,000.

88. For the year ended December 31, 2013 a company reported return-on-equity
(ROE) of 15% using average book values. In the same year the company
generated net income of $10.25 million. Total shareholder’s equity reported in the
company’s balance sheet at the beginning of the year amounted to $85.65 million.
The company has 1,000,000 equity shares outstanding in the year 2013.
The book value of equity per share for the year 2013 is closest to:
A. $51.02.
B. $85.65.
C. $222.32.

Questions 89 to 94 relate to Derivatives
89. A criticism of using derivatives includes:
A. increased market volatility.

B. lower market liquidity relative to underlying spot market.
C. slower correction of price deviation from fundamental values.
90. The protective put is most often viewed as an example of insurance, with the
option premium being the insurance cost. Which of the following concerning the
comparison of a put option with insurance is most accurate?
A. A higher exercise price for the put is analogous to a higher insurance

deductible.
B. A higher exercise price for the put is analogous to a lower insurance
deductible
C. A lower exercise price for the put is analogous to a restrictive insurance
deductible.
91. A call option is selling for $13 in which the exercise price is $120. If the price of
the underlying at expiration is $111, the profit for the seller is closest to:
A. $0.00.
B. $9.00.
C. $13.00.
92. At the expiration of a call option:
A. time value is zero.

B. intrinsic value is zero.
C. option price equals to the difference between time and intrinsic value.

93. Which of the following statements is least likely correct regarding forwards,
futures and swaps?
A. Swaps can be priced as an implicit series of off-market forward contracts,

whereby each contract is priced the same.
B. Costs incurred and benefits received by holding the underlying affect the
forward price by lowering and raising it, respectively.
C. Futures prices can differ from forward prices because of the effects of
interest rates on the interim cash flows from the daily settlement.
94. An American option can be worth more than an otherwise equivalent European
option if:
A. it has time value.

B. there are no cash flows on the underlying.
C. it is a callable and there are cash flows on the underlying.

Questions 95 to 106 relate to Fixed Income
95. An investor has purchased a 4-year, 5% annual coupon-payment bond. The

sequence of spot rates over the bond’s term to maturity is illustrated in the exhibit
below.
Exhibit: Spot Rate Sequence over the Bond’s Term to Maturity

Time-to-maturity Spot rate (%)
1 year 2.3
2 year 3.1
3 year 4.6
4 year 5.2
The price of the bond (per 100 of par value) is closest to:
A. $99.69.
B. $100.00.
C. $114.33.
96. A 12% semi-annual coupon paying bond has a three-year term-to-maturity. Based
on the spot rate sequence at the time of bond issuance, the bond is priced at
105.80 (per 100 of par value).
Relative to bond’s coupon rate, the yield-to-maturity of the bond issue is most
likely:
A. equal.
B. lower.
C. higher.
97. An investor has purchased a 7-year, 10% annual coupon payment bond issued at
90.20 per 100 of par value and holds it till maturity. All coupon payments will be
reinvested at a rate of 8%.
The interest-on-interest gain from compounding the reinvested coupons is

closest to:
A. $19.23.
B. $20.00.
C. $36.37.

98. The investor’s realized horizon yield matches the yield-to-maturity if:
A. the bond is sold at a price to generate capital gains.

B. the bond is sold at a price on the constant-yield price trajectory.
C. coupon payments are reinvested at a rate higher than the original yield-to-
maturity.
99. The manager of defined benefit pension plan would like to measure the sensitivity
of its retirement obligations to market interest rate changes. The discount rate of
the plan is currently 8.2%. The company has hired an analyst who has compiled
estimates of pension plan liabilities based on assumed interest rate changes.
Exhibit
Present Value of Liabilities & Interest Rate Assumptions
Interest Rate Present Value of
Assumption Liabilities
7.95% $102.8 million
8.20% $90.5 million
8.45% $86.4 million
The effective duration of the plan’s scheme liabilities is closest to:
A. 0.36.
B. 23.93.
C. 36.24.

100. Rica Corp is a rice manufacturer operating in Mexico. Maria Salas is the
company’s chief financial analyst. Salas is attempting to calculate and interpret
key fundamental measures by examining selective information from the
company’s financial statements over the previous two financial years. She has
compiled the necessary data in an exhibit.
Exhibit
Rica Corp’s Key Financial Information
Mexican Pesos (In Millions) 2013 2012
Gross profit 35.8 25.6
Operating profit 28.9 20.1
Interest expense 5.6 3.1
Funds from operations 125.8 95.0
Based on the information compiled by Salas, she will most likely conclude that
between 2012 and 2013 Rica Corp’s:
A. credit risk has increased.

B. ability to pay dividends has improved.
C. ability to cover interest payments has deteriorated.

101. An industry analyst is evaluating financial information concerning three

competitors in the steel manufacturing industry. He aims to determine which
company has the highest credit quality based on the information collected.
Exhibit
Financial Information Concerning Three Competitors in the Steel
Manufacturing Industry
Company Company Company Industry

A B C Average
Free cash flow from
operations/debt (%) 165.2 90.5 135.8 150.6
EBITDA interest coverage
ratio (x) 40.8 55.0 43.8 45.1
Total debt ($ millions) 543.0 330.1 400.5 340.8
Which company will receive the highest credit rating?
A. Company A
B. Company B
C. Company C
102. A five-year bullet bond has a principal amount and coupon rate of $1,000 and 4%,
respectively. The market interest rate is assumed to be constant at 4% over the
bond’s term to maturity. The bond will be issued and redeemed at par.
The principal payment due in Year 2 of the bond issue is closest to:
A. $0.
B. $40.
C. $200.
103 . Which of the following covenants will protect unsecured creditors’ claims in the
event of default?
A. Limitations on lien
B. Restricted payments
C. Change of control put

104. A fixed income analyst is evaluating three potential bond issues for interest rate
risk. Data concerning the issues are collected in an exhibit (see below).
Exhibit
Data Concerning Potential Bond Issues
Modified
Issue Duration Convexity Δ Yield*
A 5.81 20.65 15 bps
B 7.03 40.80 25 bps
C 13.89 125.78 10 bps
*Change in the annual yield-to-maturity
Based on the data collected, which issue has the highest interest rate risk?
A. A
B. B
C. C
105. An investor is choosing between two alternative zero-coupon bond investments.

The first alternative involves purchasing and holding a 2-year zero-coupon bond
to maturity. The second alternative involves purchasing a 1-year zero-coupon
bonds and reinvesting the proceeds in another one-year zero-coupon one year
from now. The investor selects the latter alternative. The yields to maturities on
one- and two-year government bonds have been compiled in the exhibit below.
Exhibit: Data Concerning 1- and 2-Year Zero-Coupon Bonds
Maturity Price (per 100 of par value) Yield-to-Maturity*

1 year 98.50 3.640
2 years 97.60 3.753
*Yields are stated on a semi-annual basis
The minimum yield-to-maturity to be expected by the investor should be closest

to:
A. 2.50%.
B. 3.87%.
C. 4.72%.

106. The single auction process:
A. will result in winning bidders paying the same price.

B. will increase the cost of funds in the form of a higher coupon rate.
C. is a secondary market mechanism used to issue U.S. Treasury bonds to the
public.

Questions 107 to relate to 112 Alternative Investments
107. Alternative investments are characterized by:
A. moderate degree of liquidity.

B. high degree of manager specialization.
C. low correlation with traditional investments
108. Which of the following is least likely a characteristic common to hedge funds?
A. Exclusive membership
B. High degree of leverage
C. Passive investment vehicles
109. Which of the following private equity strategy generally refers to minority equity
investments in more mature companies that are looking for capital to expand or
restructure operations, enter new markets, or finance major acquisitions?
A. Venture capital.
B. Leveraged buyouts.
C. Development capital.
110. Which of the following statements is least likely correct regarding timberland and
farmland?
A. Only timberland provide flexibility in harvesting.

B. Both timberland and farmland have three primary return drivers.
C. There is little flexibility in harvesting in both timberland and farmland.

111. Littleton Associates is a portfolio management firm which manages the accounts
of high net worth clients. Rector Santana is Littleton’s senior portfolio manager
and manages real estate, hedge funds and venture capital investments. It is the end
of the year and Littleton’s performance appraisal committee measuring the risk-
adjusted portfolio returns earned by Santana using the Sharpe ratio.
The risk measure used by the committee to evaluate Santana is most likely:
A. appropriate.
B. inappropriate; the use of the ratio may result in a smoothed return
distribution.
C. inappropriate; the ratio overestimates the diversification impact for a
broad portfolio of managers and alternative investments.
112. A hedge fund has undertaken an equity hedge in which the net position is long the
underlying securities. This position is undertaken based on the view that market
prices will rise and stocks will generate capital gains. The strategy being
employed by the fund is most likely classified as:
A. activist.
B. fundamental growth.
C. quantitative directional.

Questions 113 to 120 relate to Portfolio Management
113. Which of the following best describes the operational risk?
A. The risk that the company’s employees will neglect or will fail to follow
the operational guidelines.
B. The risk that arises from the people and process that combine to produce
the output of the organization.
C. The risk that the entity does not survive or succeed because it runs out of
cash, even though it might otherwise be solvent.
114. Is it beneficial to add new asset to the portfolio, if the Sharpe ratio of the new
asset is greater than the Sharpe ratio of the current portfolio?
A. No.
B. Yes.
C. Not always.
115. T.S. Associates is a portfolio management firm managing the investment

portfolios of high net worth clients. The chief investment officer is evaluating the
performances of three junior portfolio managers – Robert Smith, Dana Port, and
Jeremy East. Information concerning the results achieved by the managers is
given below:
Manager Return (%) σ (%) β

Smith 12 11 0.8
Port 14 15 1.4
East 9 7 1.1
Market portfolio 8 7
Risk-free rate 2
Based on the information presented in the exhibit, the M2 measure is highest for:
A. Smith.
B. Port.
C. East.

116. An investor who is willing to take additional risk and is using the capital market
line to make investment decisions will most likely:
A. lend a portion of his wealth at the risk-free rate.

B. select portfolios lying above the capital market line.
C. undertake a leveraged position in the market portfolio.
117. Lance Gayle is an asset advisor at Walsh & Homer, a portfolio management firm
in Dallas, Texas. He is evaluating three alternative asset classes for one of his
client’s portfolios. Gayle’s main objective is to select an asset class, which will
maximize his client’s risk-adjusted portfolio returns. Expected return and risk data
concerning the three alternatives is summarized in an exhibit. The risk-free rate of
return is equal to 0.8%.
Exhibit:
Data Concerning Expected Return and
Standard Deviation for Potential Asset Classes
Expected Annual Expected Annual
Asset Class Return (%) Standard Deviation (%)
Commodities 9.1 12.4
Emerging market equities 11.8 15.6
Long-term corporate bonds 7.2 8.9
Which of the proposed asset classes will meet Gayle’s objective?
A. Commodities
B. Emerging market equities
C. Long-term corporate bonds

118. Joyce Rogers, aged 35, is a dentist employed at a state hospital in France. Rogers
is divorced with two children, aged 4 and 10 respectively. She has decided to
revise her financial situation and obtain advice from Malcolm Smith, her financial
advisor. Smith has summarized the following information concerning Rogers:
• Rogers receives a basic annual salary of €150,000 which adequately

covers her annual living expenses. She is entitled to an annual pension
upon her retirement which will be adequate to fund her living expenses.
• She lives in a rented apartment paying a monthly rental of €3,500.
• Her children go to public schools. She aims to collect sufficient funds to
finance her children’s college education.
• In addition, she aims to be the owner of a residential property before she
retires.
• In her discussion with Smith Rogers explicitly stated, “As a child my
parents’ financial conditions were unstable. Consequently, I have a
conservative attitude towards decision making.”
Which of the following statements accurately describes Rogers’ risk tolerance?
A. Rogers has a low ability and willingness to take risk.

B. Rogers has a low ability to take risk, but a high willingness to take risk.
C. Rogers has a high ability to take risk, but a low willingness to take risk.
119. Which of the following is a valid assumption of the capital asset pricing model
(CAPM)?
A. Investors are risk-neutral.

B. Investors cannot influence trade prices.
C. All investors hold a combination of the risk-free asset and market
portfolio.

120. Bella Harris, CFA, is a portfolio manager employing a utility formula of

µ = E (r ) − 0.5 Aσ 2 to select asset classes for her clients’ investment portfolios.
Presently Harris is selecting suitable asset classes for two clients – Graham Lake,
a risk neutral investor, and Caroline Davis, a risk-loving investor. She has
compiled annual expected return and risk data in the exhibit below:
Exhibit
Expected Return and Standard Deviation Data of Potential Asset Classes
Asset Class Expected Return E(r)* Standard Deviation*
1 14% 18%
2 16 22
3 20 25
4 25 31
*Expected Return and Standard Deviation represent annual figures.
The most appropriate asset class for the two clients, respectively, is:
Lake Davis
A. 1 4.
B. 2 3.
C. 4 4.

FinQuiz.com
June, 2016
Revision 1

FinQuiz.com – 2nd Mock Exam 2016 (PM Session)

33-44 Economics 18
Total 180

Questions 1 to 18 relate to Ethical and Professional Standards
1. Laura Elliot is a broker at Housegate, a broker-dealer firm. She undertakes trades

on behalf of clients with a high net worth. She discovers that one of her clients
has engaged in the embezzlement of portfolio funds, which classifies as an illegal
activity under domestic trading regulations. In order to comply with the CFA
Institute Standards of Professional Conduct, Elliot’s preliminary course of action
would be to:
A. request for a different assignment.

B. report the violation to her supervisor.
C. report the violation to regulatory authorities.
2. Standard I (A), Knowledge of the Law, requires members and/or candidates to:
A. document a violation when disassociating themselves from an illegal

activity.
B. have detailed knowledge of all the laws that could potentially govern their
activities.
C. abide by the rules and regulations related to the administration of the CFA
examination.
3. The CFA Institute Code of Ethics requires members and candidates to:
A. encourage others to practice in a professional and ethical manner that will

reflect credit on the profession.
B. ensure the preservation of capital market integrity is given priority over
protecting employer interests.
C. use reasonable care and judgment to achieve and maintain independence
and objectivity in their professional activities.
4. In order to comply with the CFA Institute Standards of Professional Conduct

relating to duties to employers, members and candidates:
A. should not enter into an independent business while still employed.

B. are encouraged to recommend that their employers adopt and distribute a
code of ethics.
C. may obtain an assurance from a subordinate who has violated the Codes
and Standards that the wrongdoing will not recur.

5. Adequate compliance procedures should:
A. meet regulatory requirements.

B. ensure supervisors do not delegate their duties.
C. be designed to anticipate every potential violation.
6. Samantha Town is a portfolio manager at Wallace Associates situated in Dallas,

Texas. This year Town has delivered exceptional performance for one of her
client’s accounts. In exchange for the performance, her client has offered her two
front row tickets to an opera as well as the opportunity to meet the stage cast after
the show.
To ensure she does not violate the CFA Standards of Professional Conduct,
Town’s best course of action would be to:
A. reject the offer.

B. Inform her employer after attending the opera show.
C. accept the offer after obtaining permission from all relevant parties.
7. Upon reviewing the materials received during the investigation of a professional

conduct inquiry, a designated officer’s preliminary course of action would be to:
A. revoke the member’s CFA charter.

B. suspend the member’s membership.
C. propose a sanction which can be rejected by the member.
8. Which of the following is a desirable practice of a firm which has a firewall

policy implemented for its research and investment banking divisions?
A. Prohibiting communication between research and investment banking

personnel.
B. Basing the research analyst’s compensation on a flat rate without any
contingent bonuses.
C. To improve the accuracy of investment analysis, investment banking
personnel regularly review research reports prepared by analysts.

9. Recommended written trade allocation procedures least likely include:
A. processing orders on a first-come, first-served basis.

B. allocating trades for new issues by portfolio manager.
C. giving all accounts participating in a block trade a weighted price based on
their order value.
10. Joyce Parker is a portfolio manager serving East AM Associates. Parker is

calculating the return generated on one of her client’s accounts for the current
fiscal year. She calculates the net-of-fees return but does not subtract investment
management fees rendering the calculated return noncompliant with the GIPS
standards. East AM Associates has complied with the GIPS standards since
establishment even though local laws do not mandate firms to do so.
Is Parker in violation of the CFA Institute Standards of Professional Conduct?
A. Yes.
B. No, she has not violated any law.
C. No, failure to comply with the GIPS standards does not result in a
violation of the Standards of Professional Conduct.
11. Ella Lawson is the chief executive at Rome Bank, a commercial banking
enterprise. On behalf of the bank Rome will be providing funding to a
manufacturing enterprise seeking to expand its operations. During her visit to the
manufacturer’s factory, Lawson overhears two employees on the production floor
discussing the likelihood of their employer’s inability to carry out expansion.
Lawson holds shares of the enterprise and decides to sell her holding and reject
providing financial support.
Lawson is most likely in violation of the CFA Institute Standard of Professional

Conduct relating to:
A. loyalty, prudence and care.

B. diligence and reasonable basis.
C. material, nonpublic information.

12. Gus Horace is a real estate advisor situated in a developing country. Horace is
attempting to sell agricultural land, on behalf of the landowner, to a restaurant
chain seeking to grow its own produce. The land lies parallel to a river where
industrial waste is frequently dumped. In marketing the land to the potential client
Horace states, ‘This s a purchase you will not regret. You should more than likely
expect to enjoy a healthy crop in your first year of farming.’ Horace does not
disclose the fact that the original landowner is an acquaintance of his.
Horace is most likely in violation of the standard relating to:
A. fair dealing.
B. misconduct.
C. loyalty, prudence and care.
13. Martina Gibbons is a CFA Level II Candidate, who is yet to register for the Level
III exam. During an interview, Gibbons makes the following two statements:
Statement 1: “I have successfully completed the first two levels of the CFA
exam program.”
Statement 2: “The CFA program overstresses areas such as financial

analysis which I believe are unnecessary at the Level I stage.”
Which of the following statements most likely represents a violation of the

standards relating to Responsibilities as a CFA Institute Member or CFA
Candidate?
C. Both of the statements.
14. A firm is eligible for claiming compliance to the GIPS standards if:
A. the firm, as a whole, fully meets all the requirements.

B. it undertakes a verification of an investment management firm.
C. it provides ancillary support to an investment management firm.

15. Verification least likely serves to:
A. provide marketing advantages to a firm.

B. ensure the accuracy of a performance presentation.
C. test whether disclosure policies are designed to present performance in
16. Which of the following is least likely a criterion for including a portfolio in a
composite?
A. Ex-post criteria
B. Portfolio existence
C. Portfolio manager discretion
17. To be able to rely on the integrity of input data, the GIPS standards require firms
to:
A. follow certain calculation methodologies.

B. present a minimum of five years of GIPS compliant investment
performance.
C. include all actual, fee-paying portfolios in at least one composite defined
by investment strategy.
18. Which of the following statements is most likely correct regarding compliance
with the GIPS standards?
A. Obtaining verification is not mandatory.

B. The GIPS standards are comprehensive addressing unique characteristics
of each asset class.
C. Compliance with the Code of Ethics and Standards of Professional
Conduct is mandatory.

19. As the degrees of freedom increases, the t-distribution’s:
A. peak becomes flat.

B. tails become more fat.
C. peak becomes narrow.
20. The mean return of the Blue Enterprises’ stock is 15.5% while standard deviation
is 10.3%. Laura Stone has compiled probability distribution data in an exhibit for
the purposes of analysis. She aims to determine the probability that the stock
return will neither exceed 20.0% nor decline below the mean return.
Exhibit
Standard Normal Probability Distribution Data
x or z 0 0.03 0.04 0.05
0.30 0.6179 0.6293 0.6331 0.6368
0.40 0.6554 0.6664 0.6700 0.6736
0.50 0.6915 0.7019 0.7054 0.7088
The probability that the stock return will be between the mean return and 20.0% is
closest to:
A. 2%.
B. 17%.
C. 67%.
21. GR Solutions offers investment plans to its clients. Howard Isaac is one of the
firm’s clients currently invested in GR’s ‘Superior Return Plan’. Isaac will require
funds to construct a house two years from today. The plan promises to pay
$380,000 in six years from today. Given a 10% discount rate, the amount of funds
Isaac should be able to accumulate for the home construction is closest to:
A. $214,500.
B. $259,545.
C. $314,050.

22. The interest rate quoted on an investment can be viewed as:
A. opportunity costs of future consumption.

B. the return forgone from current consumption.
C. a sum of the nominal risk-free rate and premiums to compensate for
distinct types of risks.
23. A distribution that is positively skewed is characterized by:
A. a narrow peak.
B. infrequent extreme gains.
C. a symmetrical shaped distribution curve.
24. An analyst is calculating the time series mean return for a portfolio allocated 30%
to U.S. equities and 70% to U.S. bonds. He has collected annual return data for
the years 2000 to 2004.
Exhibit:
Stock and Bond Return Data 2000-2005
Stocks (%) Bonds (%)
2000 7.4 10.1
2001 - 5.6 3.4
2002 3.7 - 1.1
2003 9.3 7.9
2004 14.7 12.8
The time series mean return for the portfolio is closest to:
A. 6.4%.
B. 9.3%.
C. 10.4%.

25. Sasha Bayle is analyzing the performance of small-cap stocks in an equity index.
She is forecasting how stocks will perform relative to the previous quarter in
terms of the EPS generated. She performs her analysis using hypothesis testing
and rejects the null hypothesis in favor of the forecast that sample stocks will
generate a higher EPS. Several months later, Bayle discovers that the null
hypothesis was in fact correct and her decision was inaccurate.
Has Bayle committed an error in her statistical analysis?
A. No.
B. Yes, a Type I error.
C. Yes, a Type II error.
26. Construct Inc. will be undertaking a $30.0 million four-year railroad expansion
project in the current year. In order for the project to be successful, the project
must generate a profit of at least 10% of the initial cost. If the project fails to do
so, the company’s budget committee will reduce allocations to managers for
future projects (budget squeeze). The railroad expansion project estimates that the
project’s net present value may run from $30.5 million on the low end and $35.0
million on the high end, with the probability of either of the two outcomes being
50% and based on a continuous uniform distribution.
Given the above data, the probability of a budget squeeze is closest to:
A. 50.0%.
B. 55.6%.
C. 83.3%.
27. A strategy that provides a statistically significant positive mean return often:
A. is economically meaningful.
B. factors risk in the decision making process.
C. does not account for transaction costs and taxes.

28. An economic analyst has forecasted that inflation is projected to rise in the twenty
developing countries being sampled. The average inflation observed in these
countries in the previous year was 0.0258 while the variance of the average
inflation of the sample countries is 0.013. The analyst will use a reliability factor
of 2.845 for the analysis.
Based on a normal distribution and an unknown population variance, the 90%

confidence interval for the population mean of forecasted inflation is closest to:
A. 0.02609 ± 0.02551.
B. 0.03407 ± 0.01753.
C. 0.03060 ± 0.02100.
29. A multivariate distribution species probabilities for:
A. two or more related variables.

B. uniformly distributed variables.
C. variables with the same mean and different standard deviations.
30 The amount of the annual dividend paid by ART Enterprises to its shareholders
depends on the profits available for distribution. There is 30% probability that the
company will generate profits less than $50,000 and pay a dividend per share of
$3 with probability of 15%. There is 70% probability that profits will exceed
$50,000 and the company will pay a dividend per share of $6 with probability of
45%.
The expected dividend payment given ART Enterprises generates profits of less
than $50,000 is closest to:
A. $0.135.
B. $0.450.
C. $3.000.
31. Increasing the sample size:
A. widens the confidence interval.

B. decreases the sample standard error.
C. lowers the precision with which the population parameter is estimated.

32. Lance Thackery is an equity analyst at Eve Scott Associates. Thackery is

following the stock of a pharmaceutical. She is attempting to analyze whether the
upcoming launch of a Type-I diabetic drug will be successful and increase the
market price of the pharmaceutical’s share. The probability that the stock price
will increase given a successful drug launch, P (A/S), is 0.35. Thackery has
summarized important forecast probabilities in the exhibit below:
Exhibit:
Forecast Probabilities
Probability
Probability stock price increases 0.40
Probability stock price is unchanged 0.60
Probability drug launch is successful 0.45
Probability drug launch is unsuccessful 0.55
The probability that the stock price increases given that the drug launch is
unsuccessful is closest to:
A. 0.44.
B. 0.52.
C. 0.65.

Questions 33 to 44 relate to Economics
33. The difference between partial and general equilibrium analysis is that at least one
of the analysis:
A. ignores exogenous variables.

B. ignores endogenous variables.
C. does not take feedback effects from all markets into consideration.
Correct Answer: C
Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, LOS e
Both partial and general equilibrium analysis take endogenous and exogenous
variables into consideration. However, the difference between the two is that the
former concentrates on one market and does not address the feedback effects from
all other markets.
34. In a developing country, the real GDP growth rates for 2010 and 2012 were 2%
and 4% respectively. Over the same period, nominal GDP growth rates were 3%
and 5% respectively.
In the time period under analysis, the growth in the economy in real terms was
closest to:
A. 29.1%.
B. 41.4%.
C. 100.0%.
35. Based on an analysis of a country’s statistics, an economic analyst observes that

economic expansion caused by an increase in aggregate demand has resulted in an
inflationary gap. Based on the economic situation the most appropriate investment
strategy would be to increase investments in:
A. cyclical companies.
B. defensive companies.
C. fixed-income securities.

36. Ni-tech is an electric component manufacturer. The exhibit below illustrates sales
revenue, number of components sold, and GDP data for the years 2012 and 2013.
2013 2012
GDP ($ millions) 45.85 38.63
Quantity sold 85,600 85,000
Average sales revenue ($ millions) 2.14 1.53
Based on the data provided, the GDP deflator is closest to:
A. 118.69.
B. 138.89.
C. 139.87.
37. In a perfectly competitive market, the slope of an individual firm’s demand curve
is most likely:
A. flat.
B. kinked.
C. positive.
38. Martha Yates is an economic analyst studying the trading activities between Sri
Lanka and the United States with the former exporting tea to the latter and
importing cars. The output per worker per day is summarized in the exhibit
below:
Exhibit
Output per Worker per Day
Cars Tea (grams)
United States 2 100
Sri Lanka 1 350
Sri Lanka most likely has a (n):
A. absolute advantage in the production of cars.

B. comparative advantage in the production of tea.
C. comparative advantage in the production of cars.

39. The following transactions were recorded in a country’s balance of payments

account for the year 2013:
• The total profit generated from outsourcing garment manufacturing to

overseas factories amounted to $1.4 billion.
• The country’s engineering universities received a total grant of $40
million from overseas donors.
• The total amount of equity securities issued amounted to $1.2 billion.
• Dividend income generated by citizens amounted to $0.3 billion.
• Foreign fixed income holdings transferred to the country’s domestic
financial institutions by migrants totaled $15 million.
• The tourism and travel industry generated revenues of $0.2 billion.
The country’s capital account balance amounts to (in $ billions):
A. 0.015.
B. 1.215.
C. 1.555.

40. Sasha Gibbons is an economic analyst who is evaluating the impact of changes in
four factors on Nepal’s economic growth. Gibbons has collected her observations
in the exhibit below:
Exhibit:
Observations Concerning Factors
Factor Observation
1 The global price of oil has increased due to
higher demand from industrialized economies.
2 The relative value of the Nepalese rupee
relative to the dollar (USD/NPR) has
increased in the current year due to a surge in
foreign investments.
3 The Nepalese authorities have implemented a
regulation mandating enterprises to undertake
production worker training.
Considering each of the factors in isolation, which of the following statements

accurately addresses the impact of the observation on the short-run and long-run
aggregate supply curves?
A. Factor 3 will shift the LRAS and SRAS curves rightward.

B. Factor 2 will not impact the SRAS curve but will shift the LRAS curve
rightward.
C. Factor 1 will shift the SRAS curve leftward but have no impact on the
SRAS curve.

41. Mark Sinatra is a U.S. equity investor with a global investment portfolio.
Sinatra’s portfolio currently comprises of North and European equities. He would
like to expand his portfolio and allocate $0.5 million to Japanese equities.
Information concerning current and expected one-month spot rates is summarized
in an exhibit.
Exhibit
Current and Expected One-Month Spot Rates
Spot Rate Expected Spot Rate
in One-Month
USD/EUR 1.3805 1.3759
JPY/EUR 0.0071 0.0089
The expected change in the USD/JPY rate in one month’s time is closest to:
A. – 20.49%.
B. – 0.33%.
C. + 25.35%.
42. If the amount of money that can be created from an additional deposit of $200 in
a deposit account is $2,500, the money multiplier is closest to:
A. 8.0.
B. 11.5.
C. 12.5.
43. Industrial equipment will be typically sold in a (n):
A. factor market.
B. goods market.
C. capital market.
44. A market has reached its equilibrium quantity if the:
A. lowest price buyers are willing to accept is equal to the highest price
sellers are willing to offer.
B. lowest price sellers are willing to offer and the highest price buyers are
willing to accept are equal.
C. highest price buyers are willing to accept is higher than the lowest price

45. Rigid Corp purchased machinery for €45,000 at the beginning of the fiscal year
ending June 30, 2011. At the end of the year, the fair value of the machinery was
€48,000. Rigid Corp has elected to use the revaluation model.
Rigid will record a gain of €3,000 in its income statement if it complies with:
A. IFRS.
B. U.S. GAAP.
C. neither IFRS nor U.S. GAAP.
46. A book publisher shipped 40,000 books to its customers during the month of
January. The average price of each book sold was $45 while total cost per book
was $30. Invoice payments are due in 45 days and no cash changes hands at the
point of sale.
Which of the following statements accurately reflects the accounting

consequences of the sales transaction?
A. Net assets will increase by $600,000.

B. Liabilities will increase by $1,800,000.
C. Gross profit will decrease by $1,200,000.
47. The role of financial reporting is most likely to:
A. provide requisite information to assist analysts in their decision making.

B. evaluate the past, current and potential performance and financial position
of a company.
C. provide information on a company’s financial position, changes in
financial position and performance.
48. Sources of information which analysts may use besides annual financial
statements and supplementary information most likely include:
A. footnotes.
B. proxy statements.
C. statement of other comprehensive income.

49. The market value of one of Thomas Associate’s investments increased by $4,500
and generated interest income of $300. The security is classified as held for
trading.
The change in the company’s revenues attributable to the investment is closest to:
A. $300.
B. $4,500.
C. $4,800.
50. A parcel of land with an original cost of $0.9 million was sold for $1.2 million.
The seller received $0.4 million as down payment with the remainder to be
recovered over a period of eight years. The seller is uncertain about the buyer’s
ability to make the remaining payments.
Using the installment method, the profit recognized by the seller that is
attributable to the down payment is closest to:
A. $0.00 million.
B. $0.10 million.
C. $0.40 million.
51. The cash generated by a bank as a result of taking deposits will most likely be
classified as a (n):
A. investing cash flow.

B. financing cash flow.
C. operating cash flow.

52. On February 15, 2013 Elite Corp purchased 50,000 inventory units at a price of
$20 per unit. Elite subsequently purchased 30,000 units in September at a unit
price of $22 and 40,000 units in November at $25. The number of units sold in
that year was equal to 75,000. Elite uses the LIFO method of inventory
accounting.
Elite’s closing inventory balance on December 31, 2013 is closest to:
A. $900,000.
B. $1,000,000.
C. $1,110,000.
53. A security is antidilutive if it:
A. equates the basic EPS to the diluted EPS.

B. decreases the basic EPS relative to the diluted EPS.
C. Improves the wealth of a company’s shareholders.
54. Oscar Richards is a market analyst serving an economic research firm. He is

attempting to measure the value a small-cap equity stock and has decided to
employ the stock’s purchase price. He believes the fair value measure is
inappropriate due to its lack of objectivity and need for judgment.
Which of the following financial reporting barriers is most likely highlighted by

Richards’ decision to employ historical cost?
A. Valuation
B. Consistency
C. Measurement
55. Ilkot Inc. is a manufacturer of skiing equipment that has purchased an automated
paint coating unit for $600,000. The unit has an estimated useful life of eight
years and a residual value of $10,000.
Using the double declining balance method, the unit’s net book value in the
second year of its useful life is closest to:
A. $184,375.
B. $187,500.
C. $337,500.

56. In 2008 THC Manufacturers started business by purchasing 35,000 units at a unit
price of $55 and sold 23,000 units at a unit price of $60. In 2009 the company
purchased 5,500 units at a price of $58 and sold 13,500 at a price of $75. THS
Manufacturers complies with U.S. GAAP and applies the FIFO method of
inventory accounting.
In 2009 THS will report an ending inventory balance of:
A. $87,000.
B. $220,000.
C. $232,000.
57. In 2009 a portion of LRV Corp.’s inventory had a carrying value of $0.7 million.
The inventory was originally purchased at a total cost of $1.1 million. The cost to
replace these units has been estimated at $0.8 million. The net realizable value is
$0.9 million and should the company decide to sell the inventory it should earn an
estimated dollar profit margin of $4,250. LRV prepares and presents its financial
statements in accordance with U.S. GAAP.
In its 2011 balance sheet, LRV’s inventory will be reported at a value closest to:
A. $700,000.
B. $895,750.
C. $900,000.
58. Intangible assets with perpetual lives are most likely:
A. depreciated.
B. amortized but not tested for impairment.
C. tested annually for impairment but not amortized.

59. In 2009, Aero Inc began commercial production by purchasing 100,000 units of
inventory at a unit price of $55. In the same year Aero sold 80,000 units at a price
of $70. The following year the company purchased 65,000 units at a unit price of
$60 and sold 60,000 units at a unit price of $75. Aero applies the weighted
average method of inventory accounting.
The cost of sales reported in 2010 is closest to:

A. $2.6 million.
B. $3.5 million.
C. $4.2 million.
60. If inventory unit costs are rising and inventory quantities are constant, which
inventory accounting method will result in the highest reported taxable income?
A. LIFO
B. FIFO

61. On March 1, 2010 Tecnox, a chip processor, purchased a manufacturing unit to be

used in its production process. Depreciation charges are applied in full in the year
of purchase. Details relevant to the unit purchased are summarized in the exhibit
below:
Exhibit
Manufacturing Unit Details
Original cost $680,000
Residual value $200,000
Estimated useful life 5 years
Total estimated productive capacity 1,000 chips
2010: 280
2011: 450
Production in each year (number of chips) 2012: 120
2013: 100
2014: 50
Applicable depreciation method Units-of-production
The accumulated depreciation expense in 2011 is closest to:
A. $65.6 million.
B. $70.1 million.
C. $99.3 million.
62. Which of the following associated costs will least likely be capitalized as part of
an automated paint mixing unit?
A. Training staff on how to maintain the unit.

B. Installation and testing of the machine’s operations.
C. Replacing the factory’s lighting system to allow for the unit to operate.

63. On March 1, 2013 a customer subscribed to a monthly newsletter paying an

annual fee of $1,440 on that day. The news agency’s financial year ends on
December 31, 2013.
The adjustment required to the company’s liabilities with respect to the specific
transaction at year-end is closest to:
A. $0.
B. $240.
C. $1,200.
64. A book publishing firm gained the right to use a patent as a result of acquiring a
competitor.
How will the patent be accounted for by the firm? The patent will be:
A. accounted for using the cost model.

B. recognized if it meets certain pre-specified criteria.
C. allocated a share of the acquisition price on the basis of the asset’s fair
value.
65. Utah Corp is a designer of home lighting systems and accessories. In 2012, Utah
expanded its production by converting a vacant property into a factory; the
property was being held by the company as investment property. Prior to the
conversion, the property’s fair value was €150,000. The original purchase price of
the property was €120,000. Utah prepares and presents its financial statements in
accordance with IFRS.
In response to the change in classification, Utah will:
A. make no accounting adjustments.

B. record a gain of €30,000 in its income statement.
C. revalue the value of the property upwards by $30,000 in its balance sheet.

66. Sash Imperial has undertaken a contract to build a railroad line. The project will
take three years to complete and Sash is expected to receive $40.00 million on
completion. Total project costs are estimated at $31 million. At the end of the first
year Sash has spent $12.00 million and expects to incur a total loss of $0.50
million over the remaining project term. Sash complies with U.S. GAAP.
The amount recognized by Sash in its income statement at the end of Year 1, in
relation to the project, is closest to:
A. $2.98 million.
B. $3.48 million.
C. $15.48 million.
67. Which of the following properties will most likely fit the definition of investment
property according to IFRS?
A. An office building used solely for administrative purposes.

B. Company housing units provided to employees free of cost.
C. A vacant factory plant that is leased to a manufacturing firm.
68. U.S GAAP requires software development costs to be:
A. expensed as incurred.
B. expensed if they relate to software to be developed for internal use.
C. capitalized once the saleable product’s technological feasibility has been
established.

Questions 69 to 76 relate to Corporate Finance
69. Rector Incorporated is a manufacturing firm with a capital structure comprising of

equity and debt. The current market value of equity is $2.0 million and the beta of
the stock is 1.2. The company has $4 million face value of bonds outstanding,
which pay semi-annual coupons at an annual rate of 8%. The yield-to-maturity is
9% and the remaining term to maturity is 5 years.
The corporate pays tax at a rate of 25%. The equity risk premium and risk-free
rate is 4% and 2%, respectively.
Rector Incorporated’s weighted average cost of capital (WACC) is closest to:
A. 4.55%.
B. 6.77%.
C. 7.59%.
70. Which of the following statements most accurately compares the NPV and
payback period methods?
A. The payback period and NPV will always yield identical project rankings.
B. Compared to the payback period, NPV is a better measure of project
liquidity.
C. The payback period may lead to the acceptance of a project with a
negative NPV.
71. Snat Limited is an ink manufacturing firm. The executives of the firm have
recently undertaken a project with a profitability index (PI) of 1.50. The company
made an investment worth $300,000 at the start of the project.
The slope of the NPV profile of the project is best described as:
A. convex.
B. concave.
C. horizontal.

72. Michael Poole is an equity analyst at Dave Associates, a financial services firm.
Poole is estimating the firm’s cost of equity using the dividend discount model
approach. He has learnt that the Gordon’s growth model is particularly useful in
deriving the required rate of return when this approach is used. The company has
paid a dividend of $2.5 per share in the previous year.
The current market price per share is $25. The company’s retention rate and
return on equity is 40% and 10%, respectively.
The cost of equity using the dividend discount model is closest to:
A. 14.00%.
B. 14.40%.
C. 16.40%.
73. Dwight Engle is a financial analyst evaluating the risks associated with two
detergent manufacturers, Home Care and CleanWay. Home Care has a higher per-
unit variable operating cost while CleanWay’s fixed operating costs are 1.5 times
greater. Out of the two corporations being analyzed, Home Care has a greater
total number of shares outstanding and finances a greater proportion of its projects
using equity. CleanWay, on the other hand, rarely uses equity as a financing
source.
Based on his findings, Engle will most likely conclude that:
A. CleanWay has more operating risk.

B. Home Care’s net income is more sensitive to changes in operating income.
C. Home Care’s cash flows have greater sensitivity to changes in operating
income.

74. Aero and Beta are commercial aircraft manufacturers. Kayla Mason is an industry
analyst evaluating the financial and operating leverage structures of the two
competitors. She has collected sales and cost data concerning the manufacturers in
an exhibit. She expects unit sales to increase by 5% from their 2012 level.
Exhibit
Sales and Cost Data Concerning Aero and Beta
Aero Beta
Sales price per unit ($) 50 40
Variable costs per unit ($) 35 30
Total fixed costs ($) 350,000 250,000
Units produced and sold (2012) 50,000 50,000
Based on the expectations for 2013, Mason will most likely conclude that the
change in operating income will most likely be:
A. greater for Aero.

B. greater for Beta.
C. the same for both companies.
75. A shareholder owns 20% of a company with a market value of $30 million. The
total shares outstanding of the corporation are 5,000,000 with a market price per
share of $30. The current earnings per share is $2.50. This year the company
issued a 5% stock dividend to the shareholder.
How will the stock dividend impact earnings per share (EPS)?
A. EPS will not be affected.

B. EPS will decline by 4.80%.
C. EPS will increase by 5.00%.

76. ABC Inc. has announced the buyback of a portion of its 5,000,000 shares
outstanding. The current market price, $30, is 10% greater than its book value per
share. The company intends to employ $3 million worth of borrowed funds for the
repurchase. The after-tax cost of borrowing is 6% and the company’s reported
earnings per share is $5.00.
The percentage change in the company’s book value per share following buyback
is closest to:
A. – 0.23%.
B. + 0.19%.
C. + 11.11%

77. Pedro Lee serves a broker-dealer firm and has negotiated with Grace Arnold, the
CEO of Chemco Solutions, to sell her significantly large holding of the
company’s stock. Lee apprehends that the order may be challenging to execute
due to the size of the trade.
The execution mechanism that Lee should utilize is most likely:
A. brokered markets.
B. crossing networks.
C. over-the-counter markets.
78. A market’s limit order book quotes the best bid and offer at 35 and 38,
respectively. A limit buy order with a price of 36 is placed by a trader. The order
will most likely:
A. make market.
B. make a new market.
C. fall behind the market.
79. Jill Malcolm is studying a fundamental-weighted equity index which comprises of

two stocks, A and B. Stock A has a market capitalization of $450 million and
earnings of $100 million. Stock B has a market capitalization of $300 million and
earnings of $100 million.
Relative to a market-weighted index, a fundamental-weighted index will:
A. overweight A relative to B.
B. overweight B relative to A.
C. make an equal allocation to the two stocks.

80. A fixed income analyst is studying the corporate bond sector in his country’s
fixed income market. After thorough analysis he concludes the value of a AAA-
rated corporate bond placed by investors based on their complete understanding
of the bond’s interest rate, principal value and timing of its interest and principal
payments is 90. The bond is currently selling at a price of 120.
Based on the results collected, the analysis can most likely conclude that:
A. market prices accurately reflect intrinsic values.

B. opportunities for profitable active investments exist.
C. investors will take long positions in AAA-rated corporate bonds.
81. Samson Electrics, a Dutch component manufacturer, has issued 3.2% non-
callable, non-convertible, perpetual preferred shares with a par value of €1,000.
The credit rating provided by Standard & Poor’s is AA- and the required return on
identically rated preferred shares is 5.8%.
The intrinsic value of the preferred share is closest to:
A. €551.72.
B. €1,000.00.
C. €1,812.50.

82. Smith Richards is an equity analyst following the stock of Horizon Limited, a
company in the telecommunications sector. The company’s balance sheet for the
year 2013 is presented below. Richards aims to ascertain whether Horizon’s stock
is fairly valued. The company has 5,000 shares outstanding, which are trading in
the market at a price of $20.50.
Exhibit:
Summarized Balance Sheet for Horizon
Limited for the Financial Year 2013*
Cash $3,500
Accounts Receivable 25,000
Inventories 4,300
Net fixed assets 45,000
Total assets 77,800
Accounts Payable 10,100

Notes Payable 2,500
Common shareholder’s equity 65,200
Total liabilities and equity 77,800
*With the exclusion of net fixed assets, the market value of all assets and
liabilities are equal to their book values. The market value of net fixed assets is
1.5 times its book value.
Based on Horizon Limited’s book value per share, Richards will most likely
conclude that its stock is:
A. overvalued.
B. fairly valued.
C. undervalued.
83. Identifying the target market during the index construction process involves
determining the:
A. investment universe.
B. broadest definition of a market segment.
C. allocation to specific securities included in the index.

84. The exhibit below illustrates the details concerning a price-weighted equity index.
Beginning of Weight Shares Dividends End of

Security period price (%) outstanding per share period price
A 15.5 20 1,000 0.25 13.0
B 25.0 20 1,000 1.00 22.0
C 128.5 20 1,000 0.75 145.0
D 200.0 40 2,000 0.25 230.5
Total 5,000
The price return of the index is closest to:
A. 3.04%.
B. 4.33%.
C. 12.65%.
85. The total return of a price-weighted index has changed relative to an equal-
weighted index, identical in all other respects. Which of the following least
accurately justifies the reason for the difference in values?
A. Outperformance of large-cap stocks.

B. Outperformance of small-cap stocks.
C. A constituent stock has undergone a stock split.
86. Brian Ross is a wealthy entrepreneur managing his own investment portfolio. He
is seeking to expand his investment portfolio, which comprises solely of equities.
Ross is seeking a tax-efficient investment, which has a moderate to high degree of
liquidity and can bring diversification benefits to his portfolio. He is exploring
direct real estate as a potential investment vehicle.
Which of the following factors will discourage Ross from investing in direct real
estate?
A. Illiquidity
B. Tax consequences
C. Low diversification potential

87 The exhibit illustrates a market’s standing limit order book at market close.
Exhibit
Market’s Standing Limit Order Book
Bid Sizes Limit Prices Ask Sizes
70 15
69 13
68 11
67 10
4 65
5 64
6 63
8 62
What is the market?
A. 65 bid and 67 ask

B. 65 bid and 70 ask
C. 62 bid and 67 ask
88. The exhibit below illustrates the limit orders outstanding on a market’s book
following the arrival of a large order.
Exhibit:
Market Limit Order Book
Buyer Bid Limit Offer Seller
Size Price (€) Size
Jones 9 49.9
Victor 8 50.0
Stevens 6 50.1 7 Allen
50.2 8 Cunningham
50.3 12 Whittaker
Kim Toyama submits a day order to buy 18 contracts, limit €50.2. Toyama’s
average trade price is closest to:
A. €49.96.
B. €50.15.
C. €50.18.

89. In contrast to interest rate options, forward rate agreements (FRAs):
A. impose obligations on the counterparties.

B. are contracts with interest rate as the underlying.
C. are usually offered for purchase and sale by different dealers.
90. Leslie Hower is a junior trader at a derivatives dealer firm. During her first week
following appointment, Hower attempts to synthetically sell a risk-free bond
using call and put options. She purchases call and put options with the same
exercise price and time to maturity. She simultaneously sells the underlying short.
With respect to her attempts in creating a synthetic short position in a risk-free

bond, however is most accurate regarding her decision to:
A. purchase call options.

B. purchase put options.
C. sell the underlying short.
91. A dealer has established a protective put position by buying a stock worth $85. A
put option on the stock with an exercise price of $94 is selling for $11. For the
dealer to breakeven, the stock price has to move:
A. up at $96.
B. up at $105.
C. down at $83.
92. An investor has invested in a bond selling for $22.50 He has sold a call option for
$7.66 that has an exercise price of $31.55 The investor expects the bond price to
be $45.00 at expiration. The maximum profit of the position is closest to:
A. $14.84.
B. $21.11.
C. $30.16.

93. The value of European call option is inversely related to the:
A. exercise price
B. time to expiration.
C. value of the underlying.
94. A synthetic long position in a risk less bond is created by combining:
A. a long position in a put + long position in the underlying + short position

in the call.
B. a long position in a call + long position in the underlying + short position
in the put.
C. a short position in a put + short position in the underlying + long position
in the call.

95. The current market price of a three-year floating rate note (FRN) paying the six-
month LIBOR plus 0.25% on a semi-annual basis is 98.70 per 100 of par value.
The current six-month LIBOR is 1.05% and is expected to remain constant. Given
that the interest payment each period is 0.650 per 100 of par value, the discount
margin is closest to:
A. 2.57%.
B. 4.78%.
C. 7.64%.
96. Which of the following type of fixed income security has the lowest degree of
interest rate risk?
A. Fixed-rate bond
B. Floating-rate bond
C. Inflation-indexed bond
97. A 180-day money market instrument is quoted at an add-on rate of 4.76% for a
360-day year. The bond equivalent yield of the instrument is closest to:
A. 4.76%.
B. 4.83%.
C. 4.94%.
98. An investor purchases a five-year, 6% annual-coupon payment bond at 89.4535

and sells it in four years. Following the purchase of the bond and prior to the
receipt of the first coupon, interest rates go down to 8.5%.
The realized yield on the bond investment is closest to:
A. 3.77%.
B. 5.79%.
C. 8.71%.

99. An 8.0% semi-annual coupon payment bond has an eight year maturity and is
priced to yield 9.5%. The money duration and modified duration of the issue is
7.3524 and 5.3515, respectively. The full price of the issue is 106.35.
Ignoring the effects of convexity, the revised full price of the issue if yields
increase by 125 basis points is closest to:
A. $96.58.
B. $99.24.
C. $116.12.
100. Which of the following issues has the highest seniority ranking in the event of
default?
A. Subordinated
B. Senior unsecured
C. Senior subordinated
101. ABC Inc. has invested in a 5-year convertible bond issue trading at a price of
$1,050. The issue is convertible into the issuer’s common shares at an exercise
price of $40. The exhibit demonstrates the price of the issuer’s stock over a five
day term.
Exhibit
Issuer Stock’s Price per Share
Day Price ($)
1 36
2 32
3 42
4 40
5 34
Conversion parity will occur on Day:
A. 1.
B. 3.
C. 4.

102. Which of the following characteristics are unique to partially amortized bonds?
A. Balloon payment at maturity.

B. Entire payment of principal occurs at maturity.
C. Periodic payments of interest and principal repayments based on a
schedule.
103 Which of the following coupon payment structures will allow investors to benefit
from an increase in interest rates?
A. Plain vanilla bonds

B. Floating rate notes (FRNs)
C. Inverse FRNs
104. A company has issued a 15-year bond with a notional principal of $350 million.
The sinking fund provision calls for 8% of the outstanding principal amount to be
retired in years 8-14 with the outstanding balance paid off at maturity in 15 years.
The outstanding principal balance at the end of Year 9 is closest to:
A. $294.00.
B. $296.24.
C. $322.00.
105. Which of the following issues is most likely classified as a domestic bond?
A. A French company issues Euro-denominated bonds in Germany.

B. A U.S. company issues U.S. dollar denominated bonds in Canada.
C. A Swedish company incorporated in Japan issues Yen denominated bonds
in Japan.
106. A four-year 6% semiannual coupon payment corporate bond is priced at 110 per
100 of par value. Its yield to maturity is 7.87%, quoted on a semiannual basis. The
annual rate of the bond that can be used for direct comparison with otherwise
comparable bonds that make quarterly coupon payments is closest to:
A. 7.79%.
B. 8.02%.
C. 15.74%.

Questions 107 to 112 relate to Alternative Investments
107. At the beginning of the year 2012, Gus Knight invested $100,000 in a hedge fund
with a “1 and 10” fee structure. The value of the fund at the end of the year rises
to $135,000 and by 5% at the end of 2013. Management and incentive fees are
paid at the end of the year and are calculated independently. In the year a fund’s
net value declines, incentive fees are not be paid.
The hedge fund’s high water mark at the end of 2013 is closest to:
A. $135,000.0.
B. $135,150.0.
C. $136.657.5.
108. A drawback of investing in funds of hedge funds most likely includes:
A. diluted returns.
B. longer lockup periods.
C. difficulty in conducting due diligence.
109. A key risk cited for investing in alternative investments includes:
A. limited redemption availability.

B. concentrated portfolio positions.
C. reduced diversification potential.
110. Which of the following real estate indices will most likely result in a sample
selection bias?
A. REIT index
B. Appraisal index.
C. Repeat sales index.

111. An analyst is calculating the one year price of a commodity futures contract with
the following characteristics:
Spot price $80.96

Convenience yield $5.50
Storage costs $7.80
Risk free rate (Rf ) = 5%
The price of a one year commodity future contract is closest to:
A. $82.71.
B. $83.26.
C. $87.31.
112. Which of the following is most likely the motivation for a passive investor buying
commodities for his portfolio?
A. Speculation
B. Risk taking opportunity.
C. Risk diversification benefits.

113. Which of the following is the major drawback of the top down investment
approach?
A. This approach involves high active risk.

B. This approach involves high trading cost
C. Major portion of the portfolio is invested passively.
114. Which section of the investment policy statement provides description regarding
the custodian of the client’s assets?
A. Introduction
B. Investment guidelines
C. Statement of duties and responsibilities
115. Risk can be mitigated internally through:
A. risk transfer.
B. self-insurance.
C. risk modification.

116. Recourse Associates is an investment management firm located in the U.S. Bailey
Gibbons is a portfolio manager serving the firm. Gibbons is managing the Global
Developing Market Equity Fund (GDMEF) at Recourse. The assets under
management and the net returns generated by the fund over the previous three
years are summarized in an exhibit. The applicable tax rate is 30% and inflation is
expected to remain stable at a rate of 1.5%. Net returns are prior to considering
the effects of taxes and inflation.
Exhibit:
Information Concerning the GDMEF (Years 1-3)
Assets Under Management at the
Year Beginning of the Year ($) Net Return (%)
1 10 million 7
2 15 million 5
3 18 million 6
The real after-tax return of the fund in Year 2 is closest to:
A. 1.97%.
B. 2.41%.
C. 3.50%.
117. Mark Taylor is an equity investor who has recently purchased the stock of a
Kenyan enterprise. The risk-free rate of return in Kenya is 4.5% while the
expected return on the market index is 7.2%. The correlation of the stocks
purchased with the market index has recently increased from 0.6 to 0.8 and the
standard deviation of the stock and market index is 25.7% and 16.4%
respectively.
The expected return on the Kenyan stock is closest to:
A. 5.88%.
B. 7.88%.
C. 13.53%.

118. Maya Thomas is an independent equity investor who has undertaken an

investment in a Brazilian coffee manufacturer’s stock. The covariance of the
manufacturer’s stock with the market index and market variance is 0.01577 and
0.01360 respectively.
Thomas can most likely anticipate earning a return on her equity investment that
is:
A. less than the risk-free rate.

B. less than the market return.
C. greater than the market return.
119. With different borrowing and lending rates, the slope of the CML will become:
A. curved to the left of the market portfolio.

B. kinked to the right of the market portfolio.
C. less steep to the right and left of the market portfolio.
120. Writing an investment policy statement (IPS) is important because it:
A. is recommended by codes of corporate governance.

B. can be used as a basis to determine the suitability of an investment.
C. allows identification of any conflict between a client’s objectives and
constraints.

FinQuiz.com
June, 2016
Revision 1

CFA Level I Mock Exam 2 – Solutions (PM)
FinQuiz.com – 2nd Mock Exam 2016 (PM Session)

33-44 Economics 18
Total 180

Questions 1 to 18 relate to Ethical and Professional Standards

would be to:

Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 2, LOS c
Upon learning of the illegal client activity, Elliot’s initial course of action should
be to stop the behavior by bringing it to the attention of her supervisor or the
firm’s compliance department. Should this prove unsuccessful, her next course of
action would be to disassociate herself from undertaking trades on behalf of the
client’s account. In the absence of any regulations, members and candidates are
not required to report violations to the concerned governmental or regulatory
organizations.

activity.
activities.
examination.
Correct Answer: C
Reference:

Standard I (A), Knowledge of the Law, requires candidates to abide by the rules
and regulations related to the administration of the CFA examination. Although
members and candidates are required to understand the laws and regulations,
which govern their professional activities, they are not required to become experts
on or have detailed knowledge of all the laws that could potentially govern their
activities.
The standard recommends members and candidates to document a violation when

disassociating from an illegal or unethical activity; this is not a requirement.

Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS b
Based on the CFA Institute Code of Ethics members and candidates must practice
and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the investment profession. Additionally, members
and candidates must promote the integrity of and uphold the rules governing
capital markets. The requirement to place the importance of protecting market
integrity before employer interest is required by the Standards of Professional
Conduct as is the need to achieve and maintain independence and objectivity in
professional activities.



code of ethics.
Correct Answer: B
Reference:
To comply with the CFA Institute Standards of Professional Conduct relating to

duties to employers, members and candidates are encouraged to recommend that
their employers adopt and distribute a code of ethics to clients.
The standards do not preclude individuals from entering into an independent

business practice, which does conflict with the employer’s interest, while still
employed as long as prior notification is made.
In a supervisory capacity, when a member or candidate discovers an employee

has engaged in an illegal or unethical activity, (s) he should respond promptly by
conducting a thorough investigation. Simply obtaining assurances that the illegal
activity will not reoccur is not sufficient.

Correct Answer: A
Reference:

Adequate compliance procedures should meet regulatory requirements.
The standard concerning responsibility of supervisors permits individuals to

delegate their supervisory duties but such delegation does not relieve them of their
responsibility.
However, procedures cannot be designed to anticipate every potential violation,

which is why such a requirement is not imposed by the Code and Standards.

the show.

Correct Answer: B
Reference:
Standard I (B) Independence and Objectivity permits members and candidates to

accept gifts, benefits, compensation from clients as long as the employer is
informed either before or after accepting the gift.
Town’s best course of action would be to accept the offer as long as she informs
her employer. If notification prior to acceptance is not possible, members and
candidates must inform their clients about prior acceptance of gifts or benefits.



Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 1, Reading 1, LOS a
After reviewing the materials obtained during a professional conduct investigation

a designated officer will propose a disciplinary sanction, which can be accepted or
rejected by the member. If the sanction is rejected, the matter is referred to a
hearing panel whose task is to determine whether a violation has occurred and, if
so, what sanction should be imposed.


personnel.
contingent bonuses.
Correct Answer: B
Reference:
A desirable element of a firewall system is that the compensation arrangement

should minimize pressure on research analysts and reward independence and
objectivity. Compensation based on a flat fee rate will achieve this purpose.

While some firms go the extreme of prohibiting communication between research

and investment banking personnel, this measure may not classify as a desirable
element. A more effective solution is control the flow of information across the
wall by passing the information through a compliance department.
Providing investment-banking personnel with the authority to review, approve,

disapprove, or otherwise make changes to research reports will undermine the
independence and objectivity of an analyst and is not a desirable property.

their order value.
Correct Answer: A
Reference:
Procedures for allocating trades to clients include:
• processing and executing orders on a first-in, first out basis;

• allocating trades for new issues by allocating securities by client rather than
portfolio manager; and
• giving all accounts participating in a block trade the same execution price.

A. Yes.

Correct Answer: A
Reference:
Parker is in violation of Standard III (D) Performance Presentation because she

has falsely claimed compliance with the GIPS standards. By misrepresenting
performance information,
Parker is in violation of the CFA Institute Standards of Professional Conduct.


Correct Answer: B
Reference:
Lawson is in violation of the standard relating to diligence and reasonable basis.

This is because the discussion between the two production employees and any
information shared is not credible enough to base her investment decision on.
Given that these individuals lack seniority, it is less likely they have access to
confidential information. Therefore basing her financing and share disposal
decisions on information, which is not credible will result in a decision, which
lacks a reasonable and adequate basis.

Lawson is not in violation of the standard concerning material nonpublic

information. The specificity of the information, the extent of its difference from
public information, its nature, and its reliability are key factors in determining
whether a particular piece of information is material; the less reliable information
is, the less likely it is to be material. As discussed above, the fact that the
production employees are discussing a strategic issue whose likelihood of
occurrence is uncertain makes the information nonmaterial.
A. fair dealing.
B. misconduct.
Correct Answer: B
Reference:
Horace is in violation of the standard relating to misconduct. This is because she

has been dishonest regarding the condition of the land being sold. Horace is also
in violation of the standard relating to disclosure of conflicts by failing to disclose
her relationship with the land’s owner. Her independence and objectivity as a real
estate advisor may be impaired due to her relationship with the seller.
There is no evidence to indicate that the standard relating to fair dealing has been
violated.

13. Martina Gibbons is a CFA Level II Candidate, who is yet to register for the Level
III exam. During an interview, Gibbons makes the following two statements:
Statement 1: “I have successfully completed the first two levels of the CFA
exam program.”
Statement 2: “The CFA program overstresses areas such as financial

analysis which I believe are unnecessary at the Level I stage.”
Which of the following statements most likely represents a violation of the

standards relating to Responsibilities as a CFA Institute Member or CFA
Candidate?
Correct Answer: A
Reference:
Statement 1 represents a violation. Gibbons cannot state that she has a partial
designation as a result of passing the second level.
Statement 2 does not represent a violation of the Standards of Professional

Conduct. The relevant standard does not cover expressing opinions regarding the
CFA Program or CFA Institute.
Members and candidates are free to disagree and express their disagreement with
CFA Institute on its policies, procedures or any advocacy position taken by the
organization.
14. A firm is eligible for claiming compliance to the GIPS standards if:
A. the firm, as a whole, fully meets all the requirements.

B. it undertakes a verification of an investment management firm.
C. it provides ancillary support to an investment management firm.
Correct Answer: A

Reference:
A firm is eligible for claiming compliance to the GIPS standard only if the entire
firm, including its products and composites, meet all the requirements of the
standards. Firms cannot claim compliance if they do meet all the requirements or
all their products and composites are not in compliance.
15. Verification least likely serves to:
A. provide marketing advantages to a firm.

B. ensure the accuracy of a performance presentation.
C. test whether disclosure policies are designed to present performance in
Correct Answer: B
Reference:
Verification provides marketing advantages to the firm as the performance

presentation of verified firms is more credible.
In addition, verification tests whether a firm’s performance policies and

procedures are designed to calculate performance in compliance with the GIPS
standards; this includes the firm’s disclosure policies.
However, verification does not ensure the accuracy of a performance presentation.
16. Which of the following is least likely a criterion for including a portfolio in a
composite?
A. Ex-post criteria
B. Portfolio existence
C. Portfolio manager discretion
Correct Answer: A

Reference:
The determination of which portfolio should be included in a composite should be

done according to pre-established criteria, on an ax-ante basis.
Whether a portfolio should be included in a composite is determined by its

existence, whether it actually exists; hypothetical portfolios cannot be included in
a composite.
Another criterion that must be considered is the discretion of the composite’s

portfolio manager; this is because a composite can only include discretionary
portfolios in a composite. A manager with no or limited degree of discretion
cannot include his or her managed portfolio in a composite.
17. To be able to rely on the integrity of input data, the GIPS standards require firms
to:
A. follow certain calculation methodologies.

B. present a minimum of five years of GIPS compliant investment
performance.
C. include all actual, fee-paying portfolios in at least one composite defined
by investment strategy.
Correct Answer: A
Reference:
To be able to rely on the integrity of input data, the GIPS standards require firms
to adhere to certain calculation methodologies and to make specific disclosures
along with the firm’s performance.
Although including all actual fee-paying portfolios in a composite represents a

key feature of the GIPS standards, this requirement will not allow users to rely on
the integrity of input data.
The requirement to compile a minimum five-year annual investment performance
record does not classify as a key feature of the GIPS standards.

18. Which of the following statements is most likely correct regarding compliance
with the GIPS standards?
A. Obtaining verification is not mandatory.

B. The GIPS standards are comprehensive addressing unique characteristics
of each asset class.
C. Compliance with the Code of Ethics and Standards of Professional
Conduct is mandatory.
Correct Answer: A
Reference:
Although obtaining verification of its claim of compliance is strongly encouraged,

it is not mandatory.
The GIPS standards do not particularly require firms to adhere to the Code of
Ethics and/or the Standards of Professional Conduct.
The GIPS standards do not cover unique characteristics of each asset class.

19. As the degrees of freedom increases, the t-distribution’s:
A. peak becomes flat.

B. tails become more fat.
C. peak becomes narrow.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 10, LOS i
As the degrees of freedom increase, the peak of the t-distribution approaches

standard normal with its peak narrowing and tails becoming less fat.
20. The mean return of the Blue Enterprises’ stock is 15.5% while standard deviation
is 10.3%. Laura Stone has compiled probability distribution data in an exhibit for
the purposes of analysis. She aims to determine the probability that the stock
return will neither exceed 20.0% nor decline below the mean return.
Exhibit: Standard Normal Probability Distribution Data
x or z 0 0.03 0.04 0.05

0.30 0.6179 0.6293 0.6331 0.6368
0.40 0.6554 0.6664 0.6700 0.6736
0.50 0.6915 0.7019 0.7054 0.7088
The probability that the stock return will be between the mean return and 20.0% is
closest to:
A. 2%.
B. 17%.
C. 67%.
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 9, LOS m

P(15.5% ≤ Portfolio return ≤ 20.0%) = N(Z corresponding to 20.0%) – N(Z

corresponding to 15.5%).
For the first term, Z = (20.0 – 15.5)/10.3 = 0.4369 and N(0.44) = 0.67. Since
15.5% is the mean, for the normal distribution 50% of the probability lies on
either side of the mean. Therefore N(Z corresponding to 15.5%) is equal to 50%.
Thus P (15.5% ≤ Portfolio return ≤ 20.5%) = 0.67 – 0.50 = 0.17 or 17%.
21. GR Solutions offers investment plans to its clients. Howard Isaac is one of the
firm’s clients currently invested in GR’s ‘Superior Return Plan’. Isaac will require
funds to construct a house two years from today. The plan promises to pay
$380,000 in six years from today. Given a 10% discount rate, the amount of funds
Isaac should be able to accumulate for the home construction is closest to:
A. $214,500.
B. $259,545.
C. $314,050.
Correct Answer: B
Reference:
The amount of funds Isaac should be able to accumulate two years from today is
equal to the present value of the investment plan’s promised payment. The value
of the investment two years from today is calculated as follows:
FV = $380,000
r = 10%
N=4
PV = FVN (1 + r) - N
= $380,000/(1.10)4
= $259,545.11

22. The interest rate quoted on an investment can be viewed as:
A. opportunity costs of future consumption.

B. the return forgone from current consumption.
C. a sum of the nominal risk-free rate and premiums to compensate for
distinct types of risks.
Correct Answer: B
Reference:
The interest rate can be viewed as the opportunity cost of funds; that is, the return
forgone from current consumption.
Additionally interest rates are composed of a real risk-free interest rate plus a set
of four premiums that are required returns or compensation for bearing distinct
types of risk such as inflation, default-risk, liquidity risk or maturity risk.
23. A distribution that is positively skewed is characterized by:
A. a narrow peak.
B. infrequent extreme gains.
C. a symmetrical shaped distribution curve.
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 7, LOS j
A positively skewed distribution is characterized by frequent small losses and

infrequent extreme gains.
A distribution with a narrow peak is called leptokurtic. A distribution that is not

symmetrical is skewed.

24. An analyst is calculating the time series mean return for a portfolio allocated 30%
to U.S. equities and 70% to U.S. bonds. He has collected annual return data for
the years 2000 to 2004.
Exhibit:
Stock and Bond Return Data 2000-2005
Stocks (%) Bonds (%)
2000 7.4 10.1
2001 - 5.6 3.4
2002 3.7 - 1.1
2003 9.3 7.9
2004 14.7 12.8
The time series mean return for the portfolio is closest to:
A. 6.4%.
B. 9.3%.
C. 10.4%.
Correct Answer: A
Reference:
Portfolio return (2000) = (0.3)(7.4%) + (0.7)(10.1%) = 9.29%
Portfolio return (2001) = (0.3)(- 5.6%) + (0.7)(3.4%) = 0.70%
Portfolio return (2002) = (0.3)(3.7%) + (0.7)(- 1.1%) = 0.34%
Time series mean return = (9.29% + 0.70% + 0.34% + 8.32% + 13.37%)/5 =

6.40%

25. Sasha Bayle is analyzing the performance of small-cap stocks in an equity index.
She is forecasting how stocks will perform relative to the previous quarter in
terms of the EPS generated. She performs her analysis using hypothesis testing
and rejects the null hypothesis in favor of the forecast that sample stocks will
generate a higher EPS. Several months later, Bayle discovers that the null
hypothesis was in fact correct and her decision was inaccurate.
Has Bayle committed an error in her statistical analysis?
A. No.
B. Yes, a Type I error.
C. Yes, a Type II error.
Correct Answer: B
Reference:
Bayle has committed a Type I error by incorrectly rejecting the null hypothesis
(stocks will not generate an EPS exceeding the previous quarter) in favor of the
alternative hypothesis.
26. Construct Inc. will be undertaking a $30.0 million four-year railroad expansion
project in the current year. In order for the project to be successful, the project
must generate a profit of at least 10% of the initial cost. If the project fails to do
so, the company’s budget committee will reduce allocations to managers for
future projects (budget squeeze). The railroad expansion project estimates that the
project’s net present value may run from $30.5 million on the low end and $35.0
million on the high end, with the probability of either of the two outcomes being
50% and based on a continuous uniform distribution.
Given the above data, the probability of a budget squeeze is closest to:
A. 50.0%.
B. 55.6%.
C. 83.3%.
Correct Answer: B

Reference:
All $ figures are in millions.
Project profitability can take on a value of $0.5 ($30.5 – $30.0) on the low end
and $5 ($35.0 – $30.0) on the high end.
Range of possible values = $5.0 – $0.5 = $4.5
Fraction of possible values falling below $3 ($30 × 0.1) and resulting in budget
squeeze is the distance between 3 and 0.5 or 2.5; this value is 0.5556 (2.5/4.5) of
the total length of 4.5.
Therefore, the probability of a budget squeeze is 55.6%.
27. A strategy that provides a statistically significant positive mean return often:
A. is economically meaningful.
B. factors risk in the decision making process.
C. does not account for transaction costs and taxes.
Correct Answer: C
Reference:
A strategy providing a statistically significant positive mean return is not

necessarily economically meaningful after transaction costs, taxes and risk are
considered.

28. An economic analyst has forecasted that inflation is projected to rise in the twenty
developing countries being sampled. The average inflation observed in these
countries in the previous year was 0.0258 while the variance of the average
inflation of the sample countries is 0.013. The analyst will use a reliability factor
of 2.845 for the analysis.
Based on a normal distribution and an unknown population variance, the 90%

confidence interval for the population mean of forecasted inflation is closest to:
A. 0.02609 ± 0.02551.
B. 0.03407 ± 0.01753.
C. 0.03060 ± 0.02100.
Correct Answer: B
Reference:
Since the analyst is sampling from a population with an unknown variance and
using a small sample size (< 30), the t-distribution is used to calculate the
confidence interval:
s 0.013
X ± tα / 2 = 0.0258 ± 2.845 * = 0.034070 ± 0.017530
n 20
29. A multivariate distribution species probabilities for:
A. two or more related variables.

B. uniformly distributed variables.
C. variables with the same mean and different standard deviations.
Correct Answer: A
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 9, LOS k

A multivariate distribution specifies the probabilities for a group of related

random variables that are normally distributed.
A standard normal distribution includes two normal distributions with the same
mean but different standard deviations.
30 The amount of the annual dividend paid by ART Enterprises to its shareholders
depends on the profits available for distribution. There is 30% probability that the
company will generate profits less than $50,000 and pay a dividend per share of
$3 with probability of 15%. There is 70% probability that profits will exceed
$50,000 and the company will pay a dividend per share of $6 with probability of
45%.
The expected dividend payment given ART Enterprises generates profits of less
than $50,000 is closest to:
A. $0.135.
B. $0.450.
C. $3.000.
Correct Answer: B
Reference:
Expected dividend per share if less than $50,000 are generated = 0.15 × $3.00 =
$0.45
31. Increasing the sample size:
A. widens the confidence interval.

B. decreases the sample standard error.
C. lowers the precision with which the population parameter is estimated.
Correct Answer: B
Reference:

The sample standard error (or deviation) is inversely related to the sample size. A
larger sample size decreases the sample standard deviation and consequently the
width of the confidence interval. The larger the sample size, the greater the
precision with which one can estimate the population parameter.
32. Lance Thackery is an equity analyst at Eve Scott Associates. Thackery is

following the stock of a pharmaceutical. She is attempting to analyze whether the
upcoming launch of a Type-I diabetic drug will be successful and increase the
market price of the pharmaceutical’s share. The probability that the stock price
will increase given a successful drug launch, P (A/S), is 0.35. Thackery has
summarized important forecast probabilities in the exhibit below:
Exhibit: Forecast Probabilities
Probability
Probability stock price increases 0.40
Probability stock price is unchanged 0.60
Probability drug launch is successful 0.45
Probability drug launch is unsuccessful 0.55
The probability that the stock price increases given that the drug launch is
unsuccessful is closest to:
A. 0.44.
B. 0.52.
C. 0.65.
Correct Answer: A
Reference:
P (A) = Probability stock price increases

P (S) = Probability drug launch is successful
The probability, P(A/SC), needs to be calculated.
P(A) = P(A/S)P(S) + P(A/SC)P(SC)

0.40 = 0.35(0.45) + P(A/SC)(0.55)
P(A/SC) = 0.44

33. The difference between partial and general equilibrium analysis is that at least one
of the analysis:
A. ignores exogenous variables.

B. ignores endogenous variables.
C. does not take feedback effects from all markets into consideration.
Correct Answer: C
Reference:
Both partial and general equilibrium analysis take endogenous and exogenous
variables into consideration. However, the difference between the two is that the
former concentrates on one market and does not address the feedback effects from
all other markets.
34. In a developing country, the real GDP growth rates for 2010 and 2012 were 2%
and 4% respectively. Over the same period, nominal GDP growth rates were 3%
and 5% respectively.
In the time period under analysis, the growth in the economy in real terms was
closest to:
A. 29.1%.
B. 41.4%.
C. 100.0%.
Correct Answer: B
Reference:
Real growth in an economy is measured by the percentage change in real GDP.

Between 2010 and 2012 this growth is (4%/2%)0.5 – 1 = 1.41% or 41.4%.

35. Based on an analysis of a country’s statistics, an economic analyst observes that

economic expansion caused by an increase in aggregate demand has resulted in an
inflationary gap. Based on the economic situation the most appropriate investment
strategy would be to increase investments in:
B. defensive companies.
C. fixed-income securities.
Correct Answer: A
Reference:
When the economy is in a state of expansion caused by an increase in AD,

suitable investment strategies include:
• increasing investment in cyclical companies because they are expected to

experience the largest increase in earnings.
• reducing investment in defensive companies because they are expected to
have only a modest increase in earnings.
• reducing investments in fixed-income securities because they will decline
in price as a result of an increase in interest rates.
36. Ni-tech is an electric component manufacturer. The exhibit below illustrates sales
revenue, number of components sold, and GDP data for the years 2012 and 2013.
2013 2012
GDP ($ millions) 45.85 38.63
Quantity sold 85,600 85,000
Average sales revenue ($ millions) 2.14 1.53
Based on the data provided, the GDP deflator is closest to:
A. 118.69.
B. 138.89.
C. 139.87.
Correct Answer: B

Reference:
!"#$% !" !"##$%& !"#$ !"#$"# !" !"##$%& !"#$ !"#$%&

GDP deflator = !"#$% !" !"##$%& !"#$ !"#$"# !" !"#$ !"#$%&
×100
!,!"#,!!!
= ×100 = 138.89
!",!"" × $",!"#,!!! !",!!!
37. In a perfectly competitive market, the slope of an individual firm’s demand curve
is most likely:
A. flat.
B. kinked.
C. positive.
Correct Answer: A
Reference:
Under a perfectly competitive market, the slope of an individual firm’s demand

curve is flat.
38. Martha Yates is an economic analyst studying the trading activities between Sri
Lanka and the United States with the former exporting tea to the latter and
importing cars. The output per worker per day is summarized in the exhibit
below:
Exhibit: Output per Worker per Day
Cars Tea (grams)

United States 2 100
Sri Lanka 1 350
Sri Lanka most likely has a (n):
A. absolute advantage in the production of cars.

B. comparative advantage in the production of tea.
C. comparative advantage in the production of cars.

Correct Answer: B
Reference:
The U.S. has an absolute advantage in the production of cars because it produces
more cars per worker per day than Sri Lanka.
The opportunity cost of a car in the U.S. is 50 grams of tea (100/2 or 1 car = 50
grams of tea). In Sri Lanka, the opportunity cost of a car is 350 grams of tea. Thus
the U.S. has a comparative advantage in producing cars. In contrast, the
opportunity cost of a gram of tea in the U.S. and Sri Lanka is 1/50 and 1/350 per
car, respectively. With a lower opportunity cost per gram of tea, Sri Lanka has a
comparative advantage in this respect.
39. The following transactions were recorded in a country’s balance of payments

account for the year 2013:
• The total profit generated from outsourcing garment manufacturing to

overseas factories amounted to $1.4 billion.
• The country’s engineering universities received a total grant of $40
million from overseas donors.
• The total amount of equity securities issued amounted to $1.2 billion.
• Dividend income generated by citizens amounted to $0.3 billion.
• Foreign fixed income holdings transferred to the country’s domestic
financial institutions by migrants totaled $15 million.
• The tourism and travel industry generated revenues of $0.2 billion.
The country’s capital account balance amounts to (in $ billions):
A. 0.015.
B. 1.215.
C. 1.555.
Correct Answer: A
Reference:
CFA Level 1, Volume 2, Study Session 6, Reading 20, LOS g

Out of the transactions listed, only one will be a component of the capital account,
fixed income securities brought into the country by migrants.
40. Sasha Gibbons is an economic analyst who is evaluating the impact of changes in
four factors on Nepal’s economic growth. Gibbons has collected her observations
Exhibit: Observations Concerning Factors
Factor Observation
1 The global price of oil has increased due to
higher demand from industrialized economies.
2 The relative value of the Nepalese rupee
relative to the dollar (USD/NPR) has
increased in the current year due to a surge in
foreign investments.
3 The Nepalese authorities have implemented a
regulation mandating enterprises to undertake
production worker training.
Considering each of the factors in isolation, which of the following statements

accurately addresses the impact of the observation on the short-run and long-run
aggregate supply curves?
A. Factor 3 will shift the LRAS and SRAS curves rightward.

B. Factor 2 will not impact the SRAS curve but will shift the LRAS curve
rightward.
C. Factor 1 will shift the SRAS curve leftward but have no impact on the
SRAS curve.
Correct Answer: A
Reference:

Factor 1 will result in a leftward shift in the short-run aggregate supply (SRAS)
curve and have no impact on the long-run aggregate supply (LRAS) curve. SRAS
will shift leftward due to an increase in the cost of production.
Factor 2 will shift the SRAS curve rightward as an increase in exchange rate
lowers the cost of production. The LRAS curve will not be impacted.
Factor 3 will shift the SRAS and LRAS curves rightward. An increased level of
worker training will increase human capital and improve the quality of labor
force. Thus the SRAS and LRAS curves should shift to the right.
41. Mark Sinatra is a U.S. equity investor with a global investment portfolio.
Sinatra’s portfolio currently comprises of North and European equities. He would
like to expand his portfolio and allocate $0.5 million to Japanese equities.
Information concerning current and expected one-month spot rates is summarized
in an exhibit.
Exhibit:
Current and Expected One-Month Spot Rates
Spot Rate Expected Spot Rate
in One-Month
USD/EUR 1.3805 1.3759
JPY/EUR 0.0071 0.0089
The expected change in the USD/JPY rate in one month’s time is closest to:
A. – 20.49%.
B. – 0.33%.
C. + 25.35%.
Correct Answer: A
Reference:
CFA Level 1, Volume 2, Study Session 6, Reading 21, LOS d
The current USD/JPY spot rate is 194.4366 (1.3805/0.0071) while the expected
one-month spot rate is 154.5955 (1.3759/0.0089).
Expected change in the USD/JPY rate = (154.5955/194.4366) – 1 = - 20.49%

42. If the amount of money that can be created from an additional deposit of $200 in
a deposit account is $2,500, the money multiplier is closest to:
A. 8.0.
B. 11.5.
C. 12.5.
Correct Answer: C
Reference:
Reserve requirement = New deposit/ Amount of additional money created by a

deposit
= $200/$2,500 = 0.08
Money multiplier = 1/0.08 = 12.5
43. Industrial equipment will be typically sold in a (n):
A. factor market.
B. goods market.
C. capital market.
Correct Answer: A
Reference:
Factor markets are markets for the purchase and sale of factors of production.
Industrial equipment will be typically sold in a factor market.

44. A market has reached its equilibrium quantity if the:
A. lowest price buyers are willing to accept is equal to the highest price
B. lowest price sellers are willing to offer and the highest price buyers are
willing to accept are equal.
C. highest price buyers are willing to accept is higher than the lowest price
Correct Answer: A
Reference:
CFA Level 1, Volume 2, Study Session 4, Reading 13, Page 9, LOS b
A market is in equilibrium if the lowest price a selling is willing to offer is equal

to the highest price a buyer is willing to accept.

45. Rigid Corp purchased machinery for €45,000 at the beginning of the fiscal year
ending June 30, 2011. At the end of the year, the fair value of the machinery was
€48,000. Rigid Corp has elected to use the revaluation model.
Rigid will record a gain of €3,000 in its income statement if it complies with:
A. IFRS.
B. U.S. GAAP.
C. neither IFRS nor U.S. GAAP.
Correct Answer: C
Reference:
IFRS permit companies to use either the cost or revaluation model for the periodic
valuation and reporting of long-lived tangible assets. If revaluation initially
increases the value of the asset, the gain will bypass the income statement and be
recorded directly in equity as part of revaluation surplus.
U.S. GAAP do not permit the use of the revaluation model. Therefore, any
increase in the asset’s value will be ignored.
46. A book publisher shipped 40,000 books to its customers during the month of
January. The average price of each book sold was $45 while total cost per book
was $30. Invoice payments are due in 45 days and no cash changes hands at the
point of sale.
Which of the following statements accurately reflects the accounting

consequences of the sales transaction?
A. Net assets will increase by $600,000.

B. Liabilities will increase by $1,800,000.
C. Gross profit will decrease by $1,200,000.
Correct Answer: A
Reference:

Accounts receivable will increase by $1,800,000 (40,000 × $45) while inventory

will decrease by $1,200,000 ($30 × 40,000) and revenue will increase by
$1,800,000. Cost of goods sold will increase by $1,200,000.
Thus, net assets (total assets – total liabilities) will increase by $600,000
($1,800,000 – $1,200,000). Gross profit will increase by $600,000.
47. The role of financial reporting is most likely to:
A. provide requisite information to assist analysts in their decision making.

B. evaluate the past, current and potential performance and financial position
of a company.
C. provide information on a company’s financial position, changes in
financial position and performance.
Correct Answer: C
Reference:
The role of financial reporting is to provide information about a company’s

performance, financial position and changes in financial position that is useful to
a wide range of users in making economic decisions.
The role of financial statement analysis is to use financial reports prepared by

companies, combined with other information, to evaluate the past, current, and
potential performance and financial position of a company for the purpose of
making investment, credit and other economic decisions.
48. Sources of information which analysts may use besides annual financial
statements and supplementary information most likely include:
A. footnotes.
B. proxy statements.
C. statement of other comprehensive income.
Correct Answer: B
Reference:

Both footnotes and management commentary are considered supplemental to

financial reports. Proxy statements, which are statements distributed to
shareholders prior to company meetings containing matters that are put to vote,
are considered sources of information besides annual financial statements and
supplementary information.
The statement of other comprehensive income is included in a company’s annual

financial statements.
49. The market value of one of Thomas Associate’s investments increased by $4,500
and generated interest income of $300. The security is classified as held for
trading.
The change in the company’s revenues attributable to the investment is closest to:
A. $300.
B. $4,500.
C. $4,800.
Correct Answer: C
Reference:
Interest income will increase the company’s revenue by $300 and the increase in
the market value of the investment represents unrealized gains, further increasing
the company’s revenues. Thus revenue will increase by a total of $4,800.
50. A parcel of land with an original cost of $0.9 million was sold for $1.2 million.
The seller received $0.4 million as down payment with the remainder to be
recovered over a period of eight years. The seller is uncertain about the buyer’s
ability to make the remaining payments.
Using the installment method, the profit recognized by the seller that is
attributable to the down payment is closest to:
A. $0.00 million.
B. $0.10 million.
C. $0.40 million.

Correct Answer: B
Reference:
Under the installment method, the portion of the total profit of the sale that is
recognized in each period is determined by the percentage of the total sales price
for which the seller has received cash.
By apportioning the cash received between cost recovered and profit, the ratio of
profit to sales value is 25.0% [($1.2 million – $0.9 million)/$1.2 million].
Profit attributable to the down payment = 25.0% × $0.4 million = $0.10 million
51. The cash generated by a bank as a result of taking deposits will most likely be
classified as a (n):
A. investing cash flow.

B. financing cash flow.
C. operating cash flow.
Correct Answer: C
Reference:
Operating activities are part of the day-to-day business functioning of an entity. A

bank primarily takes deposits and extends loans to customers and any resulting
cash generated or expended from these activities will be classified as operating in
nature.

52. On February 15, 2013 Elite Corp purchased 50,000 inventory units at a price of
$20 per unit. Elite subsequently purchased 30,000 units in September at a unit
price of $22 and 40,000 units in November at $25. The number of units sold in
that year was equal to 75,000. Elite uses the LIFO method of inventory
accounting.
Elite’s closing inventory balance on December 31, 2013 is closest to:
A. $900,000.
B. $1,000,000.
C. $1,110,000.
Correct Answer: A
Reference:
Using the LIFO method of inventory accounting, items purchased last are sold
first. Closing inventory comprises (older) earlier purchases.
Under the LIFO method it is assumed that the 40,000 units of inventory purchased
in November are the first to be sold followed by the 30,000 units in September.
The remaining 5,000 units (75,000 – 40,000 – 30,000) are assumed to be sold
from the February purchase of 50,000 units.
Therefore, closing inventory comprises 45,000 units at a price of $20 per unit or a
total value of $900,000.
53. A security is antidilutive if it:
A. equates the basic EPS to the diluted EPS.

B. decreases the basic EPS relative to the diluted EPS.
C. Improves the wealth of a company’s shareholders.
Correct Answer: B
Reference:
CFA Level 1, Volume 3, Study Session 8, Reading 25, LOS h

A security is antidilutive if its inclusion in the computation of the (diluted) EPS

will produce a measure higher than the basic EPS.
54. Oscar Richards is a market analyst serving an economic research firm. He is

attempting to measure the value a small-cap equity stock and has decided to
employ the stock’s purchase price. He believes the fair value measure is
inappropriate due to its lack of objectivity and need for judgment.
Which of the following financial reporting barriers is most likely highlighted by

Richards’ decision to employ historical cost?
A. Valuation
B. Consistency
C. Measurement
Correct Answer: A
Reference:
Valuation can be a barrier to effective financial reporting. This is because, out of

the measures of value that exist, historical cost is the most objective and the least
relevant. On the other hand, fair value is more relevant but is less objective and
requires more judgment.
55. Ilkot Inc. is a manufacturer of skiing equipment that has purchased an automated
paint coating unit for $600,000. The unit has an estimated useful life of eight
years and a residual value of $10,000.
Using the double declining balance method, the unit’s net book value in the
second year of its useful life is closest to:
A. $184,375.
B. $187,500.
C. $337,500.
Correct Answer: B
Reference:

Straight-line rate = 1/8 × 100 = 12.5%
Diminishing balance rate = 12.5% × 2 = 25.0%
Net book value (Year 1) = $600,000 × (1 – 0.25) = $450,000
Net book value (Year 2) = $450,000 – [($450,000 × 0.25) + ($600,000 × 0.25)] =

$187,500
56. In 2008 THC Manufacturers started business by purchasing 35,000 units at a unit
price of $55 and sold 23,000 units at a unit price of $60. In 2009 the company
purchased 5,500 units at a price of $58 and sold 13,500 at a price of $75. THS
Manufacturers complies with U.S. GAAP and applies the FIFO method of
In 2009 THS will report an ending inventory balance of:
A. $87,000.
B. $220,000.
C. $232,000.
Correct Answer: C
Reference:
Using the FIFO method of inventory accounting, the units purchased first are
assumed to be sold first and ending inventory comprises newer purchases.
Total units sold = 13,500 + 23,000 = 36,500
The first 35,000 units are assumed to be completely sold, leaving 4,000 [5,500 –
(36,500 – 35,000) of the units purchased in 2009 in ending inventory.
Ending inventory balance = 4,000 × $58 = $232,000

57. In 2009 a portion of LRV Corp.’s inventory had a carrying value of $0.7 million.
The inventory was originally purchased at a total cost of $1.1 million. The cost to
replace these units has been estimated at $0.8 million. The net realizable value is
$0.9 million and should the company decide to sell the inventory it should earn an
estimated dollar profit margin of $4,250. LRV prepares and presents its financial
In its 2011 balance sheet, LRV’s inventory will be reported at a value closest to:
A. $700,000.
B. $895,750.
C. $900,000.
Correct Answer: B
Reference:
CFA Level 1, Volume 3, Study Session 9, Reading 29, LOS f
Under U.S. GAAP, inventory is measured at the lower of cost or market

(replacement costs) with the latter being subject to upper and lower limits.
Upper limit = Net realizable value
Lower limit = Net realizable value – normal profit margin
Upper limit = $900,000

Lower limit = $900,000 – $4,250 = $895,750
Given that market value is lower than cost ($0.8 million versus $1.1 million
respectively), inventory is impaired. Given that inventory value cannot decline
below the lower limit, LRV will write down its inventory to $895,750.
58. Intangible assets with perpetual lives are most likely:
A. depreciated.
B. amortized but not tested for impairment.
C. tested annually for impairment but not amortized.
Correct Answer: C

Reference:
Intangible assets with indefinite lives are neither amortized nor depreciated but
are tested at least annually for impairment.
59. In 2009, Aero Inc began commercial production by purchasing 100,000 units of
inventory at a unit price of $55. In the same year Aero sold 80,000 units at a price
of $70. The following year the company purchased 65,000 units at a unit price of
$60 and sold 60,000 units at a unit price of $75. Aero applies the weighted
average method of inventory accounting.
The cost of sales reported in 2010 is closest to:

A. $2.6 million.
B. $3.5 million.
C. $4.2 million.
Correct Answer: B
Reference:
Weighted average cost of inventory in 2010 = [(20,000 × $55) + (65,000 ×

$60)]/(20,000 + 65,000)
= 5,000,000/85,000
= $58.82
Cost of sales = 60,000 × $58.82 = $3,529,412 or $3.5 million
60. If inventory unit costs are rising and inventory quantities are constant, which
inventory accounting method will result in the highest reported taxable income?
A. LIFO
B. FIFO
Correct Answer: B
Reference:

When inventory unit costs are rising and inventory quantities are constant or
increasing, the FIFO method of inventory accounting will generate the highest
taxable income. This is because cost of sales will reflect older, cheaper inventory
units resulting in higher gross profit, operating profit and taxable income.
61. On March 1, 2010 Tecnox, a chip processor, purchased a manufacturing unit to be

used in its production process. Depreciation charges are applied in full in the year
of purchase. Details relevant to the unit purchased are summarized in the exhibit
below:
Exhibit: Manufacturing Unit Details
Original cost $680,000

Residual value $200,000
Estimated useful life 5 years
Total estimated productive capacity 1,000 chips
2010: 280
2011: 450
Production in each year (number of chips) 2012: 120
2013: 100
2014: 50
Applicable depreciation method Units-of-production
The accumulated depreciation expense in 2011 is closest to:
A. $65.6 million.
B. $70.1 million.
C. $99.3 million.
Correct Answer: B
Reference:

Cost per unit = ($680,000 – $200,000)/5 = $96,000
Depreciation expense in 2010 = $96,000 × 280 = $26,880,000
Depreciation expense in 2011 = $96,000 × 450 = $43,200,000
Accumulated depreciation expense (2011) = $26,880,000 + $43,200,000 =

$70,080,000 or approximately $70.1 million.
62. Which of the following associated costs will least likely be capitalized as part of
an automated paint mixing unit?
A. Training staff on how to maintain the unit.

B. Installation and testing of the machine’s operations.
C. Replacing the factory’s lighting system to allow for the unit to operate.
Correct Answer: A
Reference:
Installation and testing of the machine’s operations are necessary to get the asset
ready for its intended use and are capitalized. In addition replacing the lighting
system is a means of preparing the asset for its intended use and is capitalized
accordingly. However, training staff on how to maintain the unit is not needed to
get the asset ready for its intended use and is thus expensed.
63. On March 1, 2013 a customer subscribed to a monthly newsletter paying an

annual fee of $1,440 on that day. The news agency’s financial year ends on
December 31, 2013.
The adjustment required to the company’s liabilities with respect to the specific
transaction at year-end is closest to:
A. $0.
B. $240.
C. $1,200.
Correct Answer: C

Reference:
On March 1 the company will record unearned revenues (liability) of $1,440. On

December 31 revenue relating to ten issues has been realized and two remain.
Therefore, the unearned revenue account will be reduced by $1,200 ($1,440/12 ×
10) and transferred to revenue to reflect realized earnings.
64. A book publishing firm gained the right to use a patent as a result of acquiring a
competitor.
How will the patent be accounted for by the firm? The patent will be:
A. accounted for using the cost model.

B. recognized if it meets certain pre-specified criteria.
C. allocated a share of the acquisition price on the basis of the asset’s fair
value.
Correct Answer: C
Reference:
Intangible assets acquired in a business combination are allocated a portion of the

acquisition cost (purchase price) on the basis of their fair value.
65. Utah Corp is a designer of home lighting systems and accessories. In 2012, Utah
expanded its production by converting a vacant property into a factory; the
property was being held by the company as investment property. Prior to the
conversion, the property’s fair value was €150,000. The original purchase price of
the property was €120,000. Utah prepares and presents its financial statements in
accordance with IFRS.
In response to the change in classification, Utah will:
A. make no accounting adjustments.

B. record a gain of €30,000 in its income statement.
C. revalue the value of the property upwards by $30,000 in its balance sheet.
Correct Answer: A

Reference:
When a company changes the use of the property from being an investment
property to owner-occupied property and the chosen model is the fair value
model, the property’s fair value is considered to be its cost for accounting
purposes and no further accounting adjustments are necessary. Furthermore,
neither a gain nor loss arises on the transfer.
66. Sash Imperial has undertaken a contract to build a railroad line. The project will
take three years to complete and Sash is expected to receive $40.00 million on
completion. Total project costs are estimated at $31 million. At the end of the first
year Sash has spent $12.00 million and expects to incur a total loss of $0.50
million over the remaining project term. Sash complies with U.S. GAAP.
The amount recognized by Sash in its income statement at the end of Year 1, in
relation to the project, is closest to:
A. $2.98 million.
B. $3.48 million.
C. $15.48 million.
Correct Answer: A
Reference:
Under U.S. GAAP the percentage of completion method is used to recognize the
revenues for long-term construction projects when the outcome of the project is
reliable.
Expected losses are to be recognized immediately.
All $ amounts are in millions.
Revenue recognized for Year 1 amounts to $15.48 ($12/$31 × $40). Given that
$12 expenses have been incurred and a loss of $0.50 is anticipated, the net amount
recognized in relation to the contract is $2.98 ($15.48 – $12.00 – $0.50).

67. Which of the following properties will most likely fit the definition of investment
property according to IFRS?
A. An office building used solely for administrative purposes.

B. Company housing units provided to employees free of cost.
C. A vacant factory plant that is leased to a manufacturing firm.
Correct Answer: C
Reference:
Investment property is owned for the purposes of earning rentals or capital

appreciation or both. A vacant factory plant leased to a manufacturing firm
classifies as investment property since the purpose is to earn rentals.
Neither the office building used for administrative purposes nor company housing
units provided to employees classify as investment property.
68. U.S. GAAP requires software development costs to be:
A. expensed as incurred.
B. expensed if they relate to software to be developed for internal use.
C. capitalized once the saleable product’s technological feasibility has been
established.
Correct Answer: C
Reference:
U.S. GAAP requires software development costs incurred to develop a product

for sale to be expensed as incurred and capitalized once technological feasibility
has been established. Similarly costs to develop software for internal use will be
capitalized once it is probable that the project will be completed and that the
software will be used as intended.

69. Rector Incorporated is a manufacturing firm with a capital structure comprising of

equity and debt. The current market value of equity is $2.0 million and the beta of
the stock is 1.2. The company has $4 million face value of bonds outstanding,
which pay semi-annual coupons at an annual rate of 8%. The yield-to-maturity is
9% and the remaining term to maturity is 5 years.
The corporate pays tax at a rate of 25%. The equity risk premium and risk-free
rate is 4% and 2%, respectively.
Rector Incorporated’s weighted average cost of capital (WACC) is closest to:
A. 4.55%.
B. 6.77%.
C. 7.59%.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 36, LOS c
WACC = (0.3424)[2% + 1.2(4%)] + (0.6576)(9%)(1 – 0.25)

= 6.77%
Present value of debt:
N = 10
I/Y = 4.5% (9%/2)
FV = 4,000,000
PMT = 160,000
CPT Present value: 3,841,746
Weight of debt in capital structure = $3,841,746/($3,841,746 + 2,000,000) =

65.76%
Weight of equity in capital structure = $2,000,000/($3,841,746 + 2,000,000) =

34.24%

70. Which of the following statements most accurately compares the NPV and
payback period methods?
A. The payback period and NPV will always yield identical project rankings.
B. Compared to the payback period, NPV is a better measure of project
liquidity.
C. The payback period may lead to the acceptance of a project with a
negative NPV.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS d
In the case of projects with a payback of one year and small amount of positive
cash flows thereafter, the NPV may be negative. Based on the payback period, the
project is worthwhile. However, based on profitability (NPV), the project is not
worthwhile. Thus, NPV and payback period may generate conflicting rankings.
The payback period is a measure of project liquidity while NPV is a measure of

investment profitability.
71. Snat Limited is an ink manufacturing firm. The executives of the firm have
recently undertaken a project with a profitability index (PI) of 1.50. The company
made an investment worth $300,000 at the start of the project.
The slope of the NPV profile of the project is best described as:
A. convex.
B. concave.
C. horizontal.
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 35, LOS e
The slope of the NPV profile is convex from the origin. That is the NPV declines
at a decreasing rate as the discount rate increases.

72. Michael Poole is an equity analyst at Dave Associates, a financial services firm.
Poole is estimating the firm’s cost of equity using the dividend discount model
approach. He has learnt that the Gordon’s growth model is particularly useful in
deriving the required rate of return when this approach is used. The company has
paid a dividend of $2.5 per share in the previous year.
The current market price per share is $25. The company’s retention rate and
return on equity is 40% and 10%, respectively.
The cost of equity using the dividend discount model is closest to:
A. 14.00%.
B. 14.40%.
C. 16.40%.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 36, LOS h
Based on the Gordon’s growth model, return on equity is calculated as:
D1
re = +g
P0
where g = (1 – D/EPS)ROE
g = (0.4)(0.1) = 0.04 or 4%
Based on the return on equity, the intrinsic value of a stock can be calculated.
re = [($2.5 × 1.04)/$25] + (0.4)(0.10)

= 14.40%

73. Dwight Engle is a financial analyst evaluating the risks associated with two
detergent manufacturers, Home Care and CleanWay. Home Care has a higher per-
unit variable operating cost while CleanWay’s fixed operating costs are 1.5 times
greater. Out of the two corporations being analyzed, Home Care has a greater
total number of shares outstanding and finances a greater proportion of its projects
using equity. CleanWay, on the other hand, rarely uses equity as a financing
source.
Based on his findings, Engle will most likely conclude that:
A. CleanWay has more operating risk.

B. Home Care’s net income is more sensitive to changes in operating income.
C. Home Care’s cash flows have greater sensitivity to changes in operating
income.
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 37, LOS a, b & c
CleanWay has greater operating risk as evident from its ratio of fixed operating
costs to variable operating costs.
Since CleanWay employs a higher degree of financial leverage, its net income is
more sensitive to changes in operating income.
Clean Way’s cash flows have greater sensitivity to changes in operating income;
this is because a majority of its projects are financed using debt.

74. Aero and Beta are commercial aircraft manufacturers. Kayla Mason is an industry
analyst evaluating the financial and operating leverage structures of the two
competitors. She has collected sales and cost data concerning the manufacturers in
an exhibit. She expects unit sales to increase by 5% from their 2012 level.
Exhibit: Sales and Cost Data Concerning Aero and Beta
Aero Beta
Sales price per unit ($) 50 40
Variable costs per unit ($) 35 30
Total fixed costs ($) 350,000 250,000
Units produced and sold (2012) 50,000 50,000
Based on the expectations for 2013, Mason will most likely conclude that the
change in operating income will most likely be:
A. greater for Aero.

B. greater for Beta.
C. the same for both companies.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 37, LOS b
To determine the pace of growth in operating income, it is necessary to determine

the degree of operating leverage (DOL) for the two manufacturers.
Q(P − V )
DOL =
Q(P − V ) − F
50,000($50 − $35)
DOL (Aero) = = 1.875
50,000($50 − $35) − 350,000
50,000($40 − $30 )
DOL (Beta) = = 2.00
50,000($40 − $30 ) − 250,000
An increase in units produced by 5% will increase Aero’s operating income by

9.375% (1.875 × 5%) and Beta’s by 10% (2 × 5%). Therefore, Beta’s operating
income will change at a greater rate.

75. A shareholder owns 20% of a company with a market value of $30 million. The
total shares outstanding of the corporation are 5,000,000 with a market price per
share of $30. The current earnings per share is $2.50. This year the company
issued a 5% stock dividend to the shareholder.
How will the stock dividend impact earnings per share (EPS)?
A. EPS will not be affected.

B. EPS will decline by 4.80%.
C. EPS will increase by 5.00%.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 38, LOS a
Shares outstanding (after stock dividend) = 5,250,000 (5,000,000 × 1.05)
EPS (after stock dividend) = $2.38 [($2.50* × 5,000,000)/5,250,000]
EPS will decline by 4.80% (2.38/2.50 – 1).
*The distribution of a stock dividend should not affect the earnings power of a
corporation.
76. ABC Inc. has announced the buyback of a portion of its 5,000,000 shares
outstanding. The current market price, $30, is 10% greater than its book value per
share. The company intends to employ $3 million worth of borrowed funds for the
repurchase. The after-tax cost of borrowing is 6% and the company’s reported
earnings per share is $5.00.
The percentage change in the company’s book value per share following buyback
is closest to:
A. – 0.23%.
B. + 0.19%.
C. + 11.11%

Correct Answer: A
Reference:
Book value per share (before buyback) = $27 ($30 × 0.90).
The company will repurchase 100,000 ($3,000,000/$30) of its shares using

borrowed funds.
Post-buyback, the number of shares outstanding will equal 4,900,000 and the
book value of equity will fall to $132,000,000 [(5,000,000 × $27) – $3,000,000]
and the book value per share decreases from $27.00 to $26.94
($132,000,000/4,900,000) or a decline of – 0.23%.

77. Pedro Lee serves a broker-dealer firm and has negotiated with Grace Arnold, the
CEO of Chemco Solutions, to sell her significantly large holding of the
company’s stock. Lee apprehends that the order may be challenging to execute
due to the size of the trade.
The execution mechanism that Lee should utilize is most likely:
A. brokered markets.
B. crossing networks.
C. over-the-counter markets.
Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 46, LOS j
Brokered markets are most suitable because the trade may not be marketable due
its significantly large size. Dealers may be unwilling or unable to hold such a
large quantity of shares in their inventory and may not make markets in them; this
renders over-the-counter (dealer) markets inappropriate. Organizing order-driven
markets such as crossing networks is also not suitable because few traders may
submit orders to them.
78. A market’s limit order book quotes the best bid and offer at 35 and 38,
respectively. A limit buy order with a price of 36 is placed by a trader. The order
will most likely:
A. make market.
B. make a new market.
C. fall behind the market.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 46, LOS g

Since the limit buy price (36) falls in between the best bid (35) and offer (38), the
order will make a new market.
A buy order with a limit price equal to the best bid is said to make market.
A buy order with a limit price lower than the best bid is away from the market.
79. Jill Malcolm is studying a fundamental-weighted equity index which comprises of

two stocks, A and B. Stock A has a market capitalization of $450 million and
earnings of $100 million. Stock B has a market capitalization of $300 million and
earnings of $100 million.
Relative to a market-weighted index, a fundamental-weighted index will:
A. overweight A relative to B.
B. overweight B relative to A.
C. make an equal allocation to the two stocks.
Correct Answer: B
Reference:
Stock A has an earnings yield of 22.2% ($100/$450).
Stock B has an earnings yield of 33.3% ($100/$300)
The earnings weight of stock A ($100/$200 = 50%) is lower than its market
capitalization weight ($450/$750 = 60%).
The earnings weight of stock B ($100/$200 = 50%) is higher than its market
capitalization weight ($300/$750 = 40%).
Since stock B has a higher earnings yield, the fundamental-weighted index will
overweight stock B relative to A. In contrast, a market-capitalization-weighted
index will overweight stock A.

80. A fixed income analyst is studying the corporate bond sector in his country’s
fixed income market. After thorough analysis he concludes the value of a AAA-
rated corporate bond placed by investors based on their complete understanding
of the bond’s interest rate, principal value and timing of its interest and principal
payments is 90. The bond is currently selling at a price of 120.
Based on the results collected, the analysis can most likely conclude that:
A. market prices accurately reflect intrinsic values.

B. opportunities for profitable active investments exist.
C. investors will take long positions in AAA-rated corporate bonds.
Correct Answer: B
Reference:
Since the intrinsic value does not equal to the market price of the bond, there
exists an opportunity for active investment; investors will seek to short-sell these
bonds which are selling at a price above their perceived intrinsic value (120
versus 90 respectively).
Given the discrepancy between market and intrinsic values, the analyst will least
likely conclude that the former value accurately reflects the latter.
81. Samson Electrics, a Dutch component manufacturer, has issued 3.2% non-
callable, non-convertible, perpetual preferred shares with a par value of €1,000.
The credit rating provided by Standard & Poor’s is AA- and the required return on
identically rated preferred shares is 5.8%.
The intrinsic value of the preferred share is closest to:
A. €551.72.
B. €1,000.00.
C. €1,812.50.
Correct Answer: A
Reference:

The intrinsic value of a non-callable perpetual preferred stock is €551.72,

calculated using the equation below:
D0 (0.032 × 1,000)
V0 = = = 551.72
r 0.058
82. Smith Richards is an equity analyst following the stock of Horizon Limited, a
company in the telecommunications sector. The company’s balance sheet for the
year 2013 is presented below. Richards aims to ascertain whether Horizon’s stock
is fairly valued. The company has 5,000 shares outstanding, which are trading in
the market at a price of $20.50.
Exhibit:
Summarized Balance Sheet for Horizon
Limited for the Financial Year 2013*
Cash $3,500
Accounts Receivable 25,000
Inventories 4,300
Net fixed assets 45,000
Total assets 77,800
Accounts Payable 10,100

Notes Payable 2,500
Common shareholder’s equity 65,200
Total liabilities and equity 77,800
*With the exclusion of net fixed assets, the market value of all assets and
liabilities are equal to their book values. The market value of net fixed assets is
1.5 times its book value.
Based on Horizon Limited’s book value per share, Richards will most likely
conclude that its stock is:
A. overvalued.
B. fairly valued.
C. undervalued.
Correct Answer: A

Reference:
Market value of assets = $3,500 + $25,000 + $4,300 + (1.5 × $45,000) =

$100,300
Market value of liabilities = $10,100 + $2,500 = $12,600
Adjusted book value = $100,300 – $12,600 = $87,700
Estimated value (adjusted book value per share) = $87,700/5,000 = $17.54
Comparing the book value per share to the current market price of $20.50, the
Horizon Limited stock is overvalued.
83. Identifying the target market during the index construction process involves
determining the:
A. investment universe.
B. broadest definition of a market segment.
C. allocation to specific securities included in the index.
Correct Answer: A
Reference:
The target market determines the investment universe and the securities available
for inclusion in the index.

84. The exhibit below illustrates the details concerning a price-weighted equity index.
Beginning of Weight Shares Dividends End of

Security period price (%) outstanding per share period price
A 15.5 20 1,000 0.25 13.0
B 25.0 20 1,000 1.00 22.0
C 128.5 20 1,000 0.75 145.0
D 200.0 40 2,000 0.25 230.5
Total 5,000
The price return of the index is closest to:
A. 3.04%.
B. 4.33%.
C. 12.65%.
Correct Answer: C
Reference:
Beginning of period index value = (15.5 × 1,000) + (25.0 × 1,000) + (128.5 ×

1,000) + (200.0 × 2,000)
= 569,000
End of period index value = (13.0 × 1,000) + (22.0 × 1,000) + (145.0 × 1,000) +
(230.5 × 2,000)
= 641,000
Price return = (641,000/569,000) – 1

= 0.1265 or 12.65%
85. The total return of a price-weighted index has changed relative to an equal-
weighted index, identical in all other respects. Which of the following least
accurately justifies the reason for the difference in values?
A. Outperformance of large-cap stocks.

B. Outperformance of small-cap stocks.
C. A constituent stock has undergone a stock split.

Correct Answer: A
Reference:
Equal-weighted index comprise a significant proportion of small-cap stocks.

Therefore the outperformance of small-cap stocks could be a reason for difference
in values. Price-weighted indexes, on the other hand, are biased towards the
higher priced shares.
A property unique to price-weighted indexes is that a stock split on one

constituent security may change the weights on all the securities in the index.
Therefore, this could be a possible reason for the difference in index values.
86. Brian Ross is a wealthy entrepreneur managing his own investment portfolio. He
is seeking to expand his investment portfolio, which comprises solely of equities.
Ross is seeking a tax-efficient investment, which has a moderate to high degree of
liquidity and can bring diversification benefits to his portfolio. He is exploring
direct real estate as a potential investment vehicle.
Which of the following factors will discourage Ross from investing in direct real
estate?
A. Illiquidity
B. Tax consequences
C. Low diversification potential
Correct Answer: A
Reference:

Direct real estate are illiquid and trade in very illiquid markets making this form
of investment unsuitable for Ross who desires an asset class with a moderate to
high degree of liquidity.
Investments in real estate are attractive because of the tax benefits that they
generate.
As an asset class, real estate has been found to have a low correlation with
traditional asset classes such as equity and fixed income securities; this introduces
diversification potential to an investor’s portfolio.
87 The exhibit illustrates a market’s standing limit order book at market close.
Exhibit: Market’s Standing Limit Order

Book
Bid Sizes Limit Prices Ask Sizes
70 15
69 13
68 11
67 10
4 65
5 64
6 63
8 62
What is the market?
A. 65 bid and 67 ask

B. 65 bid and 70 ask
C. 62 bid and 67 ask
Correct Answer: A
Reference:
The market is best bid (highest bid) and offer (lowest ask) and their associated
sizes. Given the exhibit, market is at the 65 bid and 67 ask.

88. The exhibit below illustrates the limit orders outstanding on a market’s book
following the arrival of a large order.
Exhibit:
Market Limit Order Book
Buyer Bid Limit Offer Seller
Size Price (€) Size
Jones 9 49.9
Victor 8 50.0
Stevens 6 50.1 7 Allen
50.2 8 Cunningham
50.3 12 Whittaker
Kim Toyama submits a day order to buy 18 contracts, limit €50.2. Toyama’s
average trade price is closest to:
A. €49.96.
B. €50.15.
C. €50.18.
Correct Answer: B
Reference:
Toyama’s buy order will fill at the most aggressively priced sell order which is
Allen’s order. After completely filling Allen’s order at a price of €50.1, Toyama
still has 11 contracts remaining. The next most aggressively priced sell order is
Cunningham’s that will fill completely leaving Toyama with 3 unfilled contracts.
Toyama cannot trade using Whittaker’s order as his limit sell price is above
Toyama’s limit buy price.
Toyama’s average trade price = [(7 × €50.1) + (8 × €50.2)]/(7 + 8)

= €50.15

89. In contrast to interest rate options, forward rate agreements (FRAs):
A. impose obligations on the counterparties.

B. are contracts with interest rate as the underlying.
C. are usually offered for purchase and sale by different dealers.
Correct Answer: A
Reference:
FRAs represent a commitment to make one interest payment and receive another
at a future date. Thus the contract imposes obligations on both sides of the
agreement.
The underlying in both agreements is an interest rate. FRAs and interest rate
options are offered for purchase and sale by the same dealers.
90. Leslie Hower is a junior trader at a derivatives dealer firm. During her first week
following appointment, Hower attempts to synthetically sell a risk-free bond
using call and put options. She purchases call and put options with the same
exercise price and time to maturity. She simultaneously sells the underlying short.
With respect to her attempts in creating a synthetic short position in a risk-free

bond, however is most accurate regarding her decision to:
A. purchase call options.

B. purchase put options.
C. sell the underlying short.
Correct Answer: A
Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 61, LOS l

Based on the rearranged put-call parity (see below), in order to synthetically short
sell (issue) a risk-free bond, call options should be purchased while the underlying
and put options should be sold short.
- X/(1 + r)T = c0 – p0 – S0
91. A dealer has established a protective put position by buying a stock worth $85. A
put option on the stock with an exercise price of $94 is selling for $11. For the
dealer to breakeven, the stock price has to move:
A. up at $96.
B. up at $105.
C. down at $83.
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 60, LOS-b.
For the dealer to breakeven price should be at $96 ($85 + $11).
92. An investor has invested in a bond selling for $22.50 He has sold a call option for
$7.66 that has an exercise price of $31.55 The investor expects the bond price to
be $45.00 at expiration. The maximum profit of the position is closest to:
A. $14.84.
B. $21.11.
C. $30.16.
Correct Answer: C
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 60, LOS b.
The position is a covered call and the maximum profit for the investor is
= 45 – 22.50 + 7.66 = 30.16.

93. The value of European call option is inversely related to the:
A. exercise price
B. time to expiration.
C. value of the underlying.
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 59, LOS-i.
The value of European call option is:

• directly related to the time to expiration and the value of the underlying.
• inversely related to the exercise price.
94. A synthetic long position in a risk less bond is created by combining:
A. a long position in a put + long position in the underlying + short position

in the call.
B. a long position in a call + long position in the underlying + short position
in the put.
C. a short position in a put + short position in the underlying + long position
in the call.
Correct Answer: A
Reference:
CFA Level I, Volume 6, Study Session 17, Reading 59, LOS-m.
A synthetic long position in a risk less bond is created by combining a long

position in a put + long position in the underlying + short position in the call.
𝑋
!
= 𝑝! + 𝑆! − 𝑐!
1+𝑟

95. The current market price of a three-year floating rate note (FRN) paying the six-
month LIBOR plus 0.25% on a semi-annual basis is 98.70 per 100 of par value.
The current six-month LIBOR is 1.05% and is expected to remain constant. Given
that the interest payment each period is 0.650 per 100 of par value, the discount
margin is closest to:
A. 2.57%.
B. 4.78%.
C. 7.64%.
Correct Answer: B
Reference:
CFA Level I, Volume 5, Study Session 15, Reading 54, LOS f
!.!"# !.!"# !.!"# !.!"#!!""

98.70 = !!! !
+ !!! !
+ !!! !
+⋯ !!! !"
r = 0.007638
!.!"!#!!"
0.007638 = !
DM = 0.004776 or 4.78%
96. Which of the following type of fixed income security has the lowest degree of
interest rate risk?
A. Fixed-rate bond
B. Floating-rate bond
C. Inflation-indexed bond
Correct Answer: B
Reference:

A floating rate bond has the lowest degree of interest rate risk. This is because the
bond’s coupon rate is periodically reset based on changes in the level of a
reference rate.
Fixed rate bonds have a higher level of interest rate risk. The bond’s price
decreases in response to an increase in interest rates. Thus investors who hold
fixed-rate bonds are exposed to interest rate risk.
Inflation-indexed bonds protect against inflation risk.
97. A 180-day money market instrument is quoted at an add-on rate of 4.76% for a
360-day year. The bond equivalent yield of the instrument is closest to:
A. 4.76%.
B. 4.83%.
C. 4.94%.
Correct Answer: B
Reference:
The redemption amount per 100 of par value of the instrument is 102.38
(calculated below).
!"#
PV = 100 + 100× !"# ×0.0476 = 102.38
The bond-equivalent yield is 4.76%

!"# !"#.!"!!""
AOR = !"# × !""
= 0.0476 or 4.76%
Multiplying the add-on rate by the factor 360/365 yields a 365-day bond-
equivalent yield of 4.83%.
!"#
!"#
×0.0476 = 4.83%

98. An investor purchases a five-year, 6% annual-coupon payment bond at 89.4535

and sells it in four years. Following the purchase of the bond and prior to the
receipt of the first coupon, interest rates go down to 8.5%.
The realized yield on the bond investment is closest to:
A. 3.77%.
B. 5.79%.
C. 8.71%.
Correct Answer: A
Reference:
The future value of the reinvested coupons at 8.5% is 27.2371 per 100 of par
value.
[6 × (1.085)3] + [6 × (1.085)2] + [6 × (1.085)1] + 6 = 27.2371
The sales price of the bond is 76.4869 per 100 of par value:
106
= 76.4869
1.085 !
The total return is 103.7240 (76.4869 + 27.2371) and the realized yield is 8.71%.
89.4535 = 103.7240/(1 + r)4
r = 0.03770
99. An 8.0% semi-annual coupon payment bond has an eight year maturity and is
priced to yield 9.5%. The money duration and modified duration of the issue is
7.3524 and 5.3515, respectively. The full price of the issue is 106.35.
Ignoring the effects of convexity, the revised full price of the issue if yields
increase by 125 basis points is closest to:
A. $96.58.
B. $99.24.
C. $116.12.
Correct Answer: A

Reference:
∆𝑃𝑉 !"## = −𝑀𝑜𝑛𝑒𝑦𝐷𝑢𝑟×∆𝑌𝑖𝑒𝑙𝑑

∆𝑃𝑉 !"## = −7.3524×0.0125 = - 0.091905 or – 9.1905%
New full price = 106.35 × (1 – 0.091905) = 96.5759
100. Which of the following issues has the highest seniority ranking in the event of
default?
A. Subordinated
B. Senior unsecured
C. Senior subordinated
Correct Answer: B
Reference:
In terms of seniority ranking, senior unsecured debt holders have the highest
priority claims followed by senior subordinated and finally subordinated debt
holders.

101. ABC Inc. has invested in a 5-year convertible bond issue trading at a price of
$1,050. The issue is convertible into the issuer’s common shares at an exercise
price of $40. The exhibit demonstrates the price of the issuer’s stock over a five
day term.
Exhibit:
Issuer Stock’s Price per Share
Day Price ($)
1 36
2 32
3 42
4 40
5 34
Conversion parity will occur on Day:
A. 1.
B. 3.
C. 4.
Correct Answer: B
Reference:
On day 3, conversion parity will occur. This is because conversion value ($1,050)
will equal to the convertible’s bond price ($1,050).
Conversion parity occurs if conversion value = bond price
Conversion value = Current share price × conversion ratio
Conversion ratio = $1,000/$40 = 25
Conversion value (Day 1) = $36 × 25

= $900
= $1,050
= $1,000

102. Which of the following characteristics are unique to partially amortized bonds?
A. Balloon payment at maturity.

B. Entire payment of principal occurs at maturity.
C. Periodic payments of interest and principal repayments based on a
schedule.
Correct Answer: A
Reference:
CFA Level I, Study Session 15, Reading 52, LOS e
A partially amortized bond makes fixed periodic payments until maturity but only
a portion of the principal is repaid by the maturity date. Thus, a balloon payment
is required at maturity to retire the bond’s outstanding principal amount.
A bullet bond does not call for any principal repayments over the life of the bond.
Instead, the entire payment of principal occurs at maturity.
103 Which of the following coupon payment structures will allow investors to benefit
from an increase in interest rates?
A. Plain vanilla bonds

B. Floating rate notes (FRNs)
C. Inverse FRNs
Correct Answer: B
Reference:

The coupon rate offered on FRNs is directly linked to the interest rate. Therefore,
an increase in interest rate will increase the interest income received by investors.
Plain vanilla bonds offer a fixed coupon rate. Therefore, an increase in interest
rates will decrease the value of the bond and result in no change in income earned
by the investor.
The coupon rate offered on inverse FRNs is inversely related to the interest rate.
Therefore an increase in interest rates will reduce the coupon rate and
consequently the interest income earned by bond investors.
104. A company has issued a 15-year bond with a notional principal of $350 million.
The sinking fund provision calls for 8% of the outstanding principal amount to be
retired in years 8-14 with the outstanding balance paid off at maturity in 15 years.
The outstanding principal balance at the end of Year 9 is closest to:
A. $294.00.
B. $296.24.
C. $322.00.
Correct Answer: B
Reference:
CFA Level I, Study Session 15, Reading 52, LOS e
The exhibit below demonstrated the sinking fund provision schedule for the first 9
years of the bond issue:
Year Outstanding Sinking Fund Outstanding

Principal at the Payment ($ Principal at the
Beginning of the millions) End of the Year ($
Year ($ millions) millions)
0 350.00
1 to 7 350.00 0.00 350.00
8 350.00 28.00 322.00
9 322.00 25.67 296.24

105. Which of the following issues is most likely classified as a domestic bond?
A. A French company issues Euro-denominated bonds in Germany.

B. A U.S. company issues U.S. dollar denominated bonds in Canada.
C. A Swedish company incorporated in Japan issues Yen denominated bonds
in Japan.
Correct Answer: C
Reference:
CFA Level I, Study Session 15, Reading 52, LOS d
Bonds issued by companies that are incorporated in that country are called
domestic bonds. Out of the three options presented, the bonds issued by the
Swedish company classify as domestic bonds.
106. A four-year 6% semiannual coupon payment corporate bond is priced at 110 per
100 of par value. Its yield to maturity is 7.87%, quoted on a semiannual basis. The
annual rate of the bond that can be used for direct comparison with otherwise
comparable bonds that make quarterly coupon payments is closest to:
A. 7.79%.
B. 8.02%.
C. 15.74%.
Correct Answer: A
Reference:
!.!"#" ! !"#! !
1+ !
= 1+ !
APR4 = [(1.0802)1/4 – 1] × 4
= 7.794%

107. At the beginning of the year 2012, Gus Knight invested $100,000 in a hedge fund
with a “1 and 10” fee structure. The value of the fund at the end of the year rises
to $135,000 and by 5% at the end of 2013. Management and incentive fees are
paid at the end of the year and are calculated independently. In the year a fund’s
net value declines, incentive fees are not be paid.
The hedge fund’s high water mark at the end of 2013 is closest to:
A. $135,000.0.
B. $135,150.0.
C. $136.657.5.
Correct Answer: C
Reference:
Beginning of year:
Management fees = $135,000 × 1% = $1,350

Incentive fees = ($135,000 – $100,000) × 0.10 = $3,500
Value of capital at beginning of year = $135,000 – $1,350 – $3,500 = $130,150
End of year:
Value of capital at end of year = $130,150 × 1.05 = $136,657.50
In 2013, the value of the fund at the end of the year is greater than its beginning
value. Therefore, the high water mark is established at $136,657.50.
108. A drawback of investing in funds of hedge funds most likely includes:
A. diluted returns.
B. longer lockup periods.
C. difficulty in conducting due diligence.
Correct Answer: A

Reference:
A drawback of the multi-layered fee structure associated with funds of hedge

funds is the net-of-fees returns are diluted to the investor. Benefits of investing in
this hedge fund category include shorter lockup periods. Additionally, funds may
provide expertise in and conduct due diligence in selecting the individual hedge
funds.
The Alternative Investment section in the PM session is one question short.

Kindly add the following question:
109. A key risk cited for investing in alternative investments includes:
A. limited redemption availability.

B. concentrated portfolio positions.
C. reduced diversification potential.
Correct Answer: A
Reference:
A risk cited for investing in alternative investments includes limited redemption

availability and transparency, low liquidity and the challenge of manger
diversification.
Alternative investments have a low correlation with traditional asset classes

making this a benefit.
110. Which of the following real estate indices will most likely result in a sample
selection bias?
A. REIT index
B. Appraisal index.
C. Repeat sales index.
Correct Answer: C

Reference:
Repeat sales index suffer from a sample selection bias because the properties
that’s ell in each period vary and may not be representative.
111. An analyst is calculating the one year price of a commodity futures contract with
Spot price $80.96

Convenience yield $5.50
Storage costs $7.80
Risk free rate (Rf ) = 5%
The price of a one year commodity future contract is closest to:
A. $82.71.
B. $83.26.
C. $87.31.
Correct Answer: C
Reference:
Future Price = Spot Price (1+Rf) + Storage Cost – Convenience Yield

Future Price = $80.96 (1+5%) + $7.8 - $5.5 = $87.31
112. Which of the following is most likely the motivation for a passive investor buying
commodities for his portfolio?
A. Speculation
B. Risk taking opportunity.
C. Risk diversification benefits.
Correct Answer: C
Reference:

A passive investor buy commodities for his portfolio for the risk diversification
benefits. A passive investor generally invest through a collateralized position in a
future contract.

113. Which of the following statements best describes the major drawback of the top
down investment approach?
A. This approach involves high active risk.

B. This approach involves high trading cost
C. Major portion of the portfolio is invested passively.
Correct Answer: B
Reference:
In top down investment process different managers manage the same client’s
portfolio, therefore trading costs are incurred by different managers. The higher
the trading, the higher the tax expense associated with the realized capital gains.
114. Which section of the investment policy statement provides description regarding
the custodian of the client’s assets?
A. Introduction
B. Investment guidelines
C. Statement of duties and responsibilities
Correct Answer: C
Reference:
Option C is correct. Statement of duties and responsibilities section provides

description regarding the duties and responsibilities of the client, the custodian of
the client’s assets and the investment managers.
115. Risk can be mitigated internally through:
A. risk transfer.
B. self-insurance.
C. risk modification.

Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 42, LOS-g.
Risk can be mitigated internally through self-insurance or diversification.
116. Recourse Associates is an investment management firm located in the U.S. Bailey
Gibbons is a portfolio manager serving the firm. Gibbons is managing the Global
Developing Market Equity Fund (GDMEF) at Recourse. The assets under
management and the net returns generated by the fund over the previous three
years are summarized in an exhibit. The applicable tax rate is 30% and inflation is
expected to remain stable at a rate of 1.5%. Net returns are prior to considering
the effects of taxes and inflation.
Exhibit:
Information Concerning the GDMEF (Years 1-3)
Assets Under Management at the
Year Beginning of the Year ($) Net Return (%)
1 10 million 7
2 15 million 5
3 18 million 6
The real after-tax return of the fund in Year 2 is closest to:
A. 1.97%.
B. 2.41%.
C. 3.50%.
Correct Answer: A
Reference:

The after-tax nominal net return is 3.5% [5% - (5% × 0.3)]. The after-tax real
return is (1+ 3.5%)/(1 + 1.5%) – 1 = 1.97%.
Taxes are paid before incorporating the effects of inflation.
117. Mark Taylor is an equity investor who has recently purchased the stock of a
Kenyan enterprise. The risk-free rate of return in Kenya is 4.5% while the
expected return on the market index is 7.2%. The correlation of the stocks
purchased with the market index has recently increased from 0.6 to 0.8 and the
standard deviation of the stock and market index is 25.7% and 16.4%
respectively.
The expected return on the Kenyan stock is closest to:
A. 5.88%.
B. 7.88%.
C. 13.53%.
Correct Answer: B
Reference:
p i , mσ i
0.8 × 0.257
Bi = = = 1.2537
σm 0.164
E(R)I = 4.5% + 1.2537(7.2% – 4.5%) = 7.88499%
118. Maya Thomas is an independent equity investor who has undertaken an

investment in a Brazilian coffee manufacturer’s stock. The covariance of the
manufacturer’s stock with the market index and market variance is 0.01577 and
0.01360 respectively.
Thomas can most likely anticipate earning a return on her equity investment that
is:
A. less than the risk-free rate.

B. less than the market return.
C. greater than the market return.
Correct Answer: C

Reference:
The beta of the stock is 1.1596 (0.01577/0.01360). A beta greater than 1.00
implies that the expected return on the stock is higher than the market return. A
positive beta indicates that the required return will be greater than the risk-free
rate.
119. With different borrowing and lending rates, the slope of the CML will become:
A. curved to the left of the market portfolio.

B. kinked to the right of the market portfolio.
C. less steep to the right and left of the market portfolio.
Correct Answer: B
Reference:
With different borrowing and lending rates, the slope of the CML will become
kinked beyond the point representing the market portfolio; beyond this point the
graph will have a smaller slope.
The portion of the CML to the left of the market portfolio will continue to be
represented by a straight line.
120. Writing an investment policy statement (IPS) is important because it:
A. is recommended by codes of corporate governance.

B. can be used as a basis to determine the suitability of an investment.
C. allows identification of any conflict between a client’s objectives and
constraints.
Correct Answer: B
Reference:

An investment policy statement is important because it allows managers to

determine the suitability of an investment based on the client’s recorded
objectives and constraints. It is important that the client’s objectives are consistent
with his/her constraints in the IPS.

FinQuiz.com
CFA Level I 3rd Mock Exam
June, 2016
Revision 1


FinQuiz.com – 3rd Mock Exam 2016 (AM Session)

33-44 Economics 18
Total 180


Questions 1 to 18 relate to Ethics

would be to:








their order value.



7. Ace Associates is a hedge fund management firm generating above-average fund

performance for the past several years. The fund’s senior manager, Grace Singh,
is contacted by Jeremy Lewis, a self-employed portfolio manager, who is seeking
to allocate hedge funds to his client accounts. Lewis’s client base ranges from
those with imminent liquidity needs to wealthy entrepreneurs with insignificant
portfolio funding requirements. Singh signs an agreement with Lewis whereby
Ace’s management fee will be reduced for his clients in exchange for the
management of her personal account. Lewis does not disclose the arrangement to
his clients because they are expected to benefit.
Which of the following Standards of Professional Conduct is least likely being

violated?
A. Suitability
B. Referral fees
C. Misrepresentation


8. Paul Murray is preparing a report on the stock of a credit rating agency with two
other research analysts. Based on his independent discussion with the agency’s
executives as well as study of economic reports and surveys, Murray forecasts the
agency’s client base to shrink and deems a ‘sell’ rating as appropriate. However,
his colleagues disagree stating that Murray’s recommendation is too extreme and
that a ‘hold’ rating is more appropriate based on their in-depth historical industry
analysis of the impact of a shrinking client base on corporate performance.

Murray’s best course of action is to:
A. continue to identify his name with the research report.

B. request for the removal of his name from the research report.
C. not issue the report with his recommendation as it is based on material
nonpublic information.
9. Jason Briggs is a portfolio manager serving Alliance. Based on a consultant

research analyst report Briggs will be undertaking a block trade for thirty client
accounts by purchasing a pharmaceutical corporate bond issue. The company is
categorized as highly risky with potential for strong returns. Using the firm’s
broker, shares of stock are allocated to each client’s account based on current
market price with commission being charged in proportion to account size.
Martha Lake is one of Briggs’ clients. The manager has decided to exclude her
account from the trade allocation. During a discussion with Briggs she states, “As
a child I had seen my parents undergo many financial hardships and so I am
somewhat apprehensive towards uncertain situations.”
Two months later, the pharmaceutical’s credit rating has improved. However,
Briggs deems the issue as still being risky for Lake and does not inform Lake of
the rating change.
Which of the following CFA Institute Standards of Professional Conduct are most
likely being violated?
A. Suitability
B. Fair dealing
C. Communication with clients and prospects


10. Jason Lee is senior portfolio manager at Motto Trust, an asset advisory firm. To
enhance his tax management skills, Lee has been invited to attend a tax
conference which is sponsored by a tax advisory firm owned by one of his clients.
The client has offered to fully pay for transportation to the conference but Lee
declines and instead opts for his own arrangement. Lee informs his supervisor of
the conference invitation received before departing. At the conclusion of the
conference, the senior manager of the tax advisory firm invites Lee to an
exclusive golf club, which he accepts. He informs his employer about the
invitation upon returning to work the following day.
Has Lee violated any CFA Institute Standards of Professional Conduct?
A. No.
B. Only with respect to attending the conference.
C. Only with respect to accepting the golf club invitation.
11. Jessica March and Adam Pocock are CFA Level III candidates as well as
colleagues. The two candidates regularly study together for the Level III exam.
During one of their study sessions the two individuals engage in a discussion,
March: “Earlier in the year I had a discussion with Tim Martin, a Level III
candidate, who said that the most recent exam was very ‘difficult’.”
Pocock: “Difficult or not, with my relevant work experience, I am confident that

I will become a charterholder shortly following completion of the Level
III exam.”
According to the Standards of Practice Handbook, which individual is most likely

in violation?
A. March; she has shared confidential information with Pocock.

B. Pocock; he has made a guarantee regarding the receipt of the charter.
C. March; she has engaged in a discussion with Martin regarding the exam
contents.


12. Which of the following actions is least likely considered a violation of the
standard concerning Loyalty to Employers?
A. Soliciting clients prior to the cessation of employment.

B. Using a business plan generated for the employer to start a new business.
C. Applying specialized analytical skills gained at the previous employer in
the new workplace.
13. The criteria used when evaluating secondary or third-party research least likely
includes:
A. reviewing the assumptions used.

B. evaluating the quality of the researcher’s internal controls.
C. determining the soundness of the researcher’s established code of ethics.
14. Harper Inc is a financial services firm that was established on January 1, 2002.
The firm claims compliance with the GIPS standards on January 1, 2009.
In order to claim compliance, Harper Inc. initially:
A. Is required to ensure the financial years, 2002-2006, are in compliance.

B. Is required to ensure the financial years, 2002-2009, are in compliance.
C. can link non-GIPS compliant performance with GIPS-compliant
performance as long as disclosure is provided.
15. In order to prevent misconduct, the Standards of Practice Handbook recommends

members and candidates encourage their employers to:
A. restrict employee participation in IPOs.

B. establish written procedures for reporting violations.
C. disseminate a list of potential violations and disciplinary sanctions to all
firm employees.
16. According to the Fundamentals of Compliance section of the Global Investment

Performance Standards, total firm assets must:
A. not include assets assigned to a sub-advisor.

B. include non-discretionary and discretionary assets.
C. be included in composites on the basis of their respective book values.


17. XYZ Inc is an investment management firm which claims compliance with the
Global Investment Performance Standards. Each year firm management selects
ten percent of prospective client requests and makes compliant presentations; this
policy is based on a first-come, first-serve basis. Due to limited resources, the
frequency of providing compliant presentations to prospective clients is annually,
at a minimum. Existing clients are provided an annual compliant presentation of a
composite only if their portfolio is included.
Which component of XYZ Inc’s compliant presentation policy is most likely

consistent with the requirements of the Fundamental of Compliance section of the
Global Investment Performance Standards?
A. The presentation policy for existing clients.

B. The first-come, first-serve performance presentation policy.
C. The frequency of providing presentations to prospective clients.
18. Which of the following is a section of the Global Investment Performance

Standards?
A. Hedge funds
B. Record retention
C. Wrap fee portfolios


19. A project with an opportunity cost of capital equal to the internal rate of return
should most likely:
A. have no impact on shareholder wealth.

B. be expected to increase shareholder wealth.
C. be expected to decrease shareholder wealth.
20. Grace Nicholson is choosing between two one-year investment plans with a
quoted rate of 8% and 12% respectively, each of which are compounded
continuously. Nicholson intends to invest $250,000 with the objective of
generating a minimum amount of $270,000 for her daughter’s college education.
She is not concerned with maximizing her return.
To achieve her objective, Nicholson will opt for:
A. either of the two savings plan.

B. the savings plan with a quoted rate of 8%.
C. the savings plan with a quoted rate of 12%.
21. Equity investment styles will most likely be classified using a (n):
A. ratio scale.
B. ordinal scale.
C. nominal scale.
22. Several of TA’s company employees are retiring today. They have each been
offered either to be paid a lump sum amount of $200,000 or an annuity with 30
payments of $15,000 starting from the date of retirement. TA’s bank has quoted
an interest rate of 8% compounded annually.
If employees select the alternative that generates the greatest amount of wealth,
they will most likely:
A. opt for a lump sum amount.

B. opt for an annuity payment.
C. be indifferent between the two alternatives.


23. A discrete uniform distribution comprises of outcomes which:
A. take on a range of values.

B. are significant in number.
C. are equally likely in occurrence.
24. A normal distribution is characterized by:
A. a skewness of 3.
B. the parameters mean, median and mode.
C. a linear combination of two or more normally distributed variables.
25. Intermarket analysis:
A. assumes markets form repetitive wave patterns.

B. uses relative strength analysis to make allocation decisions.
C. is based on the principle that each market has unique characteristics.
26. The table below illustrates the covariance matrix for global equities, global bonds
and real estate held in the proportions 40%, 25% and 35% respectively, held in
Ricardo Segal’s portfolio.
Exhibit
Covariance Matrix
Global Global Real
equities bonds Estate
Global equities 125 150 80
Global bonds 150 45 90
Real estate 80 90 62
Based on the information, the standard deviation of Segal’s portfolio return is

closest to:
A. 5.93%.
B. 8.33%.
C. 9.93%.


27. In order to conduct hypothesis testing a:
A. significance level must be defined as a starting point.

B. decision rule must be stated prior to specifying the significance level.
C. statistical decision involves determining whether the null hypothesis is
accepted or rejected.
28. The sample mean difference between the returns of two funds managing identical
emerging market equities is – 0.55% per quarter. The mean difference was
calculated using data observed over the past thirty quarters. The standard
deviation of the sample mean difference is 5.32%. The t-distribution table to be
used for the analysis is as follows:
Exhibit:
Student’s t-distribution Table
.05 (One tail) .10 (One tail)
Degrees of freedom .10 (Two tail) .20 (Two tail)
28 1.701 1.313
29 1.699 1.311
30 1.645 1.282
Using a 10% significance level, the difference between the mean quarterly returns
is:
A. not significant.
B. significant; the calculated t-statistic of – 0.100 is greater than critical value
of – 1.699.
C. significant; the calculated t-statistic of – 0.026 is greater than the critical
value of – 1.311.
29. Which of the following reasons most likely justifies why a parametric test may be
preferred over a nonparametric test?
A. The sample data is ranked.

B. The population has an infinite variance.
C. The distribution is defined by more than two parameters.


30. In contrast to a bar chart, the candlestick chart:
A. makes price volatility more visible.

B. indicates market volatility by the height of the candle.
C. illustrates opening, closing, high and low prices during a particular period.
31. The exhibit below illustrates average monthly market price change for the ABC
Corp stock for the first seven months of the financial year 2013.
Exhibit
Average Monthly Price Change For the First Seven Months
Average Price
Month Change (%)
January to February - 0.8
February to March - 1.2
March to April - 1.9
April to May - 2.5
May to June - 2.7
June to July - 3.4
Based on the average price change, which of the following statements is most
likely correct regarding the ABC Corp stock?
A. Investors believe the stock’s intrinsic value is increasing.

B. The forces of supply and demand are roughly in balance.
C. Sellers are willing to accept lower prices to enter new short positions.
32. Samuel Edgar is a technical analyst at Slater Associates, a market research firm.
He is analyzing price trends in the market price of the Elster Inc stock, a food
processor. His analysis of the market prices leads him to conclude that a head and
shoulders pattern is being observed. Using historical market prices, he constructs
a chart and observes that the share peaked at $45 and estimates the neckline at
$32.
To profit from the analysis, the share price should:
A. rise by $13.
B. decline to $19.
C. decline by $19 below the neckline.


33. Which of the following auction mechanisms will result in the highest bidder
paying a price equal to the second-highest bid?
A. Private value auction.

B. Descending price auction.
C. Second price sealed bid auction.
34. Narita is a developing country experiencing rapid industrialization with a local

currency, NR. The living standards and household incomes are also improving
with many replacing motorcycles for automobiles. The demand function for
automobiles is given below. Pa is the price of automobiles, I equals household
monthly income, and Pm equals the per unit price of motorcycles. The household
income is NR 1,500 and the price of a motorcycle is NR 450. The market consists
of 5,000 consumers with this demand function.
Q d a = 40 − 2.3(Pa ) + 0.0007 I + 1.2 Pm
Based on the data provided and holding all else constant, the inverse demand
function is most likely:
A. 252.63 – 0.00009Qda.
B. 252.63 – 0.435Qda.
C. 200,000 – 11,500(Pa) + 3.5I + 6,000Pm.
35. A company is operating in a monopoly market with marginal revenue kept at a

constant level of $35 and a price elasticity of demand of 1.2. The profit
maximizing price is closest to:
A. $5.83.
B. $35.00.
C. $210.00.
36. Which of the following monetary policy tools will most likely reduce the amount
of money in circulation in an economy?
A. Reducing the policy rate.

B. Reducing the level of government spending.
C. Increasing the percentage reserve requirement for banks.


37. Laxline Inc. is an Australian pharmaceutical that is expecting a shipment of

inventory from South Africa in three months’ time. To hedge any associated
foreign exchange risk, the corporate treasurer decides to obtain quotations from
two separate dealers, A and B (Exhibit). Laxline Inc. will hedge risk by selling the
ZAR forward.
Exhibit
Exchange Rate Quotation from Two Dealers, A and B
A B
ZAR/AUD spot rate 9.90 - -
Three-month forward premium (%) 0.8 1.1
Based on the information provided in the Exhibit, Laxline Inc. will most likely
buy AUD from dealer:
A. dealer A at rate of ZAR 0.0792 per AUD and not trade with dealer B.
B. B and sell to dealer A earning a profit of ZAR 0.0030 per AUD transacted.
C. A and sell to dealer B earning a profit of ZAR 0.0297 per AUD transacted.
38. A fixed-rate system is characterized by:
A. explicit legislative commitment to maintain a specified parity.

B. monetary independence being subject to the maintenance of an exchange
rate peg.
C. target foreign exchange reserves bearing a direct relationship to domestic
monetary aggregates.


39. The exhibit below summarizes financial data for ABC Inc, which was
incorporated on January 1, 2013.
Exhibit
Financial Data for ABC Inc for the Year 2013
Total revenue ($) 38,560
Total economic costs ($) 25,315
Accounting profit 15,000
Cost of equity capital (%) 12%
The level of accounting profit needed to cover the opportunity costs of capital is
closest to:
A. $1,755.
B. $13,245.
C. $25,315.
40. Which of the following components is least likely excluded from a country’s GDP
but not GNP? The market value of goods and services produced by:
A. foreigners in that country.

B. citizens residing in a different country.
C. domestic companies outsourcing production overseas.
41. The price a consumer pays for agriculture machinery in a country is $500. The
market demand function for agricultural machinery is given by the equation, Qd =
2,400 – 3P.
Based on the information provided the amount by which the value of agricultural
machinery exceeds purchase costs is closest to:
A. 135,000.
B. 225,000.
C. 600,000.


42. A country’s economic growth is enhanced by an increase in:
A. the birth rate.

B. the degree of market regulation.
C. government spending on education.
43. Mathew Hughes is a market analyst studying economic variables in China. The
12-month local Chinese government debt currently offers an annual yield of 5%
while current inflation is 3%. Investors expect Inflation to rise to 4% in the
coming year and desire a real yield of 1% on the government debt. Hughes
believes that investors have overestimated expectations and that inflation rate
should in fact rise to 2%.
Based on Hughes’ expectations and the Fisher effect, in order to compensate for
the forecasted inflation and preserve real return, the government debt yield should
most likely:
A. rise by 1%.
B. decline by 1%.
C. decline by 2%.
44. When an economy is slowing and inflation and monetary trends are weakening, in
order to increase liquidity, the central bank will most likely:
A. cut the target rate.

B. increase the interest rates.
C. keep the target rate unchanged.


45. The exhibit below highlights selective financial information concerning Green
Enterprises. Martha Lewis, the company’s chief financial analyst, is evaluating
the change in the company’s tolerance for leverage between 2012 and 2013. She
has collected relevant data in the exhibit below:
Exhibit
Relevant Financial Data for Green Enterprises, 2012-2013 (In Millions)
2013 2012
Operating cash flow* 8.9 7.7
Working capital changes 0.1 (0.3)
Dividends paid 3.4 3.6
Interest paid 2.9 2.7
Total debt 17.2 15.4
*The figure is prior to working capital changes
Based on the data presented and ignoring any capital expenditures, Green
Enterprises’ tolerance for leverage has most likely:
A. improved.
B. deteriorated.
46. A company’s tax expense represents:
A. the amount paid for income taxes.

B. a provision made for its income taxes.
C. an aggregate of its income tax payable and any changes in deferred taxes
and liabilities.


47. Valaroy entered into a lease agreement to acquire equipment for five years
beginning January 1, 2011. The lease requires five annual payments of $35,450
with the first due on January 1, 2011. The useful life of the equipment is six years
and the salvage value is zero. The fair value of the equipment is $147,820 and the
applicable discount rate is 10%. Valaroy prepares and presents its financial
In relation to the lease agreement, in the fiscal year 2012, Valaroy will report:
A. a lease liability of $88,159 on its balance sheet.

B. rental expense of $35,450 in its income statement.
C. interest expense of $14,782 in its income statement.
48. Deferred taxes related to a business combination:
A. must be recognized in equity.

B. are allowed to be recognized under IFRS.
C. must be recognized as an asset or liability depending on the carrying
amount and tax base of the goodwill.
49. Boston Associates, a newspaper agency, exchanged a large printing unit with an
original cost of $400,000 for a used unit with a carrying value and purchase price
of $280,000 and $500,000, respectively, in year 2013. The original unit,
purchased in 2011, had an estimated useful life of five years, a residual value of
$30,000 and was being depreciated using the straight-line method.
Due to its lack of popularity and thus market, the fair value of the acquired unit
cannot be determined with certainty. The purchase and exchange activities were
undertaken in the beginning of the respective fiscal years.
In relation to the exchange, Boston Associates will:
A. not report a gain or loss in its income statement and will record the unit at
a value of $280,000 in its balance sheet.
B. report a gain of $28,000 in its income statement and will record the unit at
C. not report a gain or loss in its income statement and will record the unit at


50. A decline in the inventory balance in a particular accounting period should most
likely lead to a decline in:
A. the debt-to-capital ratio.

B. working capital turnover.
C. the days of inventory on hand.
51. On January 1, 2011 Kyrax Inc purchased an image processing unit for $250,000.
The estimated useful life and residual value of the unit were eight years and
$85,000 respectively. In the same year Kyrax reported operating profit of
$650,000.
Relative to the straight-line method, in 2011, the double declining depreciation

method will produce an operating profit that is:
A. $20,625 lower.
B. $41,875 lower.
C. $17,500 higher.
52. Which of the following accurately highlights the treatment of a bank overdraft in
the cash flow statement under IFRS and U.S. GAAP?
IFRS: U.S. GAAP:

A. Operating activity Operating activity
B. Cash equivalents Financing activity
C. Operating activity Financing activity


53. Lima is a limestone extractor operating in the U.S. The extractor’s chief financial
analyst, Carl Douglas, has summarized selective financial information for the
years 2010 to 2013 in the exhibit below.
Exhibit:
Financial Information for 2011-2013
$ millions 2013 2012 2011
Operating cash flow 35.8 30.9 38.6
EBIT 20.5 22.8 25.0
Long-term debt 12.0 10.4 8.6
Short-term borrowing 8.5 7.6 5.4
Interest payments 2.2 1.6 1.0
Lease payments* 21.0 16.0 18.5
*Interest payments represent 1/3 of lease payments
Lima’s fixed charge coverage ratio is the highest in:
A. 2011.
B. 2012.
C. 2013.
54. A ratio that contains cash flow from operations in its numerator and cash outflows
from investing and financing activities in its denominator measures:
A. solvency and the ability to acquire and pay down debt.

B. profitability and the cash generating ability of operations.
C. solvency and the company’s ability to acquire assets, pay debt and make
distributions to owners.


55. Martha Townshead is analyzing selective financial information for Fisher Corp.
for the years 2012 and 2013. Fisher Corp. complies with U.S. GAAP.
$’000s 2013 2012 Change

Net income 255 207 + 48
Depreciation & amortization 28 20 +8
Accounts receivable 180 135 + 45
Inventory 89 95 –6
Accounts payable 140 128 + 12
Interest payable 56 50 +6
Taxes payable 48 53 –5
Accumulated depreciation 128 105 + 23
Short-term debt 107 98 +9
Using the indirect method, Fisher Corp’s cash flow from operating activities is
closest to:
A. $140,000.
B. $257,000.
C. $279,000.
56. The exhibit below highlights selective financial measures observed for Horizon
Gates for the years 2012 and 2013, assuming 365 days in a financial year.
2013 2012 Year-on-year change (%)

Inventory turnover 15 12 + 20.00%
Receivables turnover 75 70 + 7.14%
Payables turnover 45 80 - 77.78%
Based on the year-on-year changes observed for the highlighted measures, which
of the following explanations is most likely appropriate?
A. Horizon’s credit policy has become more stringent.

B. Horizon is taking advantage of early payment discounts.
C. The average number of days for holding inventory has decreased by 20%.


57. Duckworth Associates is a book publishing firm preparing and presenting its
financial statements in accordance with U.S. GAAP. In the current year
Duckworth sold a printing unit for $2,056,000. A financial analyst has collected
selective financial information for the purpose of analysis:
Beginning balance equipment $4,560,000

Ending balance equipment $3,120,000
Capital expenditures $14,980
Annual depreciation expense $44,870
Beginning balance accumulated depreciation $980,000
Ending balance accumulated depreciation $1,015,000
Remaining useful life of equipment sold 3 years
The gain on the sale of the unit is closest to:
A. $601,020.
B. $610,890.
C. $1,445,110.
58. A key difference between IFRS and U.S. GAAP with respect to cash flow
reporting is that:
A. U.S. GAAP do not permit the use of the indirect format.

B. IFRS provide greater discretion in classifying interest and dividends.
C. IFRS require supplementary reconciliation if the indirect format is used.


59. The exhibit below highlights selective information from Baxter Inc’s financial
statements for the years 2012 and 2013. Baxter prepares and presents its financial
statements in accordance with IFRS.
$ Millions 2013 2012

Revenue 60 55
Cost of goods sold 42 38
Net income 14 10
Dividends paid* 8 6
Inventory 20 25
Cash 5 4
*Classified as a financing cash flow
The amount of cash paid by Baxter Inc. to its suppliers is closest to (in millions):
A. $10.
B. $35.
C. $45.
60. The impact of impairment loss on net profit margin is that the financial measure
will:
A. increase.
B. decrease.


61. Trans Limited is a train operator in France which prepares and presents its
financial statements in accordance with IFRS. Mark Sentosa is one of the
operator’s financial officers. Sentosa is attempting to determine whether one of
the steam engines has undergone an unexpected decline in value. Sentosa has
collected information requisite to his analysis below:
Carrying value €875,000
Fair market value €895,000
Expected annual cash over useful life €30,000
Estimated selling price (year 6) €800,000
Estimated remaining useful life 6 years
Required rate of return 10%
Selling costs €35,550
In relation to the steam engine, Sentosa will record an impairment loss amounting
to:
A. €15,550.
B. €20,000.
C. €292,763.
62. The purchase of Treasury stock should positively influence a company’s:
A. quick ratio.
B. debt-to-equity ratio.
C. return on equity ratio.


63. The exhibit below illustrates selective financial information for Trax Limited for
the years 2012 and 2013:

Current portion of long-term debt 24 20
Long-term debt 80 110
Common stock 125 140
Additional retained earnings 35 80
Over the two years, the firm’s usage of long-term debt relative to total capital has
most likely:
A. increased.
B. decreased.
64. A company has reported the following financial information for the years 2012
and 2013:
Cash 45 30
Marketable securities 15 15
Receivables 185 190
Inventory 88 90
Current liabilities 120 140
The percentage change in the quick ratio over the two years is closest to:
A. 19.54%.
B. 21.63%.
C. 55.56%.
65. Period costs such as advertising expenditures:
A. are less likely to directly match revenues.

B. more directly relate to future expected benefits.
C. are accounted for using the cash basis of accounting.


66. On January 1, 2013 an investment company established office paying $65,000 to

the landlord for space. 5% of the amount paid is a refundable deposit while the
remaining represents the first month’s rent.
The impact of the transaction on the company’s net assets on January 1 is most
likely:
A. neutral.
B. an increase of $3,250.
C. a decrease of $61,750.
67. On a company’s balance sheet shareholder’s equity represents the owners’:
A. financial position in a company.

B. claims on the resources of a company.
C. residual interest in a company’s net assets.


68. Lizole is a bioengineering firm that is currently undertaking two projects.
Project 1: A prototype version of an apparatus to be used for stem cell research.

The firm has received positive reviews from two laboratories having
tested the apparatus. The apparatus has thus been determined to be
technologically feasible, saleable and feasible to develop.
Project 2: Research undertaken for cancer diagnostic equipment aiming to take a

more in-depth study of the growth and replication of cancer cells. An
initial market survey has revealed significant potential for this project.
The expenses of the research division (in £ millions) are summarized below:
Project 1 Project 2
Materials 420 130
Labor:
Direct 705 858
Administrative 450 308
Overhead costs:
Direct 155 120
Indirect 200 105
Reorganization 50 -
In relation to the two projects, the amount capitalized as an asset under IFRS is
closest to:
A. £0.
B. £1,125.
C. £2,113.


69. Which of the following statements is most likely correct with respect to the break
point on the marginal cost of capital schedule? It represents the point:
A. of optimal capital budget.

B. where the marginal cost of capital is lowest.
C. where a company’s marginal cost of capital changes.
70. A company executive is holding a meeting with members of the compensation

committee. Together the individuals are attempting to devise a suitable
compensation scheme for executive directors. One of the members proposes a
stock dividend and cites two advantages of this form of compensation.
Advantage 1: Issuing a stock dividend should help improve the debt-to-equity

ratio as contributed capital will increase by the number of shares issued.
Advantage 2: Stock dividends are generally not taxable to the shareholder.
Which of the cited advantages is most likely correct?
A. Both advantages.
B. Advantage 1 only.
C. Advantage 2 only.
71. A senior executive at a company has identified that the average daily float
associated with a company’s bank account is $223,460. The float factor is 1.790
while the number of days in the month of analysis is 30.
The total amount of deposits made by the company for the month is closest to:
A. $13,333.
B. $3,745,140.
C. $11,999,802.


72. Which of the following factors least likely serves as a motivation for corporations
engaging in share repurchases?
A. To provide company management with discretion in controlling their

dividend policy.
B. To reduce the impact of a decline in EPS resulting from the exercise of
employee stock options.
C. To communicate to the market that company management believes that a
company’s share is overvalued.
73. The exhibit below illustrates an accounts receivable aging schedule for a
manufacturing concern.
Exhibit
Accounts Receivable Aging Schedule for a Manufacturing Concern
($ Millions) January February
Sales 550 650
Total accounts receivable 420 585
Current (1-30 days old) 220 200
1-30 days past due 100 234
>90 days past due 14 16
Which of the following scenarios is a suitable explanation for the changes

observed in the aging schedule between January and February?
A. The percentage of cash sales has increased.

B. There is an increased likelihood of accounts becoming uncollectible.
C. The company has extended the credit terms offered to customers.
74. Which of the following corporate policies is most consistent with a strong
corporate governance practices?
A. Restricting options repricing.

B. A significant portion of executive compensation is the basic salary.
C. Establishing a corporate fund to finance the medical treatment of a senior
manager’s family member.


75. Dwight Enterprises is a manufacturing firm that plans to borrow $2 million to

finance a three month project. The company would like to minimize borrowing
costs; its financial officer has identified three alternative borrowing sources.
Alternative 1: Drawing down a line of credit at 4.50% with a 1% commitment fee

on the full amount borrowed.
Alternative 2: A banker’s acceptance at an all-in inclusive rate of 6.40%.
Alternative 3: Commercial paper at 4.0% with a dealer’s commission of 1/9

percent and a backup line cost of 1/5 percent, both of which are
assessed on the $2 million of commercial paper issued.
The financing cost associate with Alternative 1 is closest to:
A. 3.27%.
B. 4.13%.
C. 4.88%.
76. A company situated in an emerging market has experienced two liquidity events
during the most recent financial year.
Liquidity event 1: The company’s bank has reduced its line of credit following a
revised central bank policy.
Liquidity event 2: The company’s inventory turnover ratio has considerably

slowed from that observed over the previous years due to declining consumer
purchase activity in the current inflationary environment.
Liquidity events 1 and 2 most likely represent:
Liquidity Event 1: Liquidity Event 2:

A. pull on liquidity drag on liquidity.
B. pull on liquidity pull on liquidity.
C. drag on liquidity pull on liquidity.


77. A portfolio manager has invested in a portfolio benchmarked to an equity index.

He is primarily concerned with the substantial rebalancing costs which will need
to be incurred to ensure index weights are maintained.
The portfolio manager has most likely invested in a (n):
A. price-weighted index.
B. value-weighted index.
C. equal-weighted index.
78. Hedge funds:
A. are heavily regulated.

B. may suffer from survivorship bias.
C. avoid the use of leverage in their investment strategies.
79. A portfolio manager has purchased $2.5 million worth of equity investments for
several of its client accounts. The purchase is financed using a combination of
cash and equity. The manager must abide by a minimum margin requirement of
35%. Given the maintenance margin requirement, if the purchase price rises by
15%, the return on equity investment in the manager’s leveraged position is
closest to (ignoring interest costs and commission):
A. 5.25%.
B. 15.00%.
C. 42.86%.


80. The exhibit below illustrates the market’s standing limit order book for the
GlenCorp stock.
Exhibit:
Standing Limit Order Book
for GlenCorp Stock
Order Prices
Bids Offers (Asks)
45
44
43
42
37
36
35
34
Isaac Howler and Joanne Milken have each placed limit orders for the company’s
shares of stock. Howler has placed a limit buy order at a price of $43/share while
Milken has placed a limit sell order at a price of $44/share.
The limit orders called by the two traders are most likely classified as:
Howler Milken
A. behind the market order standing limit order.
B. standing limit order marketable limit order.
C. marketable limit order behind the market order.
81. A trader purchased a share of stock at $40. Three months later the equity market
is facing volatile performance. He suspects the stock price may fall by a minimum
of 10%. The trader would like to minimize losses by ensuring the price falls by no
more than 15% from its initial price.
The trader should most likely:
A. execute a good-till-cancelled (GTC) stop 36, limit 34.

B. execute a GTC, stop 34, market sell.
C. purchase a call option contract struck at 34.


82. An equity portfolio manager is purchasing technology stocks for his clients’
portfolios. He believes the stock of a particular software house is undervalued at
its current market price of AUD 130 and should be trading at AUD 180. However,
he believes that there is a greater likelihood of the stock trading at AUD 180 if
other traders are willing to buy it at a price above AUD 140.
In order to best take advantage of this information, the manager should issue a:
A. call option with a 180 AUD strike.

B. GTC, stop 140 AUD, market buy order.
C. GTC, stop 140 AUD, limit 180 AUD buy order.
83. In the current financial year, a company has paid a dividend per share of $5. The
company has always maintained a retention rate of 30% and expects to continue
to do so in the long-run. The average return on equity is equal to 15%. The
company’s shareholders’ required return on equity is 20%.
The company’s justified price-to-earnings (P/E) ratio is closest to:
A. 3.16.
B. 4.52.
C. 7.78.
84. Brock Limited is an asset management firm managing equity investments for
numerous client accounts. The firm is intending to undertake an investment in the
S&P 500 equity index. Details concerning the total index price level and income
return over the two periods being analyzed has been summarized in the exhibit
below. The initial index price level is 1,000.
Exhibit:
S&P 500 Index, Price Level and Income Return
Period 1 Period 2
Total income return 1.0% 2.5%
Total price level 1,020 980
The value of the total return index is closest to:
A. 1,015.00.
B. 1,015.37.
C. 1,035.15.


85. Sector indices:
A. classify securities based on market capitalization.

B. can be used as a tool for managerial performance analysis.
C. are classified based on a universally agreed upon sector classification
method.
86. Which of the following statements accurately characterizes the impact of time on
difference in values between price and total return indexes?
A. The values of the two indexes will converge.

B. The value of the price return index will exceed the value of the total return
index.
C. The value of the total return index will exceed the value of the price return
index.
87. A security market index most likely represents:
A. a combination of asset classes.

B. a hypothetical portfolio of marketable securities.
C. a security market, market segment, or asset class.
88. Fixed income indexes are least likely classified based on:
A. maturity.
B. type of issuer.
C. frequency of coupon payments.


89. When the present value of a commodity’s storage costs exceeds the present value
of its convenience yield benefits, then:
A. the net cost of carry is negative and the commodity forward price will be
higher than the spot price compounded at risk free rate.
B. the net cost of carry is positive and the commodity forward price will be
lower than the spot price compounded at risk free rate.
C. the net cost of carry is negative and the commodity forward price will be
90. A trading is exploring arbitrage opportunities in the options market. European

calls and puts with an exercise price of 65 expire in 150 days. The underlying is
priced at 68 and makes no cash payments during the life of the options. The risk-
free rate of interest is 4.0%. Call and put options are selling for 7 and 6
respectively.
Based on the information provided, the trader will conclude that the call option is:
A. overpriced.
B. underpriced.
C. fairly valued.


91. Lisa Martin is an equity analyst who is formulating a protective put strategy for
put options on the DA Manufacturing stock. She has collected the relevant data in
the exhibit below:
Exhibit:
Put Option Data for the Analysis of the DM Manufacturing Stock
Exercise price* $50
Premium* $6
Term-to-maturity 150 days
Underlying stock price at initiation $58
Underlying stock price at expiration $49
Risk-free rate 3.5%
*Otherwise identical call options on the
manufacturer’s stock are selling for $7.
The value of the protective put strategy at expiration of the puts is:
A. $0.
B. $50.
C. $56.
92. Over-the-counter and exchange-listed options differ in terms of:
A. moneyness of options.
B. credit risk faced by the option holder.
C. the proportion of premium paid relative to exercise price.
93. Which of the following accurately describes the profit to the call option seller?
A. ∏ = Max (0, ST - X) - co
B. ∏ = -Max (0, X - ST) + co
C. ∏ = -Max (0, ST - X) + co
94. Unlike forward contracts and swaps, futures:
A. cannot be traded over-the-counter.

B. are associated with zero default risk.
C. have a non-zero contract value at initiation.


95. A share repurchase agreement with a highly rated, short in supply, sovereign bond
as collateral is associated with:
A. a low repo rate.

B. zero default risk.
C. a high repo margin.
96. A 181-day Treasury bill has a face value of $10.000 million and a present value of
$9.219 million. Assuming a 360-day year, the instrument’s discount rate is closest
to:
A. 4.49%.
B. 15.53%.
C. 16.85%.
97. A floating rate note (FRN) has a par value of $1,000 and makes semi-annual
interest payments on June and December at the six-month LIBOR plus spread of
200 basis points. On the date the instrument was issued (January 1, 2012), the six-
month LIBOR was 4.5%. In June 2012, LIBOR increased to 5.0% and declined in
December 2012 to 3.5%.
Which of the following statements is most likely correct with respect to the
interest payments due on the FRN?
A. The coupon interest due in June 2012 amounts to $32.50.

B. The coupon interest due in June 2012 amounts to $35.00.
C. The coupon interest due in December 2012 amounts to $42.50.
98. A dual currency bond:
A. is viewed as a combination of a single currency bond and foreign currency

option.
B. makes coupon payments in one currency and principal payments in
another currency.
C. makes coupon payments in one foreign currency and principal payments
in another foreign currency.


99. Three months ago, a steel manufacturer sold a 5% bond issue with a face value of
£1,000 and redemption yield of 5%. The bond will be maturing in ten months’
time.
The issue is most likely classified as a:
A. pure discount bond.

B. capital market security.
C. money market security.
100. A software house issued a 25-year bond issue at a price of 101.20 on January 1,
2013 (stated as a percentage of par). The par value of each bond in the issue is
$1,000. The bond will be callable every January 1st starting from the year 2020 at
the option of the issuer.
The callable bond has an embedded:
A. American option.
B. European option.
C. Bermuda-style option.
101. Affirmative covenants will require the issuer to:
A. use bond proceeds in a particular manner.

B. maintain minimum acceptable interest coverage ratios.
C. limit the assets that can be disposed off during the bond’s life.
102. An investor would like to invest in a security that offers inflation protection for
both interest and principal repayments. Which of the following bond structures is
most suitable for this investor?
A. Capital-indexed bond
B. Credit-linked coupon bond
C. Zero-coupon-indexed bond


103. A convertible bond issue has a conversion premium of $50 at a time when the
underlying share’s price is $35. The convertible has a par value of $1,000 and is
convertible into 80 shares of the issuer’s stock.
The convertible bond’s price is closest to:
A. $1,050.
B. $2,750.
C. $2,850.
104. Which of the following primary market mechanisms can be employed by an

issuer desiring to spread the issue over a series of time intervals without having to
prepare a separate offering circular for each bond issue?
A. Auctions
B. Shelf registration
C. Underwritten offerings
105. The primary market mechanism used to offer unregistered bonds without an
underwriting to a large institutional investor is most likely:
A. the grey market.

B. a private placement.
C. a firm commitment offering.
106. A 10%, five-year corporate bond issue with a par value of $1,000 pays coupon on
a semi-annual basis. The market discount rate at the time of the issue was 12%
and has remained unchanged.
Which of the following facts is most likely correct regarding the bond issue?
A. The bond is priced at par.

B. The bond is selling at a price below par.
C. The bond offers an excessive coupon rate.


107. An analyst has gathered some information about businesses in a foreign economy.
The exhibit below displays data about the firms operating there.
Exhibit
Fair Value Liquidation Value
(Dec 31 2009) (April 30 2010)
Firm A $150 million $60 million
Firm B $175 million $100 million
Firm C $320 million $90 million
Based on the information above, the economy is likely to:
A. have entered a business cycle low.

B. achieve abnormal growth in the near future.
C. experience an increase in the number of companies reporting at fair value.
108. For most private equity funds:
A. management fees generally range from 20-30 percent of the committed

capital.
B. Limited partners (LPs) do not earn incentive fee until general partner (GP)
have received their initial investment back.
C. General partner (GP) does not earn incentive fee until limited partners
(LPs) have received their initial investment back.
109. A commodity futures market is said to be in backwardation if:
A. the convenience yield is high.

B. there are little to no convenience yields.
C. futures prices are higher than spot prices.
110. An investor would like to invest in a real estate asset class which provides a
relatively predictable income stream and has the obligation to distribute the
majority of its income to owners. The investor should most likely select:
A. Timberland.
B. Equity REITs.
C. Residential property


111. Neil Ortega is seeking to invest in an alternative investment asset class with the
following properties:
• Liquid
• High return potential
• Diversification potential
• Inflation hedge
Ortega will most likely invest in:
A. apartments.
B. funds of hedge funds.
C. commodity derivatives.
112. Gabrielle Hope invests $250,000 in Bacca Fund, a fund of hedge funds with
which a “4 and 12” fee structure. Management and incentive fees are calculated
independently at the end of each year. One of Bracca Fund’s investments is the
Torp fund, which has generated a fund value of $320,000 at the end of the first
year. The annual return to an investor in Bacca, net of management and incentive
fees, is closest to:
A. 7.5%.
B. 19.5%.
C. 28.0%.


113. The set of exposures to IPS-permissible asset classes that is expected to achieve
the client’s long term objectives given the client’s investment constraints is most
likely referred to as:
A. tactical asset allocation.

B. systematic risk exposure.
C. strategic asset allocation.
114. A Muslim investor prohibit his investment manager from investing in businesses
related to gambling and alcohol. In preparing investment policy statement of the
investor, this prohibition will most likely be included in:
A. risk and return objectives.

B. legal and regulatory factors.
C. unique needs and circumstances.
115. If short selling is allowed, an asset plotted above the security market line should
most likely be:
A. sold.
B. sold short.
C. purchased.
116. A higher return investment is more desirable even if it comes up with higher risk
if the investor is:
A. rational.
B. risk averse.
C. risk neutral.
117. Which of the following features most likely distinguishes ETFs from index mutual
funds?
A. Dividend reinvestments
B. Ownership rights of fund assets
C. Underlying securities held by the fund


118. Christopher Fugate, CFA, is a portfolio manager at Sunny Brooks. He is

managing the investment portfolio of Ralph McKenzie which comprises of an
allocation to small-cap equity stocks and real estate. The expected return and
standard deviation of the two asset classes are illustrated in the exhibit below. The
correlation between the two asset classes is 0.02.
Exhibit:
Asset Classes Comprising McKenzie’s Investment Portfolio
Expected Annual Standard Deviation

Return (%) of Return (%)
Real estate 18.0 12.3
Small-cap equities 6.5 4.7
If McKenzie requires a portfolio return of 10%, the proportions invested in each

asset class should, respectively, be closest to:
Real estate Small-cap

(%): equities
(%):
A. 30.4 69.6.
B. 50.0 50.0.
C. 73.5 26.5.
119. A portfolio manager is exploring equity securities for an investor’s portfolio.

Based on his observations, the investment manager concludes that stock returns
are often negatively skewed.
Which of the following statements most accurately illustrates the implications of

an asset class with negatively returns?
A. Portfolio standard deviation will be overestimated.

B. There is a higher than normal probability for extreme returns.
C. A majority of the return observations are concentrated to the left of the
mean.


120. In stressed market conditions:
A. risks arise independently and hardly interact with one another.

B. the combined risk compounds the individual risks in a linear manner.
C. the total risk faced is worse than the sum of the risks of the separate
components.

FinQuiz.com
June, 2016
Revision 1

CFA Level I Mock Exam 3 – Solutions (AM)

FinQuiz.com – 3rd Mock Exam 2016 (AM Session)

33-44 Economics 18
Total 180


Questions 1 to 18 relate to Ethics

would be to:

Correct Answer: B
Reference:
Upon learning of the illegal client activity, Elliot’s initial course of action should
be to stop the behavior by bringing it to the attention of her supervisor or the
firm’s compliance department. Should this prove unsuccessful, her next course of
action would be to disassociate herself from undertaking trades on behalf of the
client’s account. In the absence of any regulations, members and candidates are
not required to report violations to the concerned governmental or regulatory
organizations.

Correct Answer: A
Reference:


Based on the CFA Institute Code of Ethics members and candidates must practice
and encourage others to practice in a professional and ethical manner that will
reflect credit on themselves and the investment profession. Additionally, members
and candidates must promote the integrity of and uphold the rules governing
capital markets. The requirement to place the importance of protecting market
integrity before employer interest is required by the Standards of Professional
Conduct as is the need to achieve and maintain independence and objectivity in
professional activities.

Correct Answer: A
Reference:
Adequate compliance procedures should meet regulatory requirements.

The standard concerning responsibility of supervisors permits individuals to
delegate their supervisory duties but such delegation does not relieve them of their
responsibility.
However, procedures cannot be designed to anticipate every potential violation
which is why such a requirement is not imposed by the Code and Standards.


Correct Answer: C
Reference:


After reviewing the materials obtained during a professional conduct investigation

a designated officer will propose a disciplinary sanction which can be accepted or
rejected by the member. If the sanction is rejected, the matter is referred to a
hearing panel whose task is to determine whether a violation has occurred and, if
so, what sanction should be imposed.

their order value.
Correct Answer: A
Reference:
Procedures for allocating trades to clients include:
• processing and executing orders on a first-in, first out basis;

• allocating trades for new issues by allocating securities by client rather
than portfolio manager; and
• giving all accounts participating in a block trade the same execution price.





Correct Answer: B
Reference:
Lawson is in violation of the standard relating to diligence and reasonable basis.

This is because the discussion between the two production employees and any
information shared is not credible enough to base her investment decision on.
Given that these individuals lack seniority, it is less likely they have access to
confidential information. Therefore basing her financing and share disposal
decisions on information, which is not credible will result in a decision which
lacks a reasonable and adequate basis.
Lawson is not in violation of the standard concerning material nonpublic

information. The specificity of the information, the extent of its difference from
public information, its nature, and its reliability are key factors in determining
whether a particular piece of information is material; the less reliable information
is, the less likely it is to be material. As discussed above, the fact that the
production employees are discussing a strategic issue whose likelihood of
occurrence is uncertain makes the information nonmaterial.
7. Ace Associates is a hedge fund management firm generating above-average fund

performance for the past several years. The fund’s senior manager, Grace Singh,
is contacted by Jeremy Lewis, a self-employed portfolio manager, who is seeking
to allocate hedge funds to his client accounts. Lewis’s client base ranges from
those with imminent liquidity needs to wealthy entrepreneurs with insignificant
portfolio funding requirements. Singh signs an agreement with Lewis whereby
Ace’s management fee will be reduced for his clients in exchange for the
management of her personal account. Lewis does not disclose the arrangement to
his clients because they are expected to benefit.
Which of the following Standards of Professional Conduct is least likely being

violated?
A. Suitability
B. Referral fees
C. Misrepresentation
Correct Answer: C


Reference:
There is no evidence to indicate that the standard relating to misrepresentation has

been violated.
Lewis is in violation of the standard relating to suitability by allocating an illiquid

asset class (hedge funds) to the accounts of clients with imminent liquidity needs.
By not disclosing details of the arrangement between Lewis and Singh (charging
lower fees in exchange for portfolio management services), the portfolio manager
is in violation of the standard relating to referral fees. This standard requires
members and candidates to disclose any compensation, benefit or consideration
received from or paid to others for the recommendation of products and services.
8. Paul Murray is preparing a report on the stock of a credit rating agency with two
other research analysts. Based on his independent discussion with the agency’s
executives as well as study of economic reports and surveys, Murray forecasts the
agency’s client base to shrink and deems a ‘sell’ rating as appropriate. However,
his colleagues disagree stating that Murray’s recommendation is too extreme and
that a ‘hold’ rating is more appropriate based on their in-depth historical industry
analysis of the impact of a shrinking client base on corporate performance.

Murray’s best course of action is to:
A. continue to identify his name with the research report.

B. request for the removal of his name from the research report.
C. not issue the report with his recommendation as it is based on material
Correct Answer: A
Reference:


Murray’s best course of action is to continue to have his name identified with the
report. This is because the recommendation derived from his colleagues has a
reasonable and adequate basis and he has no reason to doubt its independence and
objectivity. Therefore, he does not need to disassociate himself from the report.
Murray’s recommendation is based on the mosaic theory. He is using nonmaterial

nonpublic information along with information from public sources to derive his
recommendation.
9. Jason Briggs is a portfolio manager serving Alliance. Based on a consultant

research analyst report Briggs will be undertaking a block trade for thirty client
accounts by purchasing a pharmaceutical corporate bond issue. The company is
categorized as highly risky with potential for strong returns. Using the firm’s
broker, shares of stock are allocated to each client’s account based on current
market price with commission being charged in proportion to account size.
Martha Lake is one of Briggs’ clients. The manager has decided to exclude her
account from the trade allocation. During a discussion with Briggs she states, “As
a child I had seen my parents undergo many financial hardships and so I am
somewhat apprehensive towards uncertain situations.”
Two months later, the pharmaceutical’s credit rating has improved. However,
Briggs deems the issue as still being risky for Lake and does not inform Lake of
the rating change.
Which of the following CFA Institute Standards of Professional Conduct are most
A. Suitability
B. Fair dealing
C. Communication with clients and prospects
Correct Answer: B
Reference:


Briggs is in violation of the standard relating to fair dealing. This is because he

has not charged the same commission rate for all the accounts participating in a
block trade.
Briggs is in compliance with the suitability standard by excluding Lake’s account
from the block trade. Lake is not willing to participate in highly risky trades and
so the trade allocation will be unsuitable in light of her risk appetite.
Briggs is not in violation of the standard relating to communication with clients

and prospects. Given that the issue is still inappropriate for Lake’s account,
communicating the ratings change is unnecessary.
10. Jason Lee is senior portfolio manager at Motto Trust, an asset advisory firm. To
enhance his tax management skills, Lee has been invited to attend a tax
conference which is sponsored by a tax advisory firm owned by one of his clients.
The client has offered to fully pay for transportation to the conference but Lee
declines and instead opts for his own arrangement. Lee informs his supervisor of
the conference invitation received before departing. At the conclusion of the
conference, the senior manager of the tax advisory firm invites Lee to an
exclusive golf club, which he accepts. He informs his employer about the
invitation upon returning to work the following day.
Has Lee violated any CFA Institute Standards of Professional Conduct?
A. No.
B. Only with respect to attending the conference.
C. Only with respect to accepting the golf club invitation.
Correct Answer: A
Reference:
Lee has not violated any CFA Institute Standards of Professional Conduct. By
declining the client’s offer to pay for transportation, he is in compliance with the
standard relating to independence and objectivity. Furthermore, he has not
violated any standard by accepting the golf club invitation. He had informed his
employer about his visit after his return. Also, given that knowledge of the club
invitation was not available beforehand, informing his employer upon returning to
the firm is the best course of action.


11. Jessica March and Adam Pocock are CFA Level III candidates as well as
colleagues. The two candidates regularly study together for the Level III exam.
During one of their study sessions the two individuals engage in a discussion,
March: “Earlier in the year I had a discussion with Tim Martin, a Level III
candidate, who said that the most recent exam was very ‘difficult’.”
Pocock: “Difficult or not, with my relevant work experience, I am confident that

I will become a charterholder shortly following completion of the Level
III exam.”
According to the Standards of Practice Handbook, which individual is most likely

in violation?
A. March; she has shared confidential information with Pocock.

B. Pocock; he has made a guarantee regarding the receipt of the charter.
C. March; she has engaged in a discussion with Martin regarding the exam
contents.
Correct Answer: B
Reference:
March is not in violation of the CFA Institute Standards of Professional Conduct;

this is because she has not shared specific exam information concerning the
appearance of questions on the exam or any broad topical areas. Therefore she has
maintained the confidentiality of the CFA exam program.
Pocock, on the other hand, is in violation of the standard relating to reference to

the CFA Institute, the CFA Designation, and the CFA Program; this is because he
has made an explicit guarantee with respect to the final award of the charter; the
final award is subject to meeting the CFA Program requirements and approval by
the CFA Institute Board of Governors.


12. Which of the following actions is least likely considered a violation of the
standard concerning Loyalty to Employers?
A. Soliciting clients prior to the cessation of employment.

B. Using a business plan generated for the employer to start a new business.
C. Applying specialized analytical skills gained at the previous employer in
the new workplace.
Correct Answer: C
Reference:
A member or candidate is not in violation by using skills and experiences gained

at the previous place of employment in the workplace.
Using a business plan generated for the employer to start a new business is
construed as self-dealing which represents a violation of the employer loyalty
standard.
Soliciting clients prior to the cessation of employment represents a violation of
the standards concerning employer loyalty.
13. The criteria used when evaluating secondary or third-party research least likely
includes:
A. reviewing the assumptions used.

B. evaluating the quality of the researcher’s internal controls.
C. determining the soundness of the researcher’s established code of ethics.
Correct Answer: C
Reference:
The criteria used when evaluating secondary or third-party research includes:
• assumptions used;
• rigor of analysis performed;
• date/timeliness of the research; and
• evaluate the objectivity and independence of the recommendations.


14. Harper Inc. is a financial services firm that was established on January 1, 2002.
The firm claims compliance with the GIPS standards on January 1, 2009.
In order to claim compliance, Harper Inc. initially:
A. Is required to ensure the financial years, 2002-2006, are in compliance.

B. Is required to ensure the financial years, 2002-2009, are in compliance.
C. can link non-GIPS compliant performance with GIPS-compliant
performance as long as disclosure is provided.
Correct Answer: A
Reference:
On January 1, 2009 Harper has been in existence for seven years. On claiming
compliance, the firm is required to initially present a minimum of five years
(2002-2006) of GIPS-compliant investment performance.
After the firm has presented the minimum of five years of GIPS-compliant
investment performance, the firm must present an additional year of performance
each year building a record of 10 years.
Firms are not permitted to link non-GIPS compliant performance with GIPS-
compliant performance after January 1, 2000.
15. In order to prevent misconduct, the Standards of Practice Handbook recommends

members and candidates encourage their employers to:
A. restrict employee participation in IPOs.

B. establish written procedures for reporting violations.
C. disseminate a list of potential violations and disciplinary sanctions to all
firm employees.
Correct Answer: C
Reference:


In order to prevent misconduct, members and candidates should encourage their

employers to adopt policies which disseminate a list of potential violations to all
employees and associated disciplinary sanctions, up to and including dismissal
from the firm; this is recommended by the CFA Institute Standard of Professional
Conduct concerning misconduct.
Restricting employee participation in equity securities and IPOs is a

recommended procedure for compliance with respect to the standard concerning
independence and objectivity.
Encouraging their employers to establish procedures for reporting violations is a

recommended procedure for compliance with respect to the standard concerning
knowledge of the law.
16. According to the Fundamentals of Compliance section of the Global Investment

Performance Standards, total firm assets must:
A. not include assets assigned to a sub-advisor.

B. include non-discretionary and discretionary assets.
C. be included in composites on the basis of their respective book values.
Correct Answer: B
Reference:
According to the Fundamentals of Compliance section, total firm assets must

include the fair value of all discretionary and non-discretionary assets managed by
the firm. This also includes fee- and non-fee paying portfolios.
Total firm assets must also include assets assigned to a sub-advisor provided the
firm has discretion over the selection of the sub-advisor.


17. XYZ Inc is an investment management firm which claims compliance with the
Global Investment Performance Standards. Each year firm management selects
ten percent of prospective client requests and makes compliant presentations; this
policy is based on a first-come, first-serve basis. Due to limited resources, the
frequency of providing compliant presentations to prospective clients is annually,
at a minimum. Existing clients are provided an annual compliant presentation of a
composite only if their portfolio is included.
Which component of XYZ Inc’s compliant presentation policy is most likely

consistent with the requirements of the Fundamental of Compliance section of the
Global Investment Performance Standards?
A. The presentation policy for existing clients.

B. The first-come, first-serve performance presentation policy.
C. The frequency of providing presentations to prospective clients.
Correct Answer: C
Reference:
According to the fundamentals of compliance section, requirements include:
• With respect to presenting performance to prospective clients, firms must

not choose to whom they present a compliant presentation; XYZ Inc’s
performance presentation policy is inconsistent with this requirement.
• As long as a prospective client has received a compliance presentation
within the previous 12 months, the firm has met this requirement; XYZ
Inc’s policy with respect to the frequency of providing presentations to
prospective clients is consistent with this requirement.
The policy with respect to providing compliance presentations to existing clients

is a recommendation of the Global Investment Performance Standards.


18. Which of the following is a section of the Global Investment Performance

Standards?
A. Hedge funds
B. Record retention
Correct Answer: C
Reference:
Based on the options presented, wrap fee portfolios represents a valid section of
the Global Investment Performance Standards.


19. A project with an opportunity cost of capital equal to the internal rate of return
should most likely:
A. have no impact on shareholder wealth.

B. be expected to increase shareholder wealth.
C. be expected to decrease shareholder wealth.
Correct Answer: A
Reference:
When the opportunity cost of capital is equal to the internal rate of return, the net
present value is zero. This implies that a project should have no impact on
shareholder wealth; i.e. it should neither increase nor decrease wealth.
20. Grace Nicholson is choosing between two one-year investment plans with a
quoted rate of 8% and 12% respectively, each of which are compounded
continuously. Nicholson intends to invest $250,000 with the objective of
generating a minimum amount of $270,000 for her daughter’s college education.
She is not concerned with maximizing her return.
To achieve her objective, Nicholson will opt for:
A. either of the two savings plan.

B. the savings plan with a quoted rate of 8%.
C. the savings plan with a quoted rate of 12%.
Correct Answer: A
Reference:
Given that the returns for the two projects are compounded continuously, the
effective annual rate (EAR) needs to be determined.


EAR = er∞ − 1
EAR = ($250,000)e(0.08) = $270,821.77
EAR = ($250,000)e(0.12) = $281,874.21
Given that both plans generate an amount within Nicholson’s range, she can opt
for either of the two plans.
21. Equity investment styles will most likely be classified using a (n):
A. ratio scale.
B. ordinal scale.
C. nominal scale.
Correct Answer: C
Reference:
Equity investment styles are classified using a nominal scale because these scales
categorize data but do not rank them.
22. Several of TA’s company employees are retiring today. They have each been
offered either to be paid a lump sum amount of $200,000 or an annuity with 30
payments of $15,000 starting from the date of retirement. TA’s bank has quoted
an interest rate of 8% compounded annually.
If employees select the alternative that generates the greatest amount of wealth,
they will most likely:
A. opt for a lump sum amount.

B. opt for an annuity payment.
C. be indifferent between the two alternatives.
Correct Answer: B
Reference:


To determine which alternative will increase employee wealth, the present values
of both alternatives need to be determined.
Lump sum payment alternative’s present value = $200,000
Annuity payment alternative’s present value:
n = 30
PMT = 15000
i = 8%
PV = 409,344
Employees will opt for an annuity payment alternative as it offers greater present
value.
23. A discrete uniform distribution comprises of outcomes which:
A. take on a range of values.

B. are significant in number.
C. are equally likely in occurrence.
Correct Answer: C
Reference:
A discrete uniform distribution comprises of outcomes which are finite, equally

likely in occurrence, and take specific on specified values.
24. A normal distribution is characterized by:
A. a skewness of 3.
B. the parameters mean, median and mode.
C. a linear combination of two or more normally distributed variables.
Correct Answer: C
Reference:
CFA Level 1, Volume 1, Study Session 2, Reading 9, Los m
Characteristics of a normal distribution include the following:


• it is described by two parameters, its mean and variance;

• a skewness of zero and kurtosis of 3; and
• a linear combination of two or more normal random variables is also
normally distributed.
25. Intermarket analysis:
A. assumes markets form repetitive wave patterns.

B. uses relative strength analysis to make allocation decisions.
C. is based on the principle that each market has unique characteristics.
Correct Answer: B
Reference:
Intermarket analysis uses relative strength analysis to identify sectors of the

market to invest in. Observations based on intermarket analysis can help in
allocating funds across national markets.
Intermarket analysis is based on the principle that markets are interrelated and
influence each other.
The Elliot Wave Theory assumes markets form repetitive wave patterns.


26. The table below illustrates the covariance matrix for global equities, global bonds
and real estate held in the proportions 40%, 25% and 35% respectively, held in
Ricardo Segal’s portfolio.
Exhibit
Covariance Matrix
Global Global Real
equities bonds Estate
Global equities 125 150 80
Global bonds 150 45 90
Real estate 80 90 62
Based on the information, the standard deviation of Segal’s portfolio return is

closest to:
A. 5.93%.
B. 8.33%.
C. 9.93%.
Correct Answer: C
Reference:
σ 2 (R p ) = w1 2σ 2 (R1 ) + w2 2σ 2 (R2 ) + w3 2σ 2 (R3 ) + 2w1 w2 CovR1 R2 + 2w1 w3CovR1 R3 + 2w2 w3Cov (R2 , R3
= (0.40)2(125) + (0.25)2(45) + (0.35)2(62) + 2(0.40)(0.25)(150) +

2(0.40)(0.35)(80) + 2(0.25)(0.35)(90)
= 98.5575
σ (R p ) = 98.5575 = 9.93%
27. In order to conduct hypothesis testing a:
A. significance level must be defined as a starting point.

B. decision rule must be stated prior to specifying the significance level.
C. statistical decision involves determining whether the null hypothesis is
accepted or rejected.
Correct Answer: C


Reference:
Making a statistical decision involves comparing the test statistic to the critical
value and determining whether the null hypothesis is accepted or rejected
accordingly.
The significance level must be specified before stating the decision rule.
Hypothesis testing begins with stating the hypotheses.
28. The sample mean difference between the returns of two funds managing identical
emerging market equities is – 0.55% per quarter. The mean difference was
calculated using data observed over the past thirty quarters. The standard
deviation of the sample mean difference is 5.32%. The t-distribution table to be
used for the analysis is as follows:
Exhibit:
Student’s t-distribution Table
.05 (One tail) .10 (One tail)
Degrees of freedom .10 (Two tail) .20 (Two tail)
28 1.701 1.313
29 1.699 1.311
30 1.645 1.282
Using a 10% significance level, the difference between the mean quarterly returns
is:
A. not significant.
B. significant; the calculated t-statistic of – 0.100 is greater than critical value
of – 1.699.
C. significant; the calculated t-statistic of – 0.026 is greater than the critical
value of – 1.311.
Correct Answer: B
Reference:


The calculated test statistic is – 0.10% [(- 0.55% - 0)/5.32%].
Given that this is a one-sided hypothesis test and based on 29 (30 – 1) degrees of
freedom, the upper and lower t-critical values are + 1.699 and – 1.699. The
calculated test statistic is greater than the t-critical value that implies that the
difference in mean quarterly returns is significant.
29. Which of the following reasons most likely justifies why a parametric test may be
preferred over a nonparametric test?
A. The sample data is ranked.

B. The population has an infinite variance.
C. The distribution is defined by more than two parameters.
Correct Answer: A
Reference:
A nonparametric test is used in those situations where the assumptions of a

parametric test are not satisfied; that is, when the data are given in ranks, or when
the hypothesis we are addressing does not concern a parameter, or when the data
does not meet distributional assumptions.
30. In contrast to a bar chart, the candlestick chart:
A. makes price volatility more visible.

B. indicates market volatility by the height of the candle.
C. illustrates opening, closing, high and low prices during a particular period.
Correct Answer: A
Reference:


An advantage of the candlestick chart over the bar chart is that price moves (price
volatility) is much more visible.
The bar chart indicates market volatility by the height of each bar.
Both the candlestick chart and bar chart show opening, closing, high and low
prices during the day.
31. The exhibit below illustrates average monthly market price change for the ABC
Corp stock for the first seven months of the financial year 2013.
Exhibit: Average Monthly Price Change

For the First Seven Months
Average Price
Month Change (%)
January to February - 0.8
February to March - 1.2
March to April - 1.9
April to May - 2.5
May to June - 2.7
June to July - 3.4
Based on the average price change, which of the following statements is most
likely correct regarding the ABC Corp stock?
A. Investors believe the stock’s intrinsic value is increasing.

B. The forces of supply and demand are roughly in balance.
C. Sellers are willing to accept lower prices to enter new short positions.
Correct Answer: C
Reference:
Since the market price is making lower lows, the ABC stock is undergoing a
downtrend. In a downtrend, supply is overwhelming demands and sellers are
willing to accept lower and lower prices to exit their existing position or enter
new short positions.


32. Samuel Edgar is a technical analyst at Slater Associates, a market research firm.
He is analyzing price trends in the market price of the Elster Inc stock, a food
processor. His analysis of the market prices leads him to conclude that a head and
shoulders pattern is being observed. Using historical market prices, he constructs
a chart and observes that the share peaked at $45 and estimates the neckline at
$32.
To profit from the analysis, the share price should:
A. rise by $13.
B. decline to $19.
C. decline by $19 below the neckline.
Correct Answer: B
Reference:
The head and shoulders formation is a bearish indicator which suggests that a
technician would expect a previously established uptrend to end and a downtrend
to commence. To profit from an anticipated decline in security price, the analyst
will seek to short the security under analysis.
Based on the calculated price target, Edgar would anticipate the security price to
decline to $19 or $13 below the neckline (see below).
Price target = Neckline – (Head – Neckline)

= $32 – ($45 – $32) = $19


33. Which of the following auction mechanisms will result in the highest bidder paying
a price equal to the second-highest bid?
A. Private value auction.

B. Descending price auction.
C. Second price sealed bid auction.
Correct Answer: C
Reference:
In a second sealed price bid mechanism, the winning buyer is the one who
submitted the highest bid but the price paid is equal to the second highest bid.
34. Narita is a developing country experiencing rapid industrialization with a local

currency, NR. The living standards and household incomes are also improving
with many replacing motorcycles for automobiles. The demand function for
automobiles is given below. Pa is the price of automobiles, I equals household
monthly income, and Pm equals the per unit price of motorcycles. The household
income is NR 1,500 and the price of a motorcycle is NR 450. The market consists
of 5,000 consumers with this demand function.
Q d a = 40 − 2.3(Pa ) + 0.0007 I + 1.2 Pm
Based on the data provided and holding all else constant, the inverse demand
function is most likely:
A. 252.63 – 0.00009Qda.
B. 252.63 – 0.435Qda.
C. 200,000 – 11,500(Pa) + 3.5I + 6,000Pm.
Correct Answer: A
Reference:


Holding household income and the per unit price of motorcycles constant, we find
Qda = 5,000[40 – 2.3(Pa) + 0.0007(1,500) + 1.2(450)]

= 200,000 – 11,500(Pa) + 5,250 + 2,700,000
= 2,905,250 – 11,500Pa
Solving for Pa = 252.63 – 0.00087Qda or 252.63 – 0.00009Qda
35. A company is operating in a monopoly market with marginal revenue kept at a

constant level of $35 and a price elasticity of demand of 1.2. The profit
maximizing price is closest to:
A. $5.83.
B. $35.00.
C. $210.00.
Correct Answer: C
Reference:
MR = P[1 – 1/Ep]
P = MR/[1 – 1/Ep] = $35/[1 – 1/1.2] = $210.00
36. Which of the following monetary policy tools will most likely reduce the amount
of money in circulation in an economy?
A. Reducing the policy rate.

B. Reducing the level of government spending.
C. Increasing the percentage reserve requirement for banks.
Correct Answer: C
Reference:


Increasing the percentage reserve requirement for banks will shrink money supply
as a bank that was short on reserve requirements may have to cease lending until
it builds the necessary reserves.
Reducing the policy rate will reduce the potential penalty that banks will have to
pay the central bank if they run short of liquidity; this will increase their
willingness to lend and thus will cause the broad money growth to expand.
Government spending is a fiscal policy tool which is not used to influence money
supply in an economy.
37. Laxline Inc. is an Australian pharmaceutical that is expecting a shipment of

inventory from South Africa in three months’ time. To hedge any associated
foreign exchange risk, the corporate treasurer decides to obtain quotations from
two separate dealers, A and B (Exhibit). Laxline Inc. will hedge risk by selling the
ZAR forward.
Exhibit
Exchange Rate Quotation from Two Dealers, A and B
A B
ZAR/AUD spot rate 9.90 - -
Three-month forward premium (%) 0.8 1.1
Based on the information provided in the Exhibit, Laxline Inc. will most likely
buy AUD from dealer:
A. dealer A at rate of ZAR 0.0792 per AUD and not trade with dealer B.
B. B and sell to dealer A earning a profit of ZAR 0.0030 per AUD transacted.
C. A and sell to dealer B earning a profit of ZAR 0.0297 per AUD transacted.
Correct Answer: C
Reference:
Dealer A will be buying AUD 3 months forward at 9.90 × (1 + 0.008) = 9.9792

while Dealer B will be buying AUD forward at 9.90 × (1 + 0.011) = 10.0089.
Therefore, to profit from the transaction Laxline Inc. should sell AUD at the
higher rate (10.0089) to Dealer B and buy AUD at a lower rate (9.9792) from
Dealer A. The profit earned for each AUD transacted will amount to ZAR 0.0297.


38. A fixed-rate system is characterized by:
A. explicit legislative commitment to maintain a specified parity.

B. monetary independence being subject to the maintenance of an exchange
rate peg.
C. target foreign exchange reserves bearing a direct relationship to domestic
monetary aggregates.
Correct Answer: B
Reference:
A fixed-rate system differs from a currency board system in two ways. Firstly,
there is no explicit legislative commitment to maintain a specified parity.
Secondly, the target level of foreign exchange reserves is discretionary bearing no
particular relationship to domestic monetary aggregates. However, monetary
independence is subject to the maintenance of the exchange rate peg.
Exhibit
Financial Data for ABC Inc for the Year 2013
closest to:
A. $1,755.
B. $13,245.
C. $25,315.
Correct Answer: A
Reference:


defined as normal profit.
Economic profit = Total revenue – Total economic costs = $38,560 – $25,315 =

$13,245
Accounting profit = Economic profit + Normal profit
Normal profit = Accounting profit – Economic profit = $15,000 – $13,245 =
$1,755
40. Which of the following components is least likely excluded from a country’s GDP
but not GNP? The market value of goods and services produced by:
A. foreigners in that country.

B. citizens residing in a different country.
C. domestic companies outsourcing production overseas.
Correct Answer: A
Reference:
GDP includes the final market value of all goods and services produced by factors
of production located within a country/economy during a period of time. GNP
measures the market value of goods and services produced by factors of
production supplied by residents regardless of whether production takes place
within the country or outside. The difference between the two is that GDP
includes, and GNP excludes, the production of goods and services by foreigners
residing in a particular country. On the other hand, GNP includes, and GDP
excludes, the production of goods and services by its citizens outside of the
country.


41. The price a consumer pays for agriculture machinery in a country is $500. The
market demand function for agricultural machinery is given by the equation, Qd =
2,400 – 3P.
Based on the information provided the amount by which the value of agricultural
machinery exceeds purchase costs is closest to:
A. 135,000.
B. 225,000.
C. 600,000.
Correct Answer: A
Reference:
Consumer surplus, which is the difference between the value that the consumer
places on a good and the amount of money required to pay for them.
Based on the $500 paid for machinery, Qd = 2,400 – 3(500) = 900, inverting the
demand function and solving for the price intercept we get P = 800 – 0.3333Q.
Based on the equations, the price intercept is 800 and the quantity intercept is
2,400.
Consumer surplus = ½ × 900 × (800 – 500) = 135,000
42. A country’s economic growth is enhanced by an increase in:
A. the birth rate.

B. the degree of market regulation.
C. government spending on education.
Correct Answer: C
Reference:


Sources of economic growth include:
• Labor supply;
• Human capital;
• Physical capital;
• Technology; and
• Natural resources.
Increasing the level of government spending on education will improve the

quality of human capital that in turn will contribute to economic growth.
Labor supply is the growth in the number of people available for work and is
measured by the product of labor force and average hours worked per worker. The
labor force is the proportion of working age population that is employed or
unemployed. An increase in a country’s birth rate will not enhance the labor
supply and thus economic growth in the near- to medium term.
Making market regulation more stringent has no direct impact on economic

growth.
43. Mathew Hughes is a market analyst studying economic variables in China. The
12-month local Chinese government debt currently offers an annual yield of 5%
while current inflation is 3%. Investors expect Inflation to rise to 4% in the
coming year and desire a real yield of 1% on the government debt. Hughes
believes that investors have overestimated expectations and that inflation rate
should in fact rise to 2%.
Based on Hughes’ expectations and the Fisher effect, in order to compensate for
the forecasted inflation and preserve real return, the government debt yield should
most likely:
A. rise by 1%.
B. decline by 1%.
C. decline by 2%.
Correct Answer: C
Reference:


According to the Fisher effect, the nominal interest rate is the sum of the real
interest rate and expected inflation.
Based on Hughes’ expectations a nominal government debt yield of 3% (1% +

2%) should preserve the real return demanded by investors. To compensate for
the lower expected inflation the nominal government debt yield should thus
decline by 2% (5% - 3%).
44. When an economy is slowing and inflation and monetary trends are weakening, in
order to increase liquidity, the central bank will most likely:
A. cut the target rate.

B. increase the target rate.
C. keep the target rate unchanged.
Correct Answer: A
Reference:
CFA Level 1, Volume 2, Study Session 5, Reading 19, LOS n
When an economy is slowing and inflation and monetary trends are weakening,
the central bank may increase liquidity by cutting their target rate and the
monetary policy is said to be contractionary.


45. The exhibit below highlights selective financial information concerning Green
Enterprises. Martha Lewis, the company’s chief financial analyst, is evaluating the
change in the company’s tolerance for leverage between 2012 and 2013. She has
collected relevant data in the exhibit below:
Exhibit
Relevant Financial Data for Green Enterprises, 2012-2013 (In Millions)
2013 2012
Operating cash flow* 8.9 7.7
Working capital changes 0.1 (0.3)
Dividends paid 3.4 3.6
Interest paid 2.9 2.7
Total debt 17.2 15.4
*The figure is prior to working capital changes
Based on the data presented and ignoring any capital expenditures, Green
Enterprises’ tolerance for leverage has most likely:
A. improved.
B. deteriorated.
Correct Answer: A
Reference:


Green Enterprises’ tolerance for leverage is measured using the retained cash flow
(RCF) to total debt ratio. Retained cash flow is calculated as operating cash flows
before working capital changes less dividends.
Tolerance for leverage (2012) = ($7.7 – $3.6)/$15.4 = 0.2662

Tolerance for leverage (2013) = ($8.9 – $3.4)/$17.2 = 0.3198
A ratio of 0.2662 indicates that the company may be able to pay off debt from
cash flow retained in the business in approximately 3.8 years (1/0.2662) while a
ratio of 0.3198 indicates that the company may be able to pay off debt from cash
flow retained in the business in approximately 3.1 years (1/0.3198). Therefore,
Green’s tolerance for leverage has improved over the two years.
46. A company’s tax expense represents:
A. the amount paid for income taxes.

B. a provision made for its income taxes.
C. an aggregate of its income tax payable and any changes in deferred taxes
and liabilities.
Correct Answer: C
Reference:
A company’s tax expense represents an aggregate of its income tax payable and
any changes in deferred taxes and liabilities.
The amount paid for income taxes is represented by income taxes paid while
income tax payable represents a provision made for income taxes on a company’s
balance sheet.


47. Valaroy entered into a lease agreement to acquire equipment for five years
beginning January 1, 2011. The lease requires five annual payments of $35,450
with the first due on January 1, 2011. The useful life of the equipment is six years
and the salvage value is zero. The fair value of the equipment is $147,820 and the
applicable discount rate is 10%. Valaroy prepares and presents its financial
In relation to the lease agreement, in the fiscal year 2012, Valaroy will report:
A. a lease liability of $88,159 on its balance sheet.

B. rental expense of $35,450 in its income statement.
C. interest expense of $14,782 in its income statement.
Correct Answer: A
Reference:
The lease will be recognized as a capital lease by Valaroy. This is because the
lease term is more than 75% of the useful life of the leased asset and the present
value of the leased payments are more than 90% of the fair value of the leased
asset (see below).
Present value of leased payments:
35,450 35,450 35,450 35,450

35,450 + + + + = 147,821
1.1 1.1 ! 1.1 ! 1.1 4
Interest (at Reduction Lease liability on 31

Lease Annual 10%; accrued of lease December after Lease
liability, 1 Interest in previous liability, 1 Liability Payment on 1
Year January Payment year) January January Same Year
2011 $147,821 $35,450 $0 $35,450 $112,372
2012 $112,372 $35,450 $11,237 $24,213 $88,159
48. Deferred taxes related to a business combination:
A. must be recognized in equity.

B. are allowed to be recognized under IFRS.
C. must be recognized as an asset or liability depending on the carrying
amount and tax base of the goodwill.


Correct Answer: A
Reference:
Deferred taxes related to a business combination must be recognized in equity.

IFRS prohibits the recognition of deferred taxes related to goodwill arising in a
business combination.
49. Boston Associates, a newspaper agency, exchanged a large printing unit with an
original cost of $400,000 for a used unit with a carrying value and purchase price
of $280,000 and $500,000, respectively, in year 2013. The original unit,
purchased in 2011, had an estimated useful life of five years, a residual value of
$30,000 and was being depreciated using the straight-line method.
Due to its lack of popularity and thus market, the fair value of the acquired unit
cannot be determined with certainty. The purchase and exchange activities were
undertaken in the beginning of the respective fiscal years.
In relation to the exchange, Boston Associates will:
A. not report a gain or loss in its income statement and will record the unit at
B. report a gain of $28,000 in its income statement and will record the unit at
C. not report a gain or loss in its income statement and will record the unit at
Correct Answer: C
Reference:


When an asset is exchanged, accounting for it involves removing the carrying

value of the asset given up and replacing it with the fair value of the acquired
asset. However, if a fair value is not available, the acquired asset will be recorded
at the carrying amount of the asset given up.
Annual depreciation expense of asset given up = ($400,000 – $30,000)/5 =

$74,000
Carrying amount of asset given up = $400,000 – ($74,000 × 2) = $252,000
Since the acquired asset is recorded at the carrying value of the asset given up,
neither a gain nor loss will be reported in Boston’s income statement.
50. A decline in the inventory balance in a particular accounting period should most
likely lead to a decline in:
A. the debt-to-capital ratio.

B. working capital turnover.
C. the days of inventory on hand.
Correct Answer: C
Reference:
The days of inventory on hand measure includes inventory turnover as its

denominator. A decline in closing inventory balance will lead to an increase in the
inventory turnover ratio and consequently a decline in days of inventory on hand.
The debt-to-capital ratio comprises total debt in its numerator and capital (debt
plus equity) in its denominator. A decline in inventory balance will not affect this
ratio.
The working capital turnover should rise following a decline in closing inventory
balance. The denominator of this measure is working capital which is equal to the
difference between current assets and current liabilities. Therefore a declining
inventory balance will decrease the denominator and lead to a rise in this measure.


51. On January 1, 2011 Kyrax Inc purchased an image processing unit for $250,000.
The estimated useful life and residual value of the unit were eight years and
$85,000 respectively. In the same year Kyrax reported operating profit of
$650,000.
Relative to the straight-line method, in 2011, the double declining depreciation

method will produce an operating profit that is:
A. $20,625 lower.
B. $41,875 lower.
C. $17,500 higher.
Correct Answer: B
Reference:
CFA Level 1, Volume 3, Study Session 9, Reading 30, LOS c & d
Depreciation expense (straight-line) = ($250,000 – $85,000)/8 = $20,625

Depreciation expense (double declining) = 1/8 × 2 × $250,000 = $62,500
In 2011 the depreciation expense will be higher and operating profit lower by
$41,875 ($62,500 – $20,625) under the double declining method.
52. Which of the following accurately highlights the treatment of a bank overdraft in
the cash flow statement under IFRS and U.S. GAAP?
IFRS: U.S. GAAP:

A. Operating activity Operating activity
B. Cash equivalents Financing activity
C. Operating activity Financing activity
Correct Answer: B
Reference:
Bank overdrafts are treated as cash equivalents under IFRS and financing activity
under U.S. GAAP.


53. Lima is a limestone extractor operating in the U.S. The extractor’s chief financial
analyst, Carl Douglas, has summarized selective financial information for the
years 2010 to 2013 in the exhibit below.
Exhibit:
Financial Information for 2011-2013
$ millions 2013 2012 2011
Operating cash flow 35.8 30.9 38.6
EBIT 20.5 22.8 25.0
Long-term debt 12.0 10.4 8.6
Short-term borrowing 8.5 7.6 5.4
Interest payments 2.2 1.6 1.0
Lease payments* 21.0 16.0 18.5
*Interest payments represent 1/3 of lease payments
Lima’s fixed charge coverage ratio is the highest in:
A. 2011.
B. 2012.
C. 2013.
Correct Answer: A
Reference:
Fixed charge coverage ratio = EBIT + Lease payments*/(Interest payments +

Lease payments*)
Fixed charge coverage ratio (2013) =
[20.5 + (21.0 × 1/3)]/[2.2 + (21.0 × 1/3)] = 2.989

[22.8 + (16.0 × 1/3)]/[1.6 + (16.0 × 1/3)] = 4.058

[25.0 + (18.5 × 1/3)]/[1.0 + (18.5 × 1/3)] = 4.349
*The interest portion of lease payments is included in the calculation.


54. A ratio that contains cash flow from operations in its numerator and cash outflows
from investing and financing activities in its denominator measures:
A. solvency and the ability to acquire and pay down debt.

B. profitability and the cash generating ability of operations.
C. solvency and the company’s ability to acquire assets, pay debt and make
distributions to owners.
Correct Answer: C
Reference:
The investing and financing coverage ratio comprises cash flow from operations
in its numerator and cash outflows for investing and financing activities in its
denominator. This coverage ratio measures solvency as well as the ability of a
company to acquire assets, pay debts, and make distributions to owners.
55. Martha Townshead is analyzing selective financial information for Fisher Corp.
for the years 2012 and 2013. Fisher Corp. complies with U.S. GAAP.
$’000s 2013 2012 Change

Net income 255 207 + 48
Depreciation & amortization 28 20 +8
Accounts receivable 180 135 + 45
Inventory 89 95 –6
Accounts payable 140 128 + 12
Interest payable 56 50 +6
Taxes payable 48 53 –5
Accumulated depreciation 128 105 + 23
Short-term debt 107 98 +9
Using the indirect method, Fisher Corp’s cash flow from operating activities is
closest to:
A. $140,000.
B. $257,000.
C. $279,000.
Correct Answer: B


Reference:
All $ figures are in 000’s.
Operating cash flow:

Net income $255
+ Depreciation & amortization 28
- Increase in accounts receivable (45)
+ Decrease in inventory 6
+ Increase in accounts payable 12
+ Increase in interest payable 6
- Decrease in taxes payable (5)
Net cash flow from operating activities 257
56. The exhibit below highlights selective financial measures observed for Horizon
Gates for the years 2012 and 2013, assuming 365 days in a financial year.
2013 2012 Year-on-year change (%)

Inventory turnover 15 12 + 25.00%
Receivables turnover 75 70 + 7.14%
Payables turnover 45 80 - 43.75%
Based on the year-on-year changes observed for the highlighted measures, which
of the following explanations is most likely appropriate?
A. Horizon’s credit policy has become more stringent.

B. Horizon is taking advantage of early payment discounts.
C. The average number of days for holding inventory has decreased by 20%.
Correct Answer: C
Reference:


The average number of days for holding inventory is measured using the days of
inventory on hand (DOH), calculated as: number of days in period/inventory
turnover. The measures observed for the two years are calculated below. The
decline in measure is 20.00% [(24.333/30.417) – 1].
DOH (2012) = 365/12 = 30.417

DOH (2013) = 365/15 = 24.333
An improvement in the receivables turnover ratio observed between 2012 and

2013 suggests either Horizon’s cash collection practices have become more
efficient or that its credit policy has become more stringent.
The payables turnover ratio measures how many times a year the company
theoretically pays off all its creditors. A decline in the measure suggests that the
company may be delaying payments and thus may not be taking advantage of
early payment discounts.
57. Duckworth Associates is a book publishing firm preparing and presenting its
financial statements in accordance with U.S. GAAP. In the current year
Duckworth sold a printing unit for $2,056,000. A financial analyst has collected
selective financial information for the purpose of analysis:

Ending balance equipment $3,120,000
Capital expenditures $14,980
Annual depreciation expense $44,870
Ending balance accumulated depreciation $1,015,000
Remaining useful life of equipment sold 3 years
The gain on the sale of the unit is closest to:
A. $601,020.
B. $610,890.
C. $1,445,110.
Correct Answer: B
Reference:



Plus: capital expenditures 14,980
Minus: Ending balance equipment (3,120,000)
Equals historical cost of equipment sold 1,454,980

Plus: depreciation expense 44,870
Minus: Ending balance accumulated depreciation (1,015,000)
Equals accumulated depreciation on equipment sold 9,870
Net book value of equipment sold = $1,454,980 – $9,870 = $1,445,110

Gain on asset sale = $2,056,000 – $1,445,110 = $610,890
58. A key difference between IFRS and U.S. GAAP with respect to cash flow
reporting is that:
A. U.S. GAAP do not permit the use of the indirect format.

B. IFRS provide greater discretion in classifying interest and dividends.
C. IFRS require supplementary reconciliation if the indirect format is used.
Correct Answer: B
Reference:
IFRS allow greater discretion in the reporting of interest and dividends while U.S.
GAAP do not. For instance, under IFRS interest paid may be classified as either
an operating or financing activity. However, U.S. GAAP require interest paid and
received to be classified as operating activities.
Both U.S. GAAP and IFRS permit the use of the indirect format with the former
requiring the presentation of supplementary reconciliation (between net income
and cash flow) if the direct format is used.


59. The exhibit below highlights selective information from Baxter Inc’s financial
statements for the years 2012 and 2013. Baxter prepares and presents its financial
statements in accordance with IFRS.

Revenue 60 55
Net income 14 10
Dividends paid* 8 6
Inventory 20 25
Cash 5 4
*Classified as a financing cash flow
The amount of cash paid by Baxter Inc. to its suppliers is closest to (in millions):
A. $10.
B. $35.
C. $45.
Correct Answer: B
Reference:
Cash paid to suppliers = Cost of goods sold + Increases in inventory – increase in

accounts payable
Cash paid to suppliers ($ millions) = 42 + (20 – 25) – (18 – 16) = 35
60. The impact of impairment loss on net profit margin is that the financial measure
will:
A. increase.
B. decrease.


Correct Answer: B
Reference:
Net profit margin = net profit/sales

Impairment losses will decrease current period net income (numerator).
Therefore, the financial measure will decrease.
61. Trans Limited is a train operator in France which prepares and presents its
financial statements in accordance with IFRS. Mark Sentosa is one of the
operator’s financial officers. Sentosa is attempting to determine whether one of
the steam engines has undergone an unexpected decline in value. Sentosa has
collected information requisite to his analysis below:
Carrying value €875,000
Fair market value €895,000
Expected annual cash over useful life €30,000
Estimated selling price (year 6) €800,000
Estimated remaining useful life 6 years
Required rate of return 10%
Selling costs €35,550
In relation to the steam engine, Sentosa will record an impairment loss amounting
to:
A. €15,550.
B. €20,000.
C. €292,763.
Correct Answer: A
Reference:


Under IFRS, impairment occurs when the asset’s recoverable amount falls below
its carrying amount.
Recoverable amount = Higher of fair value less costs to sell and value in use
Value in use = present value of the future cash flows expected to be derived from
using the asset
€"#,!!! €"#,!!! €"#,!!! €"#,!!! €"#,!!! ($"#,!!!!$"##,!!!)

Value in use = !.!!
+ !.!"!
+ !.!"!
+ !.!"!
+ !.!"!
+ !.!"!
=
€582,237
Fair value less costs to sell = €895,000 – €35,550 = €859,450
Given that fair value less costs to sell is higher, the recoverable amount is equal to
€859,450. An impairment loss of €15,550 (€875,000 – €859,450) will be recorded
in the income statement since the recoverable amount has declined below the
carrying value.
62. The purchase of Treasury stock should positively influence a company’s:
A. quick ratio.
B. debt-to-equity ratio.
C. return on equity ratio.
Correct Answer: C
Reference:
CFA Level 1, Volume 3, Study Session 8, Reading 26, LOS f & i
The purchase of Treasury stock will reduce a company’s cash (assets) and equity.
The transaction will have no effect on a company’s net income. The company’s
return-on-equity ratio should increase which results in an improvement in the
company’s profitability.
A decrease in cash (assets) resulting from the purchase of Treasury stock will
reduce the company’s quick ratio and result in a weaker liquidity position.
The company’s debt-to-equity ratio will increase due to a decrease in total equity;
an increase in the leverage measure implies greater financial risk and a weaker
financial position.


63. The exhibit below illustrates selective financial information for Trax Limited for
the years 2012 and 2013:

Current portion of long-term debt 24 20
Additional retained earnings 35 80
Over the two years, the firm’s usage of long-term debt relative to total capital has
most likely:
A. increased.
B. decreased.
Correct Answer: C
Reference:
Based on the measures calculated below, Trax’s proportion of long-term debt to

total capital has remained unchanged.
All $ calculations are in millions.

Total capital = Long-term debt + shareholders’ equity
Total capital (2012) = $140 + $80 + $110 = $330

Total capital (2013) = $125 + $35 + $80 = $240
Long-term debt-to-total capital (2012) = $110/$330 = 0.33

Long-term debt-to-total capital (2013) = $80/$240 = 0.33


64. A company has reported the following financial information for the years 2012
and 2013:
Cash 45 30
Marketable securities 15 15
Receivables 185 190
Inventory 88 90
The percentage change in the quick ratio over the two years is closest to:
A. 19.54%.
B. 21.63%.
C. 55.56%.
Correct Answer: B
Reference:
Quick ratio = (Cash + marketable securities + receivables)/current liabilities

Quick ratio (2012) = (30 + 15 + 190)/140 = 1.6786
Quick ratio (2013) = (45 + 15 + 185)/120 = 2.0417
Quick ratio percentage change = (2.0417/1.6786) – 1 = 21.63%
65. Period costs such as advertising expenditures:
A. are less likely to directly match revenues.

B. more directly relate to future expected benefits.
C. are accounted for using the cash basis of accounting.
Correct Answer: A
Reference:


Advertising expenditures are examples of period costs which less directly match
revenues and are reflected in the period when the company incurs the expenditure
or incurs the liability to pay.
These expenditures are accounted for using the matching principle; i.e. when they
are incurred regardless of when cash is paid.
66. On January 1, 2013 an investment company established office paying $65,000 to

the landlord for space. 5% of the amount paid is a refundable deposit while the
remaining represents the first month’s rent.
The impact of the transaction on the company’s net assets on January 1 is most
likely:
A. neutral.
B. an increase of $3,250.
C. a decrease of $61,750.
Correct Answer: A
Reference:
The company’s cash (asset) account is decreased by $65,000 while deposits

(asset) are increased by $3,250 ($65,000 × 0.05) and prepaid rent (asset) is
increased by $61,750 ($65,000 × 0.95). The company’s assets decreased by
$65,000 and increased by a total of $65,000 ($61,750 + $3,250) resulting in a zero
impact on net assets.
67. On a company’s balance sheet shareholder’s equity represents the owners’:
A. financial position in a company.

B. claims on the resources of a company.
C. residual interest in a company’s net assets.
Correct Answer: C
Reference:


Owners’ equity is defined as the excess of a company’s assets over liabilities or,
in other words, net assets. Owners’ equity is the owners’ residual interest in the
company’s assets after deducting the liabilities (that is, the net assets).
68. Lizole is a bioengineering firm that is currently undertaking two projects.
Project 1: A prototype version of an apparatus to be used for stem cell research.

The firm has received positive reviews from two laboratories having tested the
apparatus. The apparatus has thus been determined to be technologically feasible,
saleable and feasible to develop.
Project 2: Research undertaken for cancer diagnostic equipment aiming to take a

more in-depth study of the growth and replication of cancer cells. An initial
market survey has revealed significant potential for this project.
The expenses of the research division (in £ millions) are summarized below:
Project 1 Project 2
Materials 420 130
Labor:
Direct 705 858
Administrative 450 308
Overhead costs:
Direct 155 120
Indirect 200 105
Reorganization 50 -
In relation to the two projects, the amount capitalized as an asset under IFRS is
closest to:
A. £0.
B. £1,125.
C. £2,113.
Correct Answer: B
Reference:


For internally created intangible assets, IFRS require companies to separately

identify the research and development phase. Furthermore, IFRS require that costs
to internally generate intangible assets during the research phase should be
expensed while those incurred during the development phase should be
capitalized as intangible assets if the project is technologically feasible, the
company has demonstrated its ability to use or sell the resulting asset and the
ability to complete the project.
Lizole can capitalize £1,125 million (£420 million + £705 million) of the costs
with respect to project 1 which meets the criteria of development.


69. Which of the following statements is most likely correct with respect to the break
point on the marginal cost of capital schedule? It represents the point:
A. of optimal capital budget.

B. where the marginal cost of capital is lowest.
C. where a company’s marginal cost of capital changes.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 36.
The break point on the marginal cost of capital schedule represents the point
where the cost of one of the company’s sources of capital changes and capital
structure may experience deviations from the target capital structure.
70. A company executive is holding a meeting with members of the compensation

committee. Together the individuals are attempting to devise a suitable
compensation scheme for executive directors. One of the members proposes a
stock dividend and cites two advantages of this form of compensation.
Advantage 1: Issuing a stock dividend should help improve the debt-to-equity

ratio as contributed capital will increase by the number of shares
issued.
Advantage 2: Stock dividends are generally not taxable to the shareholder.
Which of the cited advantages is most likely correct?
A. Both advantages.
B. Advantage 1 only.
C. Advantage 2 only.
Correct Answer: C
Reference:


Advantage 1 is incorrect; advantage 2 is correct. Issuing a stock dividend has no

impact on a company’s debt-to-equity ratio. This is because although retained
earnings are reduced by the value of the stock dividends paid, contributed capital
increases by the same amount resulting in a zero net impact on total shareholder’s
equity.
The payment of stock dividend does not impose any tax liability on the
shareholders of a company; this is because shareholders are compensated in the
form of shares as opposed to cash.
71. A senior executive at a company has identified that the average daily float
associated with a company’s bank account is $223,460. The float factor is 1.790
while the number of days in the month of analysis is 30.
The total amount of deposits made by the company for the month is closest to:
A. $13,333.
B. $3,745,140.
C. $11,999,802.
Correct Answer: B
Reference:
Float factor = Average daily float ÷ (Total amount of checks deposited/Number of

days)
1.790 = $223,460 ÷ (Total number of checks deposited/30)
Total number of checks deposited = $3,745,140
72. Which of the following factors least likely serves as a motivation for corporations
engaging in share repurchases?
A. To provide company management with discretion in controlling their

dividend policy.
B. To reduce the impact of a decline in EPS resulting from the exercise of
employee stock options.
C. To communicate to the market that company management believes that a
company’s share is overvalued.


Correct Answer: C
Reference:
One of the motivations for a company to engage in share repurchases is to

communicate to the market that its management believes that its share is
undervalued or simply to support share price.
Share repurchases can also be undertaken to mitigate the impact of a decline in

EPS resulting from the exercise of employee stock options. Exercising employee
stock options will increase the number of shares outstanding and decline earnings
per share. On the other hand, share repurchases will decrease the number of
shares outstanding thereby decreasing the net decline resulting from exercising
options.
Unlike cash dividends, management need not commit to a policy of share

repurchases. Therefore, with a share repurchase program, company management
has greater flexibility with respect to the timing and amount of cash distributions
to shareholders.
73. The exhibit below illustrates an accounts receivable aging schedule for a
manufacturing concern.
Exhibit
Accounts Receivable Aging Schedule for a Manufacturing Concern
($ Millions) January February
Sales 550 650
Total accounts receivable 420 585
Current (1-30 days old) 220 200
>90 days past due 14 16
Which of the following scenarios is a suitable explanation for the changes

observed in the aging schedule between January and February?
A. The percentage of cash sales has increased.

B. There is an increased likelihood of accounts becoming uncollectible.
C. The company has extended the credit terms offered to customers.


Correct Answer: C
Reference:
By converting the aging to percentages, one can observe that the percentage of
payments made after thirty days following the sales transaction date has increased
from 47.6% [(100 + 56 + 30 + 14)/420] to 65.8% [(234 + 90 + 45 +16)/585]. The
extension of credit terms could be a possible reason why customers are delaying
their payments.
The percentage of accounts that are overdue has declined from 3.33% (14/420) in
January to 2.74% (16/585) in February. Therefore the likelihood of accounts
being uncollectable has, in fact, decreased.
The percentage of customers making cash payments on sales has declined from
23.6% [(550 – 420)/550] to 10.0% [(650 – 585)/650] indicating an increase in
credit sales.
74. Which of the following corporate policies is most consistent with a strong
A. Restricting options repricing.

B. A significant portion of executive compensation is the basic salary.
C. Establishing a corporate fund to finance the medical treatment of a senior
manager’s family member.
Correct Answer: A
Reference:


Option repricing, the repricing of stock options’ strike prices downward, will
remove the incentives created by the original options for management, thus
reducing the link between long-term profitability and performance of the
company with management remuneration. The policy of restricting option
repricing is consistent with the code of ethics.
Executive compensation should be designed to align their interests with the long-
term interests of shareholders. One way of achieving this is to increase the
proportion of stock options, grants and bonuses while keeping the basic salary,
which is fixed and has no incentive component, at a minimum.
A policy of lending or donating cash to insiders or their families constitutes a

personal use of shareholder assets and is inconsistent with the code of ethics.
75. Dwight Enterprises is a manufacturing firm that plans to borrow $2 million to

finance a three month project. The company would like to minimize borrowing
costs; its financial officer has identified three alternative borrowing sources.
Alternative 1: Drawing down a line of credit at 4.50% with a 1% commitment fee

on the full amount borrowed.
Alternative 2: A banker’s acceptance at an all-in inclusive rate of 6.40%.
Alternative 3: Commercial paper at 4.0% with a dealer’s commission of 1/9

percent and a backup line cost of 1/5 percent, both of which are
assessed on the $2 million of commercial paper issued.
The financing cost associate with Alternative 1 is closest to:
A. 3.27%.
B. 4.13%.
C. 4.88%.
Correct Answer: B
Reference:


Alternative 3 is the cheapest.

!.!"# ×$",!!!,!!!×!/!" !(!.!" × $",!!!,!!!×!/!")
Cost (Alternative 1) = $",!!!,!!!
×3= 0.04125
or 4.13%
76. A company situated in an emerging market has experienced two liquidity events
during the most recent financial year.
Liquidity event 1: The company’s bank has reduced its line of credit following a
revised central bank policy.
Liquidity event 2: The company’s inventory turnover ratio has considerably

slowed from that observed over the previous years due to declining consumer
purchase activity in the current inflationary environment.
Liquidity events 1 and 2 most likely represent:
Liquidity Event 1: Liquidity Event 2:

A. pull on liquidity drag on liquidity.
B. pull on liquidity pull on liquidity.
C. drag on liquidity pull on liquidity.
Correct Answer: C
Reference:
Liquidity event 1 represents a drag on liquidity; this occurs when receipts lag
creating pressure from the decreased available funds. Reducing a company’s line
of credit creates a liquidity squeeze.
Liquidity event 2 represents a pull on liquidity; this occurs when disbursements

are paid too quickly or trade credit availability is limited. A slowing down of the
inventory turnover ratio and sales volume may indicate potential obsolete
inventory.


77. A portfolio manager has invested in a portfolio benchmarked to an equity index.

He is primarily concerned with the substantial rebalancing costs which will need
to be incurred to ensure index weights are maintained.
The portfolio manager has most likely invested in a (n):
A. price-weighted index.
B. value-weighted index.
C. equal-weighted index.
Correct Answer: C
Reference:
Once an equally-weighted index is constructed, prices of constituent securities

change so that the index is no longer equally weighted. Thus, maintaining equal
weights requires constant rebalancing and incurring rebalancing costs.
78. Hedge funds:
A. are heavily regulated.

B. may suffer from survivorship bias.
C. avoid the use of leverage in their investment strategies.
Correct Answer: B
Reference:
Hedge funds use leverage as well as long and short positions. As unregulated
entities they are not required to report their performance that may result in
potential survivorship bias.


79. A portfolio manager has purchased $2.5 million worth of equity investments for
several of its client accounts. The purchase is financed using a combination of
cash and equity. The manager must abide by a minimum margin requirement of
35%. Given the maintenance margin requirement, if the purchase price rises by
15%, the return on equity investment in the manager’s leveraged position is
closest to (ignoring interest costs and commission):
A. 5.25%.
B. 15.00%.
C. 42.86%.
Correct Answer: C
Reference:
Maximum leverage ratio = 1 ÷ minimum margin requirement

= 1 ÷ 0.35
= 2.857
A 15% increase in the stock will result in a 0.42857 or 42.86% (2.857 × 0.15)
return on the manager’s leveraged equity investment.


80. The exhibit below illustrates the market’s standing limit order book for the
GlenCorp stock.
Exhibit:
Standing Limit Order Book
for GlenCorp Stock
Order Prices
Bids Offers (Asks)
45
44
43
42
37
36
35
34
Isaac Howler and Joanne Milken have each placed limit orders for the company’s
shares of stock. Howler has placed a limit buy order at a price of $43/share while
Milken has placed a limit sell order at a price of $44/share.
The limit orders called by the two traders are most likely classified as:
Howler Milken
A. behind the market order standing limit order.
B. standing limit order marketable limit order.
C. marketable limit order behind the market order.
Correct Answer: C
Reference:
The trade called by Howler is classified as a marketable limit order. The order is
placed above the best offer ($42) and will generally completely or partially fill at
the best offer price.
The trade called by Milken is classified as a behind the market order as it is

placed above the best offer. The trade will not execute unless market prices rise.
Traders call limit orders waiting to trade standing limit orders.


81. A trader purchased a share of stock at $40. Three months later the equity market
is facing volatile performance. He suspects the stock price may fall by a minimum
of 10%. The trader would like to minimize losses by ensuring the price falls by no
more than 15% from its initial price.
The trader should most likely:
A. execute a good-till-cancelled (GTC) stop 36, limit 34.

B. execute a GTC, stop 34, market sell.
C. purchase a call option contract struck at 34.
Correct Answer: A
Reference:
A stop limit order is more suitable for the trader relative to a stop market order. A
GTC stop 34, market sell order will become valid when the price falls to $34 and
will execute at the best available price even if that price is significantly lower than
$34. On the other hand, a GTC stop 36 limit 34 will ensure that the selling price
falls no lower than $34 (or by 15%).
A call option is typically used to limit losses on short positions. A put option with
a strike of $34 will guarantee that the share will be sold at the aforementioned
price.
82. An equity portfolio manager is purchasing technology stocks for his clients’
portfolios. He believes the stock of a particular software house is undervalued at
its current market price of AUD 130 and should be trading at AUD 180. However,
he believes that there is a greater likelihood of the stock trading at AUD 180 if
other traders are willing to buy it at a price above AUD 140.
In order to best take advantage of this information, the manager should issue a:
A. call option with a 180 AUD strike.

B. GTC, stop 140 AUD, market buy order.
C. GTC, stop 140 AUD, limit 180 AUD buy order.
Correct Answer: C


Reference:
A GTC, stop 140 AUD, limit 180 AUD buy order will insure that the order to
purchase the stock will become valid if the price rises above AUD 140. A 180
AUD limit order will help to avoid the possibility of trading at a price above 180
AUD and incurring a loss on the trade.
A call option is typically used to limit losses on a short position.
A GTC, stop 140 AUD market buy order is not appropriate because there is a
possibility that the order is executed at a price higher than AUD 180. Market
orders typically execute at the best available price; this price may not be the most
suitable.
83. In the current financial year, a company has paid a dividend per share of $5. The
company has always maintained a retention rate of 30% and expects to continue
to do so in the long-run. The average return on equity is equal to 15%. The
company’s shareholders’ required return on equity is 20%.
The company’s justified price-to-earnings (P/E) ratio is closest to:
A. 3.16.
B. 4.52.
C. 7.78.
Correct Answer: B
Reference:
! ! ! !!!.!" ∗
Justified P/E = !! = !!!∗∗
! !
=!.!"! !.!" (!.!") = 4.52
!
The payout ratio one year from now is equal to the current payout ratio, 70%, as
stated in the case.
g** = (1 – dividend payout ratio)(return on equity)


84. Brock Limited is an asset management firm managing equity investments for
numerous client accounts. The firm is intending to undertake an investment in the
S&P 500 equity index. Details concerning the total index price level and income
return over the two periods being analyzed has been summarized in the exhibit
below. The initial index price level is 1,000.
Exhibit:
S&P 500 Index, Price Level and Income Return
Period 1 Period 2
Total income return 1.0% 2.5%
Total price level 1,020 980
The value of the total return index is closest to:
A. 1,015.00.
B. 1,015.37.
C. 1,035.15.
Correct Answer: B
Reference:
Price return (Period 1) = (1,020/1,000) – 1 = 0.02 or 2%
Price return (Period 2) = (980/1,020) – 1 = - 0.0392 or – 3.92%
Total return (Period 1) = 2% + 1.0% = 3.0%
Total return (Period 2) = 2.5% - 3.92% = - 1.42%
Value of total return index (Period 2) = 1,000 × (1 + 3.0%) + (1 – 1.42%)

= 1,015.37


85. Sector indices:
A. classify securities based on market capitalization.

B. can be used as a tool for managerial performance analysis.
C. are classified based on a universally agreed upon sector classification
method.
Correct Answer: B
Reference:
Sector indices play an important role in performance appraisal because they

provide a means to determine whether a particular portfolio manager is more
successful at stock selection or sector allocation. Sector indices are organized into
families with each index in a family representing an economic sector. However,
the classification of economic sectors is not based on a universally agreed upon
sector classification method as none exists.
86. Which of the following statements accurately characterizes the impact of time on
difference in values between price and total return indexes?
A. The values of the two indexes will converge.

B. The value of the price return index will exceed the value of the total return
index.
C. The value of the total return index will exceed the value of the price return
index.
Correct Answer: C
Reference:
With the passage of time, the value of the total return index will exceed the value
of the price return index due to the reinvestment of dividends and/or interest
income.


87. A security market index most likely represents:
A. a combination of asset classes.

B. a hypothetical portfolio of marketable securities.
C. a security market, market segment, or asset class.
Correct Answer: C
Reference:
A security market index represents a security market, market segment, or asset

class.
88. Fixed income indexes are least likely classified based on:
A. maturity.
B. type of issuer.
C. frequency of coupon payments.
Correct Answer: C
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 47, LOS i
Fixed income indices can be classified on the dimensions of maturity or the type
of issuer.


89. When the present value of a commodity’s storage costs exceeds the present value
of its convenience yield benefits, then:
A. the net cost of carry is negative and the commodity forward price will be
higher than the spot price compounded at risk free rate.
B. the net cost of carry is positive and the commodity forward price will be
C. the net cost of carry is negative and the commodity forward price will be
Correct Answer: A
Reference:
When the present value of a commodity’s storage cost exceeds the present value
of its convenience yield benefits, then the net cost of carry is negative and the
commodity forward price will be higher than the spot price compounded.
Forward Price = Spot Price compounded at risk free rate – (negative cost of carry)
90. A trading is exploring arbitrage opportunities in the options market. European

calls and puts with an exercise price of 65 expire in 150 days. The underlying is
priced at 68 and makes no cash payments during the life of the options. The risk-
free rate of interest is 4.0%. Call and put options are selling for 7 and 6
respectively.
Based on the information provided, the trader will conclude that the call option is:
A. overpriced.
B. underpriced.
C. fairly valued.
Correct Answer: B
Reference:


Based on the put-call parity (see below), the call is underpriced as it is selling for
7 while the synthetic (intrinsic) value of the call is 10.04.
c0 = p0 + S0 – X/(1 + r)T
= 6 + 68 – 65/(1.04)150/365
= 10.04
91. Lisa Martin is an equity analyst who is formulating a protective put strategy for
put options on the DA Manufacturing stock. She has collected the relevant data in
the exhibit below:
Exhibit:
Put Option Data for the Analysis of the DM Manufacturing Stock
Exercise price* $50
Premium* $6
Term-to-maturity 150 days
Underlying stock price at initiation $58
Underlying stock price at expiration $49
Risk-free rate 3.5%
*Otherwise identical call options on the
manufacturer’s stock are selling for $7.
The value of the protective put strategy at expiration of the puts is:
A. $0.
B. $50.
C. $56.
Correct Answer: B
Reference:
The protective put strategy comprises of the purchase of a put option and the
underlying asset.
Since the price of the underlying at expiration ($49) is less than the option
exercise price ($58), the put expires and is worth $9 ($58 – $49) and the
underlying is worth $49. Thus, the value of strategy is equal to $58 ($58 – $49 +
$49).


Value at expiration when ST ≤ X = $49
92. Over-the-counter and exchange-listed options differ in terms of:
A. moneyness of options.
B. credit risk faced by the option holder.
C. the proportion of premium paid relative to exercise price.
Correct Answer: B
Reference:
Over-the-counter differ from exchange-listed options in that option holders

(buyers) face credit risk with respect to the former. However, exchange traded
options trade on standardized exchanges with the clearinghouse serving as
counterparty to each transaction. Defaults are rare with the clearinghouse always
being successful in paying when the seller defaults; therefore, option holders do
not face counterparty credit risk.
93. Which of the following accurately describes the profit to the call option seller?
A. ∏ = Max (0, ST - X) - co
B. ∏ = -Max (0, X - ST) + co
C. ∏ = -Max (0, ST - X) + co
Correct Answer: C
Reference:
Profit to the call seller = ∏ = -Max (0, ST - X) + co
94. Unlike forward contracts and swaps, futures:
A. cannot be traded over-the-counter.

B. are associated with zero default risk.
C. have a non-zero contract value at initiation.


Correct Answer: A
Reference:
Unlike forward contracts and swaps, futures contracts are typically traded on
standardized, established exchanges suggesting that they are not traded in over-
the-counter markets.
Although the risk of default is relatively lower due to the daily settlement of gains
and losses, this does not mean that futures have zero default risk.
Futures, forwards and swaps all have zero contract values at contract initiation.


95. A share repurchase agreement with a highly rated, short in supply, sovereign bond
as collateral is associated with:
A. a low repo rate.

B. zero default risk.
C. a high repo margin.
Correct Answer: A
Reference:
Repo rates are lower for highly rated collaterals such as highly rated sovereign
bonds. Credit risk is present in a repurchase agreement even if the collateral is a
highly rated sovereign bond. Repo margins are lower if the collateral is short in
supply and is of high quality.
96. A 181-day Treasury bill has a face value of $10.000 million and a present value of
$9.219 million. Assuming a 360-day year, the instrument’s discount rate is closest
to:
A. 4.49%.
B. 15.53%.
C. 16.85%.
Correct Answer: B
Reference:
!"#$ !"!!"
Discount rate = !"#$ × !"
!"# $"#,!!!.!!!!$",!"#,!!!
= !"! × $"#,!!!,!!!
= 15.53%


97. A floating rate note (FRN) has a par value of $1,000 and makes semi-annual
interest payments on June and December at the six-month LIBOR plus spread of
200 basis points. On the date the instrument was issued (January 1, 2012), the six-
month LIBOR was 4.5%. In June 2012, LIBOR increased to 5.0% and declined in
December 2012 to 3.5%.
interest payments due on the FRN?
A. The coupon interest due in June 2012 amounts to $32.50.

B. The coupon interest due in June 2012 amounts to $35.00.
C. The coupon interest due in December 2012 amounts to $42.50.
Correct Answer: A
Reference:
CFA Level I, Study Session 15, Reading 52, LOS a
To calculate the coupon interest payment owed on a FRN on a particular date, the
prior six-month LIBOR rate should be used.
Coupon interest payment due in June 2012 = [(4.5% + 2%)/2] × $1,000 = $32.50
Coupon interest payment due in December 2012 = [(5.0% + 2%)/2] × $1,000 =

$35.00
98. A dual currency bond:
A. is viewed as a combination of a single currency bond and foreign currency

option.
B. makes coupon payments in one currency and principal payments in
another currency.
C. makes coupon payments in one foreign currency and principal payments
in another foreign currency.
Correct Answer: B


Reference:
A dual currency bond makes coupon payments in one currency and principal
payments in another currency. One currency may be domestic and the other
foreign or both foreign.
Currency option bonds are viewed as a combination of a single-currency bond
plus a foreign currency option.
99. Three months ago, a steel manufacturer sold a 5% bond issue with a face value of
£1,000 and redemption yield of 5%. The bond will be maturing in ten months’
time.
The issue is most likely classified as a:
A. pure discount bond.

B. capital market security.
C. money market security.
Correct Answer: B
Reference:
The issue is classified as a capital market security as the original maturity is 13

(10 +3) months.
The issue is not a pure discount bond since it is issued as its face value (see
below).
N = 13; I/Y = 5; PMT = 50; FV = 1,000; (CPT) PV = 1,000
Money market securities have an original maturity (at issuance) of less than one
year.


100. A software house issued a 25-year bond issue at a price of 101.20 on January 1,
2013 (stated as a percentage of par). The par value of each bond in the issue is
$1,000. The bond will be callable every January 1st starting from the year 2020 at
the option of the issuer.
The callable bond has an embedded:
A. American option.
B. European option.
C. Bermuda-style option.
Correct Answer: C
Reference:
CFA Level I, Study Session 15, Reading 52, LOS f
The callable bond has an embedded Bermuda-style call. These options give the
issuer the right to call the bonds on specified dates following the call protection
period. In the case of the 25-year bond issue, the protection period ends in the
year 2020.
101. Affirmative covenants will require the issuer to:
A. use bond proceeds in a particular manner.

B. maintain minimum acceptable interest coverage ratios.
C. limit the assets that can be disposed off during the bond’s life.
Correct Answer: A
Reference:
CFA Level I, Study Session 15, Reading 52, LOS c
Affirmative covenants are typically administrative in nature. They include

promises by the issuer to employ bond proceeds in a particular manner.
Negative covenants constrain the issuer’s potential business decisions. The

purpose of negative covenants is to protect bondholders from such actions such as
the dilution of claims and so forth. Examples of these types of covenants include
requiring the issuer to maintain a minimum acceptable interest coverage ratio and
limiting the assets that can be disposed off during the bond’s life.


102. An investor would like to invest in a security that offers inflation protection for
both interest and principal repayments. Which of the following bond structures is
most suitable for this investor?
A. Capital-indexed bond
B. Credit-linked coupon bond
C. Zero-coupon-indexed bond
Correct Answer: A
Reference: CFA Level I, Volume 5, Study Session 15, Reading 52, LOS e
Capital-indexed bonds pay a fixed coupon rate that is applied to a principal

amount that increases in line with the increases in the index during the bond’s life.
Both interest and principal repayments are adjusted for inflation.
Credit-linked coupon bonds provide protection against credit risk and some
general protection against a poor economy since credit ratings tend to decline
during economic downturns.
Zero-coupon-indexed bond do not pay coupon; thus, inflation adjustment is made

via the principal repayment only.
103. A convertible bond issue has a conversion premium of $50 at a time when the
underlying share’s price is $35. The convertible has a par value of $1,000 and is
convertible into 80 shares of the issuer’s stock.
The convertible bond’s price is closest to:
A. $1,050.
B. $2,750.
C. $2,850.
Correct Answer: C
Reference:


Conversion premium = Bond’s price – conversion value

Conversion value = Current share price × conversion ratio
Conversion value = $35 × 80 = $2,800
Bond’s price = $50 + $2,800 = $2,850
104. Which of the following primary market mechanisms can be employed by an

issuer desiring to spread the issue over a series of time intervals without having to
prepare a separate offering circular for each bond issue?
A. Auctions
B. Shelf registration
C. Underwritten offerings
Correct Answer: B
Reference:
A shelf registration allows authorized issuers to offer additional bonds to the

general public without having to prepare a new and separate offering circular for
each bond issue. Instead the issuer prepares a single, all-encompassing offering
circular for each bond issue.
105. The primary market mechanism used to offer unregistered bonds without an
underwriting to a large institutional investor is most likely:
A. the grey market.

B. a private placement.
C. a firm commitment offering.
Correct Answer: B
Reference:


A private placement is a primary market mechanism whereby a non-underwritten,

unregistered offering of bonds are sold to an investor or a group of investors, such
as a large institutional investor.
A firm commitment offering entails an underwritten offering of bonds. The grey

market is a forward market for bonds that are to be issued.
106. A 10%, five-year corporate bond issue with a par value of $1,000 pays coupon on
a semi-annual basis. The market discount rate at the time of the issue was 12%
and has remained unchanged.
Which of the following facts is most likely correct regarding the bond issue?
A. The bond is priced at par.

B. The bond is selling at a price below par.
C. The bond offers an excessive coupon rate.
Correct Answer: B
Reference:
Given the price of the bond, $926.40 (calculated below), the bond is selling at a
discount to par offering a low coupon rate.
N = 5 × 2 = 10
I/Y = 12/2 = 6
PMT = 100/2 = 50
FV = 1,000
CPT PV = 926.40


107. An analyst has gathered some information about businesses in a foreign economy.
The exhibit below displays data about the firms operating there.
Exhibit
Fair Value Liquidation Value
(Dec 31 2009) (April 30 2010)
Firm A $150 million $60 million
Firm B $175 million $100 million
Firm C $320 million $90 million
Based on the information above, the economy is likely to:
A. have entered a business cycle low.

B. achieve abnormal growth in the near future.
C. experience an increase in the number of companies reporting at fair value.
Correct Answer: A
Reference:
In a weak economic environment, liquidation values will most likely be far lower
than the immediately previous fair values because there will be many assets for
sale but few buyers.
108. For most private equity funds:
A. management fees generally range from 20-30 percent of the committed

capital.
B. Limited partners (LPs) do not earn incentive fee until general partner (GP)
C. General partner (GP) does not earn incentive fee until limited partners
(LPs) have received their initial investment back.
Correct Answer: C
Reference:


For most private equity funds, GP does not earn an incentive fee until the LPs
Management fees generally range from 1-3 percent of the committed capital.
109. A commodity futures market is said to be in backwardation if:
A. the convenience yield is high.

B. there are little to no convenience yields.
C. futures prices are higher than spot prices.
Correct Answer: A
Reference:
A commodity futures market is in backwardation when the convenience yield is

high and futures prices are lower than spot prices. Commodity futures markets are
in contango when there are little to no convenience yields.
110. An investor would like to invest in a real estate asset class which provides a
relatively predictable income stream and has the obligation to distribute the
majority of its income to owners. The investor should most likely select:
A. Timberland.
B. Equity REITs.
C. Residential property
Correct Answer: B
Reference:
Equity REITs have the obligation to distribute the majority of their income to
shareholders (owners) and provide a relatively stable rental income stream.


111. Neil Ortega is seeking to invest in an alternative investment asset class with the
following properties:
• Liquid
• High return potential
• Diversification potential
• Inflation hedge
Ortega will most likely invest in:
A. apartments.
B. funds of hedge funds.
C. commodity derivatives.
Correct Answer: C
Reference:
Commodities offer the potential for returns, low correlations with other asset
classes (potential for diversification), inflation protection, and are relatively
liquid.
One of the major risks associated with investing in apartments (real estate) is that
the investment may be potentially illiquid despite the rentals on apartments
providing an inflation hedge in addition to diversification and return potential.
Despite providing more liquidity relative to their underlying funds, diversification

and return potential, funds of hedge funds are not known for providing inflation
protection.


112. Gabrielle Hope invests $250,000 in Bacca Fund, a fund of hedge funds with “4
and 12” fee structure. Management and incentive fees are calculated
independently at the end of each year. One of Bracca Fund’s investments is the
Torp fund, which has generated a fund value of $320,000 at the end of the first
year. The annual return to an investor in Bacca, net of management and incentive
fees, is closest to:
A. 7.5%.
B. 19.5%.
C. 28.0%.
Correct Answer: B
Reference:
Management fee = $320,000 × 4% = $12,800
Incentive fee = ($320,000 – $250,000) × 0.12 = $8,400
Total fees to Bacca = $12,800 + $8,400 = $21,200
Investor net return = ($320,000 – $250,000 – $21,200)/$250,000 = 19.52%


113. The set of exposures to IPS-permissible asset classes that is expected to achieve
the client’s long term objectives given the client’s investment constraints is most
likely referred to as:
A. tactical asset allocation.

B. systematic risk exposure.
C. strategic asset allocation.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 45, LOS-f.
The strategic asset allocation (SSA) is the set of exposures to IPS-permissible

asset classes that is expected to achieve the client’s long term objectives given the
client’s investment constraints
114. A Muslim investor prohibit his investment manager from investing in businesses
related to gambling and alcohol. In preparing investment policy statement of the
investor, this prohibition will most likely be included in:
A. risk and return objectives.

B. legal and regulatory factors.
C. unique needs and circumstances.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 45, LOS-b.
Prohibition of investor from investing in certain types of businesses or companies

whether rooted in religious beliefs or personal objections to certain products are
discussed in “Unique circumstance” of the investment policy statement.


115. If short selling is allowed, an asset plotted above the security market line should
most likely be:
A. sold.
B. sold short.
C. purchased.
Correct Answer: C
Reference:
Estimated return of an asset plotted above the SML indicates that asset is
undervalued and that asset should be purchased.
116. A higher return investment is more desirable even with higher risk if the investor
is:
A. rational.
B. risk averse.
C. risk neutral.
Correct Answer: C
Reference:
If an investor is risk neutral, he will care only about return and not about risk
therefore the higher return investments are more desirable even if they come with
higher risk.
117. Which of the following features most likely distinguishes ETFs from index mutual
funds?
A. Dividend reinvestments
B. Ownership rights of fund assets
C. Underlying securities held by the fund
Correct Answer: A


Reference:
One difference between a mutual fund and ETF is that the former usually
reinvests dividends whereas the latter pays out dividends.
118. Christopher Fugate, CFA, is a portfolio manager at Sunny Brooks. He is

managing the investment portfolio of Ralph McKenzie which comprises of an
allocation to small-cap equity stocks and real estate. The expected return and
standard deviation of the two asset classes are illustrated in the exhibit below. The
correlation between the two asset classes is 0.02.
Exhibit:
Asset Classes Comprising McKenzie’s Investment Portfolio
Expected Annual Standard Deviation

Return (%) of Return (%)
Small-cap equities 6.5 4.7
If McKenzie requires a portfolio return of 10%, the proportions invested in each

asset class should, respectively, be closest to:
Real estate Small-cap

(%): equities
(%):
A. 30.4 69.6.
B. 50.0 50.0.
C. 73.5 26.5.
Correct Answer: A
Reference:


RP = w1R1 + (1 – w1)R2
10.0 = (w1)(18.0) + (1 – w1)(6.5)
10.0 = 18.0w1 + 6.5 – 6.5w1
3.5 = 11.5w1
w1 = 30.43%
Thus, the real estate and small-cap equities should be held in the proportions
30.43% and 69.56% (1 – 0.3043) respectively.
119. A portfolio manager is exploring equity securities for an investor’s portfolio.

Based on his observations, the investment manager concludes that stock returns
are often negatively skewed.
Which of the following statements most accurately illustrates the implications of

an asset class with negatively returns?
A. Portfolio standard deviation will be overestimated.

B. There is a higher than normal probability for extreme returns.
C. A majority of the return observations are concentrated to the left of the
mean.
Correct Answer: A
Reference:
A return distribution is negatively skewed if returns are not symmetric around the
mean and most of the returns fall to the right of the mean. A negatively skewed
distribution has a higher frequency of negative deviations from the mean, which
has the effect of overestimating standard deviation.
Kurtosis refers to fat tails or higher than normal probabilities for extreme returns.
120. In stressed market conditions:
A. risks arise independently and hardly interact with one another.

B. the combined risk compounds the individual risks in a linear manner.
C. the total risk faced is worse than the sum of the risks of the separate
components.


Correct Answer: C
Reference:
Option C is correct. In most adverse financial interactions, the whole is much

worse than the sum of its parts i.e. the combined risk compounds the individual
risks in a non-liner manner. Risks do not usually arise independently, but
generally interact with one another, a problem that is even more critical in
stressed market conditions.

FinQuiz.com
June, 2016
Revision 1

FinQuiz.com – 3rd Mock Exam 2016 (PM Session)

33-44 Economics 18
Total 180

Questions 1 to 18 relate to Ethical Standards

activity.
activities.
examination.


code of ethics.

the show.




personnel.
contingent bonuses.

A. Yes.

A. fair dealing.
B. misconduct.

7. Joanne Lawson is an equity research analyst at Hilltop Associates, a portfolio

management firm. For her firm’s client accounts, Lawson is analyzing Redcliff, a
software house, which is currently undertaking an IPO. Three years ago Redcliff’s
software developer built a stock forecasting model for Hilltop; the developer is no
longer employed at the firm. However, Redcliff continues to provide technical
support to Hilltop. Based on Lawson’s discussion with competitors, industry
analysts and the company’s fundamentals, she forecasts above average
performance in the years to come and rates the stock as ‘buy’. Due to a time
shortage, Lawson releases the report with a brief summary of the company’s
fundamentals and phrases the recommendation as in word – ‘buy’. She signs off
her report disclosing that additional information is available on request.
Lawson is in violation of the CFA Institute Standards of Professional Conduct

relating to investment analysis, recommendations and actions because:
A. she has not justified her recommendation.

B. she has not disclosed the service arrangement with Redcliff.
C. her recommendation lacks a reasonable and adequate basis.
8. Members and candidates can meet their obligations under the standard relating to
performance presentation by:
A. maintaining records of data being used to calculate presented performance.

B. maintaining the relevance of performance history by removing terminated
accounts.
C. ensuring the material is kept simple as well as comprehendible to all
parties to whom the presentation is addressed.
9. According to the CFA Institute Standards of Professional Conduct, a member and

candidate with outstanding agent options to buy stock as part of the compensation
package for corporate financing activities should least likely disclose the
associated:
A. amount.
B. exercise price.
C. expiration date.

10. An investment professional who takes advantage of his firm’s controlling position
in the forward market to manipulate the price of the underlying equity security is
most likely in violation of:
A. the Code of Ethics but not the Standards of Professional Conduct.

B. the Standards of Professional Conduct but not the Code of Ethics.
C. both the Code of Ethics and the Standards of Professional Conduct.
11. Richards Hamm serves a board member of a banking institution. This year Hamm
has received an offer to serve on the board of a manufacturing enterprise as a
nonexecutive. The position will not interfere with his present duties and he will
receive a lifetime membership of the enterprises’ recreational centre.
According to the CFA Institute Standards of Professional Conduct, Hamm:

A. can accept the offer as long as prior written consent is obtained from his
employer.
B. can accept the offer without seeking approval since he is not receiving
monetary compensation.
C. cannot accept the offer as the additional compensation will compromise
his independence and objectivity.
12. Beatrice Walsh received her CFA Institute membership six years ago. Walsh
spaced her study for the three levels over a period of five years without failing on
any attempt. However, Walsh has been unable to pay her membership dues in the
current year due to financial problems, which have compounded following
resignation from employment. She is currently seeking employment and makes
the following two statements in a job interview:
Statement 1: I have always excelled at retaining concepts, which is why I believe

I have been able to pass all three levels in consecutive attempts.
Statement 2: As a CFA charterholder I am committed to holding the highest

ethical standards.
Which of the following statements most likely represents a violation of the Code
and Standards?

13. Which of the following represents a violation of the standard concerning Conduct
as Members and Candidates in the CFA program?
A. Predicting the topic areas to appear in an exam.

B. Claiming partial designation as a result of passing one level of the exam
program.
C. Discussing questions which have appeared on a CFA exam program with
candidates following its conclusion.
14. According to the Standards of Practice Handbook, which of the following is least
likely considered confidential exam information?
A. Contents of the Candidate Pledge.

B. Formulas that have not been tested in an exam.
C. The answer key developed for the written portions of the CFA Level II
and III exams.
15. At the beginning of the year Jason Lumes, who is managing the investment
portfolio of Bastille Corp’s defined benefit plan, receives a request from the
company’s chief executive to set up a trust for funding the treatment of patients
with terminal illnesses. Under the arrangement Lumes will be using 5% of the
commission fee earned from new pension fund clients referred to by Bastille
Corp’s chief executive. Lumes sets up an individual meeting with each of the new
clients receiving their consent for the arrangement. Once the first round of
commission income is donated to the trust, Lumes holds a meeting to disclose the
arrangement to Bastille Corp’s senior management that is not participating in the
pension plan.
According to the Standards of Practice Handbook, Lumes is most likely in:
A. compliance.
B. violation; he has not disclosed the arrangement to the actual client.
C. violation; he has delayed disclosure to Bastille Corp’s senior management.

16. According to the Standards of Practice Handbook, once a compliance program is

in place, a supervisor should:
A. delineate procedures for reporting violations and sanctions.

B. distribute the contents of the program to all firm employees.
C. incorporate a professional conduct evaluation as part of an employee’s
performance review.
17. A key feature of the GIPS standards most likely includes:
A. fair representation and full disclosure of investment performance.

B. the legal requirement to comply with the provisions of the GIPS standards.
C. including all actual, discretionary, non-fee- and fee-paying portfolio in at
least one composite defined by a common investment mandate.
18. If a member or candidate comes across material or nonpublic information, he

should:
A. disclose the information to his supervisor.

B. make reasonable efforts to achieve public disclosure of the information.
C. modify the current investment recommendation so it is contrary to the
information.

19. Mark Richards is Tilk Enterprises’ project manager. He is evaluating two pairs of
construction projects (coded A, B, C and D). Out of the four projects Richards
will be selecting only one; he intends to evaluate each pair independently using
the NPV and IRR rule. Details concerning the projects are summarized in the
exhibit below:
Exhibit:
Details Concerning Project Pairs
Pair 1 (A & B) Pair 2 (C & D)
A: End of period C: End of period
Cash flow timing B: End of period D: Mid-period
A: $150,000 C: $200,000
Initial investment B: $95,000 D: $200,000
Based on the information presented in the exhibit, there will be a conflict in

ranking generated by NPV and IRR for:
A. Pair 1 only.
B. Pair 2 only.
C. both pairs.
20. Compared to the time-weighted return, the money-weighted return will:
A. remove the effect of cash flow timing on project return.

B. be less sensitive to the timing of cash flows into or out of the portfolio.
C. be depressed if a client gives the investment manager more funds to invest
at an unfavorable time.

21. Yard Inc. maintains a defined contribution plan permitting employees to make
annual contributions of $35,000 into the plan. In order to generate the required
annual contribution, several of Yard’s employees invest $35,000 per year in an
exchange-traded fund that will pay an annual return of 8% for the next 35 years.
If the plan generates its promised return, the amount of money each employee will
have for retirement after making the last payment is closest to:
A. $0.8 million.
B. $6.0 million.
C. $6.5 million.
22. Lifeline Inc. is a manufacturer of swimming safety gear. Lifeline intends to

expand production by purchasing and converting vacant property for factory use.
Total purchase costs will amount to $350,000. Lifeline will make a down payment
of $50,000 and intends to finance the remainder using a 20-year loan with
quarterly payments. The bank has quoted an interest rate of 6% with quarterly
compounding and the first loan payment is due one year from the present day.
Each quarterly payment paid by Lifeline Inc. to its bank is closest to:
A. $4,568.
B. $6,464.
C. $7,542.
23. Which of the following probabilities is estimated using little to no data and is
relevant to investment decision-making?
A. priori probability.
B. empirical probability.
C. subjective probability.

24. Lance Hope is a portfolio manager selecting global stocks for his clients’
portfolios. Put of the sixteen being analyzed, Hope will shortlist five countries
from which stocks will be purchased.
The possible combinations of five country stocks Hope can create are closest to:
A. 174.
B. 4,368.
C. 524,160.
25. A desirable statistical property of an estimator most likely includes:
A. precision.
B. consistency.
C. effectiveness.
26. Selena Roberts manages an equity fund allocated to U.S. and Canadian equities in
the proportions 45% and 55% respectively. The expected returns and covariances
between the two equities are illustrated in the exhibit below:
Exhibit:
Equity Fund, Expected Returns & Covariances
U.S. Canadian
Equity E(R) = 15% E(R) = 25%
Covariance Matrix
U.S. Canadian
U.S. 200 125
Canadian 125 350
The correlation between the two stocks is closest to:
A. 0.00.
B. 0.05.
C. 0.47.

27. The Central Limit Theorem:
A. requires a finite population variance.

B. requires the population to be normally distributed.
C. asserts that for small sample sizes the distribution of sample mean will be
approximately normal.
28. Martin Kallos is an equity market analyst who is forecasting that the market price
of Nathan Inc.’s stock will increase over the next quarter. Kallos predicts that the
market price will increase by 2% in the first month, with a probability of 0.35,
followed by 3%, with a probability of 0.15, over the remaining three months. The
second price increase will only occur if the first materializes.
The probability that the stock price will increase by 3% given that it has increased
by 2% is closest to:
A. 0.018.
B. 0.123.
C. 0.429.
29. Which of the following assumptions most likely underlies technical analysis?
A. Market trends and patterns reflect rational human behavior.

B. Impact on market pricing is based on the collective sentiment of traders.
C. Trends and patterns are often unpredictable giving an opportunity to earn
abnormal returns.
30. Janice Mackintosh is performing statistical analysis on the equity market of

Algeria. She is attempting to predict the effects of a recent technology regulation
on the forecasted EPS of software houses. She collects financial data concerning
40 software houses. Mackintosh calculates population mean using EPS values of
$25.6 and $40.5. Based on her collected sample she forecasts that the EPS value
is expected to equal $35.2.
Based on the data collected and using the central limit theorem, the standard error
of the sample mean is closest to:
A. 0.0087.
B. 0.0187.
C. 0.1185.

31. Karim Heth is a technical analyst following the stock of Brown Enterprises, a
textile manufacturer. He believes that a double-bottom pattern exists based on
data concerning average price changes observed over the recent most four
financial years (Exhibit). He decides to exit his existing long position by selling
the Brown stock and estimates that the strategy can be executed at a price target
of $16.62.
Exhibit:
Price Change Data:2010-2013
Month Market Price ($)
2010 38.87
2011 54.40
2012 35.50
2013 54.38
Based on Heth’s analysis, he is most likely incorrect regarding the:
A. price target.
B. position to be taken.
C. identified chart pattern.
32. A rate of change (ROC) oscillator which crosses into positive territory signals that
the asset:
A. is overbought.
B. should be purchased.
C. price will experience a trend reversal.

33. If the income effect dominates the substitution effect, the impact of higher interest
rates on the level of savings is most likely:
A. neutral.
B. positive.
C. negative.
34. Recordia is a German seller of smart music players. Recordia’s monthly supply of
music players is given by the equation,
Qssp = - 50.5 + 28.5Psp – 4.5W
where Qssp is the number of smart music players sold, Psp is the price of players
sold in euros, and W is the wage rate in euros paid by smart music player sellers
to laborers. Per unit price of a smart music player is €225 and wage is €13.50.
There are currently five sellers producing smart music players identical to
Recordia.
Based on the data provided, the slope of the aggregate market supply curve is
closest to:
A. 0.007.
B. 50.500.
C. 142.500.
35. A decrease in the price of a good is followed by a decrease in consumption if:
A. the good is normal.

B. income effect dominates the substitution effect and the good is inferior.
C. a positive income effect dominates the substitution effect and the good is
Giffen.

Exhibit:
Financial Data for ABC Inc for theYear 2013
closest to:
A. $1,755.
B. $13,245.
C. $25,315.
37. A fiscal policy may be able to stabilize aggregate demand completely because:
A. relevant data often appear well before a policy decision needs to be made.
B. there is uncertainty of where the economy will be heading independent of
policy changes.
C. private sector behavior may change as discretionary fiscal adjustments are
announced.

38. The exhibit below illustrates economic data concerning Giyata (local currency,
GT), a developing country in Africa.
Exhibit:
Economic Data Concerning Giyata
GT (millions)
Domestic business investment in capital goods 45.7
Domestic business investment in inventories 23.6
Exports 12.2
Domestic business investment in owner-occupied
property 21.0
Government spending on final goods and services 28.8
Transfer payments 8.9
Imports 10.5
Net tax revenue collections 14.2
The GDP for Giyata, based on the expenditure approach, is closest to (in GT
millions):
A. 99.8.
B. 122.9.
C. 143.9.
39. In an effort to boost economic growth, the ratio of government spending to tax
collection revenue in Belarus has exceeded 1.0 for the past two years. This trend
is expected to continue for the foreseeable future. For the aggregate income to
equal aggregate expenditure, the:
A. country should run a trade surplus.

B. country should increase foreign borrowings.
C. private sector should increase domestic investment.

40. In the year 2013 the quantity of money on hand in a country, in local currency
units, amounted to 450 million. During the year the average number of times the
local currency changed hands was equal to 58. The country’s GDP, in real terms,
amounted to 300 million.
If money neutrality holds and all else is held constant, an increase in the supply of
money by 2% will most likely:
A. decrease velocity to 56.86.

B. increase price level to 88.74.
C. increase real output to $306 million.
41. Which of the following fiscal stances will be most effective in boosting aggregate
demand?
A. Expanding the supply of money.

B. Exploration of natural resources.
C. Enhanced public spending on social goods.
42. Currently the USD/GBP spot rate is 1.6736 while the three month forward rate is
1.6745.
Which of the following is the best interpretation of the forward

discount/premium?
A. The interest rates in Great Britain are higher than those in United States.
B. The real value of the USD/GBP spot rate will appreciate in the next 90
days.
C. The interest rates in the United States are higher than those in Great
Britain.

43. The Moroccan government authorities have launched a program whereby they
intend to enhance spending on public infrastructure as well as develop schools
and hospitals. To offset the effects of the fiscal policy, the country’s central bank
is reducing money supply.
What are the implications of the two policies on Morocco’s economy?
A. Interest rates will be reduced.

B. Reduction in private sector demand.
C. Growth in private and public sectors.
44. Lance Richard is a British investor holding Malaysian equities in his investment
portfolio. The current nominal spot value of a MGR is GBP 5.56 and is expected
to increase by 5% by the end of the year. The current annual British and
Malaysian price level is 103 and 98, respectively.
The GBP price level is forecasted to decrease by 2% while the Malaysian price
level will increase by 3%.
Based on the forecast data, the real value of the MGR will:
A. rise to 5.84.
B. rise to 6.14.
C. decline to 5.28.

45. Which audit opinion most likely signals to investors that a company’s financial
statements are unreliable?
A. Adverse
B. Unqualified
C. Disclaimer of opinion
46. Blue Ridge had an average-days-of-sales outstanding (DSO) period of 65 days in

2011. Total sales (all on credit) were $2.5 million in the same year. Company
management believes days on sales outstanding will decline to 60 days in
response to a more stringent credit collection policy. Credit sales are anticipated
to increase to $2.8 million. There are 365 days in a fiscal year.
In order to meet management projections, the required change in average accounts

receivable should be closest to:
A. – 8.33%.
B. + 3.38%.
C. + 12.00%.
47. A company has reported total deferred tax assets and liabilities amounting to
$35,000 and $50,000 respectively in its balance sheet for the year ended 2012. In
the fiscal year 2013, the statutory tax rate increased from 30% to 35%.
Which of the following most accurately illustrates the effect of the increase in tax
rate on the deferred tax accounts?
Deferred tax asset: Deferred tax liability:

A. Increase Increase
B. Decrease Increase
C. Increase Decrease

48. Clay Corp issued a €2,100,000 face-value seven year bonds on January 1, 2010,
when the prevailing market interest rate was 5%. The bonds pay 4% interest
annually on December 31.
Using the effective interest rate method, at year end Clay Corp will report:
A. a liability with a carrying value of €1,993,410.

B. interest expense of €84,000 on its income statement.
C. sale proceeds of €2,100,000 in association with the bond issue.
49. Oxygenic Corp recognized a deferred tax asset of $50,000 in relation to

differences in acceptable depreciation methods for tax and accounting purposes.
The deferred tax asset was reduced by $5,000 using a valuation allowance in the
following year.
Which of the following reasons most accurately justifies the reason for the
reduction?
A. The deferred tax item is more relevant to equity.

B. There will be taxable income available in the near future.
C. There is a high probability that the deferred tax asset will not be realized.
50. Lica, a garment manufacturer, purchased an item of equipment for $300,000 in

2011. The original estimated life of the equipment was five years and residual
value $25,000. The company originally applied the double declining balance
method of depreciation to the equipment. The company’s management revised the
method to straight line in the beginning of the 2012 fiscal year.
Compared to the previously used depreciation method, the company’s reported

depreciation expense in 2012 will be higher by:
A. $17,000.
B. $21,000.
C. $33,250.

51. Cross-sectional analysis can be performed as long as the companies under

analysis:
A. are of roughly equal size.

B. are in the same time period.
C. operate in the same currency.
52. Lightline, a component manufacturer, has reported average payables and ending
payables of $12,450 and $10,785 respectively for the year 2013. On average
Lightline takes 57 days to pay its suppliers. The company would like to shorten
this to a minimum of 45 days next year in order to take advantage of early
payment discounts. The company expects to make $80,000 worth of purchases in
2014.
Assuming there are 365 days in a financial year and Lightline achieves its targets,
the company’s closing balance of account payables in 2014 will be closest to:
A. $8,941.05.
B. $9,863.03.
C. $32,444.44
53. Which of the following factors will most likely contribute to an extension of the
cash conversion cycle?
A. Faster repayments to creditors.

B. Stringent customer credit policy.
C. Shorter inventory holding period.

54. The exhibit below highlights data concerning total assets reported by two
manufacturing concerns, Greena and Ice, in their respective balance sheets.
Greena Ice
Percent of Total Percent of Total
Assets Assets
Cash 2 7
Receivables 11 16
Inventory 9 11
Fixed assets net of
depreciation 70 58
Investments 8 8
Total assets 100 100
Using vertical common-size analysis, which of the following conclusions is least

valid? Relative to:
A. Ice, Greena is more liquid.

B. Greena, Ice has a lower proportion of credit sales.
C. Greena, Ice is deploying its fixed assets in a more effective manner.

55. Lance Mansfield is a financial analyst examining Westmore’s sales and purchase
activities for the month of April, its first month of operations. She has collected
the relevant data in the exhibit below. Westmore applies the LIFO method of
Exhibit:
Sale and Purchase Activity For the Month of April
Date Transaction Unit Price
April 1 Purchased 50 units $8
April 10 Sold 100 units $15
Westmore’s ending inventory balance is closest to:
A. $1,640.
B. $2,260.
C. $3,965.

56. Rochedale is a manufacturing concern preparing and presenting its financial

statements in accordance with IFRS. Thomas Gayle, an independent financial
analyst, is attempting to ascertain whether the company’s ability to meet interest
obligations has improved between the years 2012 and 2013. Rochedale classifies
the interest and dividends being paid as a use of cash in the operating section of
the cash flow statement. The company does not have any preferred shares of stock
outstanding.
Exhibit:
Selecting Financial Information for Rochedale
£’000s 2013 2012
Cash flow from operations 352 380
Interest paid 48 40
Taxes paid 68 65
Dividends paid 183 50
Between 2012 and 2013, Rochedale’s ability to meet interest obligations has most
likely:
A. improved.
B. deteriorated.
57. The payment of a stock dividend is most likely:
A. not disclosed on the cash flow statement.

B. disclosed as an operating cash flow under U.S. GAAP.
C. disclosed as either a (n) operating or financing cash flow under IFRS.

58. The exhibit below highlights selective financial information from Klienveldt
Incorporated’s balance sheet and cash flow statement for the years 2012 and
2013. The company uses the direct format for preparing its cash flow statement.
$’000s 2013 2012 Change

Wages payable 48 35 + 13
Taxes payable 169 180 – 11
Deferred tax asset 32 30 +2
Cash paid for income taxes 78 74 +4
Cash paid to employees 15 15 0
The amount of income tax and wages expense reported by Kleinveldt in its
income statement for the year 2013 is closest to:
income tax wages

expense: expense:
A. ($5,000) $13,000.
B. $67,000 $28,000.
C. $89,000 $2,000.
59. In 2013, Trans Inc. reported $250,000 as income tax payable based on income for
tax purposes. The tax expense reported on its income statement is equal to
$180,000. Trans Inc. will most likely report the difference between the two tax
amounts as:
A. a deferred tax asset.

B. a deferred tax liability.
C. comprehensive income.

60. On March 30, 2013 Builders, a construction firm, recorded an impairment loss of
$4,500 in relation to one its cement mixing units. One year later, the company
was able to recover 30% of the decline in asset value following an improvement
in the unit’s productivity. Builders prepares and presents its financial statements
in accordance with U.S. GAAP.
In relating to the mixing unit, Builders will most likely:
A. make no further accounting adjustments.

B. report a gain of $1,350 in its income statement.
C. report a gain of $1,350 in other comprehensive income.
61. Cash and cash equivalents are most likely:
A. measured at amortized cost.

B. classified as marketable securities.
C. associated with a moderate degree of interest rate risk.
62. For the year ended December 31, 2013 Lakner plc reported net income of $8.5
million and depreciation charges of $0.9 million. In addition, the company
reported a $0.3 million gain on the retirement of debt. The exhibit below
illustrates selective balance sheet information between the financial years 2012
and 2013.
$ Millions 2013 2012 Change

Accounts payable 35 40 –5
Income tax payable 12 10 +2
Deferred tax liability 6 10 –4
Interest payable 5 8 –3
Accounts receivable 14 7 +7
Inventory 9 1 +8
Cash 3 1 +2
Which of the adjustments is most likely required to reconcile net income with
operating cash flow?
A. Add 20.1.
B. Subtract 11.9.
C. Subtract 15.9.

63. Long-term financial liabilities issued at a price differing from par are reported on
the balance sheet at an amount equal to their:
A. fair value.
B. face value.
C. amortized cost.
64. Allen Luther, a financial analyst, is analyzing the financial statements of Jack &
Prime, a newspaper agency. The agency complies with U.S. GAAP. Between
2012 and 2013 the company did not issue any additional debt but repurchased $5
million shares of common stock. Any other changes in the common stock account
were purely due to increase in share market value. He has summarized selective
financial information in the exhibit below:

Retained earnings 42 37
Net income 8 6
Using the direct method, Jack & Prime’s net cash used in financing activities is
closest to (in millions):
A. $9.
B. $11.
C. $14.
65. Rector Associates is a wealth management firm which has recently purchased
shares of foreign equity stock for its client portfolios. The shares will be held for
an eight-month term after which they will be sold. The primary objective behind
the investment is to profit from short-term market fluctuations in the foreign
equity market. Six months into the investment, the stock has increased in value by
$5.
With respect to the gain, Rector Associates will most likely:
A. make disclosure in its footnotes.

B. report it in other comprehensive income.
C. report it as an unrealized gain in the income statement.

66. Narcus Limited is a chip manufacturer operating in the U.S. The sales process
involves the manufacturer first delivering chips to customers followed by the
dispatch of a representative to its customers’ respective sites for installation.
During the financial year 2013 Narcus sold 3,500 chips at a unit price of $250;
10% of the units sold are yet to be installed by year end while 5% of the chips
were returned due to technical issues.
For the financial year 2013, Narcus will report net revenue of:
A. $743,750.
B. $831,250.
C. $875,000.
67. Rex Corp. has reported the following amounts with respect to equity for the
financial year 2013:
Beginning shareholder’s equity $950,270

Net income 45,040
Dividends paid 37,370
Shares issued 256,970
Ending shareholder’s equity 1,534,000
The amount that has bypassed the income statement and is classified as other
comprehensive income is closest to:
A. $0.
B. $244,350.
C. $319,090.

68. A company reported the following figures in its financial statements for the most
recent financial year:
Ending liabilities $4.5 million

Ending contributed capital 1.2 million
Beginning retained earnings 1.1 million
Net income 0.9 million
Revenue 3.3 million
Distributions to owners 0.4 million
The company’s total assets at the end of the year are closest to:
A. $5.7 million.
B. $7.3 million.
C. $9.7 million.

69. Land Solutions (LS) specializes in the manufacture of cultivators used for
agricultural purposes. This year LS manufactured 34,000 units at a sales price of
$2,000. Variable costs per unit were $1,050 and fixed costs totaled $12 million.
Total fixed financing expenses amount to $2 million.
LS’s revenue at its operating breakeven is closest to:
A. $21,052,631.
B. $25,262,000.
C. $68,000,000.
70. Which of the following dividend policies should most likely have an economic
effect on a shareholder’s total cost basis?
A. Cash dividends
B. Stock dividends
C. Reverse stock split
71. Thirty days have passed since a company invested in a 150-day Treasury security
with a par value and face value of $1,000.00 and 969.31, respectively.
The bond-equivalent yield of the Treasury security is closest to:
A. 8.93%.
B. 9.18%.
C. 9.63%.

72. A company has announced an annual dividend per share of Brazilian Leros (BRL)
2, which will be payable on a quarterly basis, on January 28. The stock price at
the time of the announcement is BRL 40. Company management has calculated
that the share will first trade at an ex-dividend price of BRL 38 on January 30,
which is a business day. Shareholders will be entitled the right to receive
dividends on Sunday, February 1. Payment of dividends will occur on February
15, which happens to be the first national holiday of the year.
Which of the following dates is most likely inconsistent with the dividends
payment chronology?
A. January 30
B. February 1
C. February 15
73. Cash dividends and repurchases are economically equivalent when:
A. earnings yield and after-tax cost of borrowing are equal.

B. the market price per share is equal to the book value per share.
C. the information content and taxation of cash dividends and share
repurchases are the same.

74. The exhibit below summarizes key financial results for Krayack Limited, a steel
processor, between the years 2012 and 2013.
Exhibit:
Key Financial Results for Krayack Limited
$ Millions (where applicable) 2013 2012
Credit sales 100 150
Accounts receivable 50 70
Inventory 40 25
Cash and marketable securities 15 10
Net operating cycle 65 days 83 days
Between 2012 and 2013, Krayack Limited’s day’s payables outstanding has most
likely:
A. increased.
B. decreased.
C. remained constant.
75. Which of the following practices is least consistent with strong corporate
governance?
A. Board members are held accountable for any decisions taken on advice
provided by external consultants.
B. Board members of a manufacturing firm occasionally receive
remuneration for providing investment advice.
C. Allocating the position of board chair and chief executive officer to one
executive board member while appointing an objective individual as lead
independent director.
76. A company’s executive is in the process of selecting a liquidity source that can be
used without affecting the normal operations of a company. The executive will
most likely:
A. utilize the cash in the company’s bank account.

B. negotiate a debt contract on behalf of the firm.
C. file for bankruptcy protection and reorganization.

77. Jesse Mackintosh is constructing a portfolio that will be benchmarked to a

market-capitalization-weighted equity index. He is in the process of calculating
the index’s total return for the most recent period. Mackintosh has collected the
necessary data for the calculation in an exhibit.
Exhibit:
Index Price and Income Return Data
Beginning of
Beginning of End of period Total Period
Security market cap market cap Dividends Weight (%)
A 56,500 53,000 500 49.3
B 37,500 40,000 0 32.8
C 20,500 37,000 100 17.9
Total 114,500 130,000 100.0
The total return on the index is closest to:
A. 6.67%.
B. 14.06%.
C. 22.93%.
78. Which of the following statements accurately compares market-capitalization

(cap)-weighted with price-weighted indexes (which are identical in all respects)?
A. Market-cap-weighted indexes are most sensitive to the effects of

reconstitution.
B. Reconstitution affects market-cap- and price-weighted indexes in a similar
manner.
C. The value of price-weighted indexes may depart from a market-cap-
weighted index due to rebalancing.
79. Which of the following voting mechanisms is most likely used to meet the
interests of shareholders who own a small number of shares?
A. Proxy
B. Statutory
C. Cumulative

80. A trader serving a securities trading firm has purchased a stock priced at $80 on
margin using 40% equity. The maintenance requirement for the position is 25%.
The trader will receive a margin call if the stock price:
A. falls below $20.

B. falls below $64.
C. rises above $80.
81. Donald Grant is a junior market analyst writing a report on the role of dealers and
arbitrageurs in equity markets. He discusses the role of both parties in providing
liquidity to markets with his senior editor,
Statement: “While dealers typically provide liquidity to buyers and sellers in

equity markets, arbitrageurs do not; the latter are primarily concerned with
exploiting any security misvaluations.”
Grant is most likely correct with respect to the role of:
A. dealers only.
B. arbitrageurs only.
C. both dealers and arbitrageurs.
82. A British investor is expecting to receive $10 million in three month’s time and
would like to hedge against an unfavorable movement in the US dollar (USD). He
purchases USD denominated put options with a strike price of 1.55, paying a
premium of 0.30. The current GBP/USD spot exchange rate is 1.66.
The investor will exercise the put option if the spot exchange rate:
A. rises above 1.55.

B. declines below 1.25.
C. declines below 1.55.

83. A major use of a market index is that it:
A. can be used for modeling unsystematic risk.

B. accurately reflects the overall attitudes of investors in a market.
C. it can serve as a market proxy when measuring risk-adjusted performance.
84. Mark Patel and Eliza Butler are equity investors seeking to purchase a
manufacturer’s share of stock currently trading at $43. They place the orders with
their respective brokers who issue the following instructions on behalf of the two
individuals:
Patel - “This order should be executed at the best price available but by no means
can a price higher than $50 be accepted.”
Butler - “Any shares received should automatically be transferred by us, the

brokerage firm, to Butler’s security account.”
The instructions issued on behalf of the clients can be respectively classified as:
Patel Butler
A. Execution validity.
B. Validity execution.
C. Execution clearing.
85. An investor is evaluating the degree of regulation in a country’s financial markets.

Which of the following factors is a sign of high degree of market regulation?
A. Pension funds are required to maintain adequate reserves to ensure future

liabilities can be funded.
B. Allowing diversity in accounting standards to ensure a wide range of
reporting situations are adequately addressed.
C. Private financial companies are exempt from minimum capital
requirement regulations in an effort to promote corporate growth.

86. The exhibit below illustrates the share price and earnings per share (EPS) for
three companies (Tecra, Cosmos, and Latle) in the technology sector for the most
recent financial year (2013).
Exhibit:
Price and EPS Data for Tecra, Cosmos & Latle for the Financial Year 2013
£ Tecra Cosmos Latle
Price per share 782.5 560.2 430.6
EPS 446.1 450.1 220.5
Using the method of comparables, which of the following companies appears to

be the most undervalued?
A. Tecra
B. Cosmos
C. Latle
87. The performance of commodity indices:
A. reflects the risk-free interest rate.

B. is affected solely by changes in commodity prices.
C. is identical to the performance of underlying commodities.
88. During the year 2010, an index portfolio benchmarked to a newly formed equity
index generated a total capital gain of $125 while cumulative dividend generated
by index securities amounted to $50. The total price of the constituent securities at
the end of the period was $1,250.
The total return of the index portfolio is closest to:
A. 14.00%.
B. 14.58%.
C. 15.56%.

89. An American style put option on a bond expires in 80 days and has an exercise
price of $0.90 per $1 of par. The bond is currently worth $1.20 per $1 par and
makes no cash payments during the life of the option. The risk-free rate of interest
is 3.5% and the notional principal of the contract is $1,000. The bond is expected
to be worth $1.40 per $1 par at option expiration.
The highest and lowest possible prices (per $1 par value) for the put option are
respectively closest to:
Highest price Lowest price

($): ($):
A. 0.89 0.20.
B. 0.90 0.00.
C. 1.40 1.20.
90. Which of the following statements most accurately illustrates a consequence of

arbitrage?
A. Short selling becomes restrictive.

B. The same good can sell for different prices in different markets in the
future.
C. The combined actions of traders would force the convergence of trading
prices.
91. Derivatives most likely:
A. include mutual funds.

B. trade in spot and over-the-counter markets.
C. have a definite life span similar to insurance contracts.

92 The exhibit below illustrates details concerning otherwise identical call and put
options on a U.S. small-cap stock.
Exhibit:
Details Concerning Call and Put on US Small-Cap Stock
Call: Put:
Time to expiration (days) 120 120
Exercise price ($) 85 85
Option price ($) 14 9
Volatility (Annual standard deviation, %) 14 12
Type of option American American
Risk-free rate 5.50%
Holding all else constant, which of the following changes will increase the value
of the option in question?
A. Decreasing the volatility of the call option.

B. Decreasing the exercise price of the put option.
C. Increasing the time to expiration of the put option.
93. Which of the following factors most likely differentiate American call prices from
European call prices? .
A. volatility
B. right to exercise early
C. cash flows of the underlying
94. An analyst has gathered the following data for an underlying stock selling for
$146.
Exercise Price Call price Put Price

$150 $7.50 $8.20
The breakeven price for the put option buyer is closest to:
A. 136.80
B. 141.80
C. 158.20

95. The spread measure which accounts for future interest rate volatility is the:
A. Z-spread.
B. G-spread.
C. option-adjusted spread.
96. Each bond comprising the par curve:
A. is priced at par value.

B. is a zero-coupon issue.
C. has a full price equal to par value between coupon payment dates.
97. A decline in the effective duration of a callable bond most likely implies that a
bond’s:
A. yield-to-worst has risen.

B. yield-to-maturity has risen.
C. benchmark yield curve has shifted upwards.
98. A 5%-annual coupon paying bond issue has a term to maturity of six years. The
bond’s par value is $1,000 and is trading at a yield to maturity of 7%.
The bond is most likely trading at:
A. par.
B. a discount to par.
C. a premium to par.
99. A one-year zero coupon bond issue was purchased at a price of $850. The
principal value of the bond is $1,000.
The zero-coupon bond:
A. will be redeemed at $850.

B. will pay a fixed rate of interest.
C. has an implied interest of $150.

100. An increase in market interest rates will most likely benefit the holder of a:
A. call option.
B. put option.
C. conversion option.
101. A company has purchased a bond at a price of $956. The par value of the bond is
$1,000 and the original term to maturity is five years. The applicable capital gains
tax rate is 25%.
Based on the information provided on the bond issue, the company:
A. will not need to pay any capital gains taxes on the maturity of the bond
issue.
B. will need to declare capital gains of $44 at the maturity of the bond issue
only.
C. will need to include $8.8 in taxable income every tax year for 5 years and
declare a capital gain of $44 at maturity.
102. The interest income generated by a municipal bond issued in the United States is
most likely:
A. exempt from federal income tax and from the income tax of the state in
which the bonds are issued.
B. taxed at the income tax of the state in which the bonds are issued but
exempt from federal income tax.
C. taxed at the federal income tax rate but exempt from the income tax of the
state in which the bonds are issued.
103. The number of common shares per bond is closest to:
A. 8.
B. 18.
C. 20.

104. Which of the following factors least likely distinguishes investment-grade from
high-yield bond issues?
A. Liquidity
B. Coupon rate
C. Credit quality
105. The settlement date of which of the following bonds occurs the day following the
transaction date?
A. Eurobonds
B. Corporate bonds
C. Quasi-government bonds
106. An analyst is comparing two corporate bond issues, X and Y. He has compiled
statistics for the two bonds (Exhibit). The analyst would like to determine which
bond offers a higher yield-to-maturity when the yields are stated on a monthly
bond basis.
Exhibit:
Statistics for Bond X and Y
X Y
Annual coupon rate 5.00% 8.00%
Coupon payment frequency Quarterly Monthly
Yield-to-maturity 5.67% 6.15%
Believing that Bond Y is riskier than X, the analyst will most likely conclude that
the additional compensation offered by the former is closest to:
A. 47.0 bps.
B. 50.7 bps.
C. 51.2 bps.

107. Which of the following is not the characteristic of hedge fund?
Hedge funds:
A. impose restrictions on redemptions.

B. are primarily used to provide diversification benefits for the portfolio.
C. are generally set up as private investment partnership open to a limited
number of investors willing and able to make a large initial investment.
108. In which of the following private equity strategy, the current management team is
being replaced and the acquiring team is involved in managing the company?
A. Venture capital
B. Management buy-ins.
C. Management buyouts.
109. Which of the following is least likely an income based approach to appraisal for
an income producing property?
A. Comparable sales approach

B. Direct capitalization approach
C. Discounted cash flow approach
110. Which of the following sources of venture capital (VC) financing can be used to
support a major marketing campaign of a company that has recently initiated
commercial production and sales?
A. Seed-stage financing.
B. Later stage financing.
C. Formative stage financing.

111. Luna Babbage is an investor who has invested $150,000 each in the hedge funds
ART and EDD at the beginning of the calendar year. Both funds have a “2 and
10” fee structure with management and incentive fees being paid at the end of the
year. For both funds, the incentive fee is calculated based on returns in excess of a
6% hurdle rate. At the end of the calendar year the value of ART appreciates by
10% while EDD depreciates by 4%.
The incentive fee paid to the management of ART is closest to:
A. $270.
B. $600.
C. $3,300.
112. In contrast to traditional investments, alternative investments are characterized by:
A. high absolute returns.

B. low degree of leverage.
C. potential tax disadvantages.

113. An investor currently owns a portfolio with expected annual return and standard
deviation of 12% and 18% respectively. The investor is considering adding a new
stock in his current portfolio. The standard deviation of the stock is 22% and its
correlation with the current portfolio is 0.35.
Considering 5% risk free rate, the risk adjusted return of the stock from adding to
the investor’s current portfolio is closest to:
A. 7.99%
B. 12.15%
C. 25.67%
114. A portfolio consists of 30 assets with the correlation being 0.75 among all pairs of
assets. The portfolio variance is 0.0625. The risk of such a portfolio will be
closest to:
A. 4.84%.
B. 15.63%.
C. 22.62%.
115. A public investor with an asset base of US$50,000 should most likely opt for a
(n):
A. hedge fund.
B. exchange traded fund.
C. separately managed account.

116. A portfolio manager forms an investment portfolio with two asset classes, 1 and
2, held in the proportions 60% and 40% respectively. The expected annual returns
and standard deviations of the asset classes are summarized in the exhibit below.
Exhibit:
Expected Annual Standard Deviations and Returns of a Two-Asset Portfolio
1 13.5 15.2
2 20.8 24.0
If the portfolio standard deviation is 14.5%, the correlation between the two asset
classes should be closest to:
A. 0.20.
B. 0.73.
C. 1.00.
117. One difference between a defined contribution (DC) and defined benefit (DB)
plan is that in the case of the latter:
A. future benefits are undefined.

B. investment risk exposure is low.
C. employees are required to contribute a portion of their wages each period.
118. What are the implications for investors using the Markowitz efficient frontier for
making investment decisions?
A. The slope of the efficient frontier is concave.

B. Investors are rewarded with increasing increase in returns for assuming
more risk.
C. Portfolios to the right of the global minimum variance portfolio are the
most efficient.
119. Which of the following set of non-financial risks is collectively referred to as

compliance risk?
A. Credit risk, tax risk and liquidity risk.

B. Tax risk, regulatory risk and accounting risk.
C. Regulatory risk, solvency risk and model risk.

120. An investor has purchased shares of a large-cap equity stock. The covariance of
the stock with the market index is 0.0320 while standard deviation of the stock
and the market index is 22.5% and 15.7% respectively.
The return of the large-cap equity stock most likely follows a trend which:
A. follows the general market.

B. resembles the general market.
C. moves opposite to the general market.

FinQuiz.com
June, 2016
Revision 1


FinQuiz.com – 3rd Mock Exam 2016 (PM Session)

33-44 Economics 18
Total 180


Questions 1 to 18 relate to Ethical Standards

activity.
activities.
examination.
Correct Answer: C
Reference:
Standard I (A), Knowledge of the Law, requires candidates to abide by the rules
and regulations related to the administration of the CFA examination. Although
members and candidates are required to understand the laws and regulations that
govern their professional activities, they are not required to become experts on or
have detailed knowledge of all the laws that could potentially govern their
activities.
The standard recommends members and candidates to document a violation when

disassociating from an illegal or unethical activity; this is not a requirement.


code of ethics.
Correct Answer: B
Reference:


To comply with the CFA Institute Standards of Professional Conduct relating to

duties to employers, members and candidates are encouraged to recommend that
their employers adopt and distribute a code of ethics to clients.
The standards do not preclude individuals from entering into an independent

business practice, which does conflict with the employer’s interest, while still
employed as long as prior notification is made.
In a supervisory capacity, when a member or candidate discovers an employee

has engaged in an illegal or unethical activity, (s) he should respond promptly by
conducting a thorough investigation. Simply obtaining assurances that the illegal
activity will not reoccur is not sufficient.

the show.

Correct Answer: B
Reference:
Standard I (B) Independence and Objectivity permits members and candidates to

accept gifts, benefits, compensation from clients as long as the employer is
informed either before or after accepting the gift.
Town’s best course of action would be to accept the offer as long as she informs
her employer. If notification prior to acceptance is not possible, members and
candidates must inform their clients about prior acceptance of gifts or benefits.




personnel.
contingent bonuses.
Correct Answer: B
Reference:
A desirable element of a firewall system is that the compensation arrangement

should minimize pressure on research analysts and reward independence and
objectivity. Compensation based on a flat fee rate will achieve this purpose.
While some firms go the extreme of prohibiting communication between research

and investment banking personnel, this measure may not classify as a desirable
element. A more effective solution is control the flow of information across the
wall by passing the information through a compliance department.
Providing investment banking personnel with the authority to review, approve,

disapprove, or otherwise make changes to research reports will undermine the
independence and objectivity of an analyst and is not a desirable property.



A. Yes.
Correct Answer: A
Reference:
Parker is in violation of Standard III (D) Performance Presentation because she

has falsely claimed compliance with the GIPS standards. By misrepresenting
performance information, Parker is in violation of the CFA Institute Standards of
Professional Conduct.

A. fair dealing.
B. misconduct.
Correct Answer: B


Reference:
Horace is in violation of the standard relating to misconduct. This is because she

has been dishonest regarding the condition of the land being sold. Horace is also
in violation of the standard relating to disclosure of conflicts by failing to disclose
her relationship with the land’s owner. Her independence and objectivity as a real
estate advisor may be impaired due to her relationship with the seller.
There is no evidence to indicate that the standard relating to fair dealing has been
violated.
7. Joanne Lawson is an equity research analyst at Hilltop Associates, a portfolio

management firm. For her firm’s client accounts, Lawson is analyzing Redcliff, a
software house, which is currently undertaking an IPO. Three years ago Redcliff’s
software developer built a stock forecasting model for Hilltop; the developer is no
longer employed at the firm. However, Redcliff continues to provide technical
support to Hilltop. Based on Lawson’s discussion with competitors, industry
analysts and the company’s fundamentals, she forecasts above average
performance in the years to come and rates the stock as ‘buy’. Due to a time
shortage, Lawson releases the report with a brief summary of the company’s
fundamentals and phrases the recommendation as in word – ‘buy’. She signs off
her report disclosing that additional information is available on request.
Lawson is in violation of the CFA Institute Standards of Professional Conduct

relating to investment analysis, recommendations and actions because:
A. she has not justified her recommendation.

B. she has not disclosed the service arrangement with Redcliff.
C. her recommendation lacks a reasonable and adequate basis.
Correct Answer: B
Reference:


The client-seller relationship Hilltop maintains with Redcliff may influence

Lawson’s independence and objectivity in producing a recommendation for the
latter’s stock. This is a matter that must be disclosed to clients and prospects so
that they may judge any potential conflict of interest. By failing to do so, Lawson
is in violation of the standard relating to disclosure of conflicts.
Based on the standard relating to communication with clients and prospects,

communication can range from one word (“buy” or “sell”) to in-depth reports.
Given that Lawson has notified clients that additional information is available on
request, Lawson is not in violation of restricting her recommendation to a single
phrase.
Being based on a wide range of sources, Lawson has a reasonable and adequate
basis for her recommendation.
8. Members and candidates can meet their obligations under the standard relating to
performance presentation by:
A. maintaining records of data being used to calculate presented performance.

B. maintaining the relevance of performance history by removing terminated
accounts.
C. ensuring the material is kept simple as well as comprehendible to all
parties to whom the presentation is addressed.
Correct Answer: A
Reference:
Members and candidates can continue to meet the requirements of the Code and
Standards with respect to performance presentation by:
• maintaining the data and records used to calculate the performance being
presented
• including terminated accounts as part of performance history with a clear
indication of when the accounts were terminated
• considering the knowledge and sophistication of the audience to whom a
performance presentation is being addressed; this does not imply that the
performance presentation should be kept simple and comprehendible.


9. According to the CFA Institute Standards of Professional Conduct, a member and

candidate with outstanding agent options to buy stock as part of the compensation
package for corporate financing activities should least likely disclose the
associated:
A. amount.
B. exercise price.
C. expiration date.
Correct Answer: B
Reference:
According to the recommended procedures for compliance, when holding

outstanding agent options, members and candidates should disclose the amount
and expiration date of the options.
10. An investment professional who takes advantage of his firm’s controlling position
in the forward market to manipulate the price of the underlying equity security is
most likely in violation of:
A. the Code of Ethics but not the Standards of Professional Conduct.

B. the Standards of Professional Conduct but not the Code of Ethics.
C. both the Code of Ethics and the Standards of Professional Conduct.
Correct Answer: C
Reference:
An investment professional who engages in practices that distort prices has

violated both the Standards of Professional Conduct and Code of Ethics. The
former is violated as the member has engaged in market manipulation while the
latter is violated as the individual has not attempted to promote the integrity of
and uphold the rules governing capital markets.


11. Richards Hamm serves a board member of a banking institution. This year Hamm
has received an offer to serve on the board of a manufacturing enterprise as a
nonexecutive. The position will not interfere with his present duties and he will
receive a lifetime membership of the enterprises’ recreational centre.
According to the CFA Institute Standards of Professional Conduct, Hamm:

A. can accept the offer as long as prior written consent is obtained from his
employer.
B. can accept the offer without seeking approval since he is not receiving
monetary compensation.
C. cannot accept the offer as the additional compensation will compromise
his independence and objectivity.
Correct Answer: A
Reference:
Hamm can accept the offer as long as he receives written consent from his
employer prior to acceptance. The standard concerning additional compensation
arrangements requires members and candidates to not accept gifts, benefits,
compensation, or consideration until they receive a written consent from all
relevant parties. Regardless of the fact that Lee is being awarded for his service in
the form of nonmonetary compensation, consent is still warranted.


12. Beatrice Walsh received her CFA Institute membership six years ago. Walsh
spaced her study for the three levels over a period of five years without failing on
any attempt. However, Walsh has been unable to pay her membership dues in the
current year due to financial problems, which have compounded following
resignation from employment. She is currently seeking employment and makes
the following two statements in a job interview:
Statement 1: I have always excelled at retaining concepts, which is why I believe

I have been able to pass all three levels in consecutive attempts.
Statement 2: As a CFA charterholder I am committed to holding the highest

ethical standards.
Which of the following statements most likely represents a violation of the Code
and Standards?
Correct Answer: C
Reference:
Statement 1 represents a violation of the CFA Institute Standards of Professional

Conduct. She has not passed all three levels in consecutive attempts and claiming
she has done so represents a violation. Furthermore, Walsh implies that her ability
to retain concepts makes her superior relative to other candidates. Thus Walsh is
in violation of the standard relating to Reference to CFA Institute, the CFA
designation, and the CFA program.
Statement 2 represents a violation as Walsh cannot claim membership to the CFA

Institute until she pays her annual dues.


13. Which of the following represents a violation of the standard concerning Conduct
as Members and Candidates in the CFA program?
A. Predicting the topic areas to appear in an exam.

B. Claiming partial designation as a result of passing one level of the exam
program.
C. Discussing questions which have appeared on a CFA exam program with
candidates following its conclusion.
Correct Answer: C
Reference:
Conduct which is construed a violation of the standard in question includes

providing exam information to candidates; this includes discussing exam
questions. Predictions related to the contents of an exam are not confidential
information and thus any attempt to do so does not represent a violation.
Claiming partial designation as a result of passing one level of the exam program
represents a violation of the standard related to Reference to the CFA Institute, the
CFA designation, and the CFA Program.
14. According to the Standards of Practice Handbook, which of the following is least
likely considered confidential exam information?
A. Contents of the Candidate Pledge.

B. Formulas that have not been tested in an exam.
C. The answer key developed for the written portions of the CFA Level II
and III exams.
Correct Answer: A
Reference:


The contents of the Candidate pledge are not considered confidential information
and are provided on the CFA Institute website, which can be accessed by all
candidates.
Sharing formulas that have not been tested in an exam as well as the answer key
developed for exam questions is considered a violation since both are considered
confidential exam information.
15. At the beginning of the year Jason Lumes, who is managing the investment
portfolio of Bastille Corp’s defined benefit plan, receives a request from the
company’s chief executive to set up a trust for funding the treatment of patients
with terminal illnesses. Under the arrangement Lumes will be using 5% of the
commission fee earned from new pension fund clients referred to by Bastille
Corp’s chief executive. Lumes sets up an individual meeting with each of the new
clients receiving their consent for the arrangement. Once the first round of
commission income is donated to the trust, Lumes holds a meeting to disclose the
arrangement to Bastille Corp’s senior management that is not participating in the
pension plan.
According to the Standards of Practice Handbook, Lumes is most likely in:
A. compliance.
B. violation; he has not disclosed the arrangement to the actual client.
C. violation; he has delayed disclosure to Bastille Corp’s senior management.
Correct Answer: B
Reference:
Lumes is in violation of the standard relating to referral fees because he has not
made disclosure to the ultimate beneficiaries of the existing and new pension
plans, which are his actual clients. Therefore, by failing to identify his actual
clients, Lumes is in violation of the standard concerning loyalty, prudence, and
care as well as referral fees.
Lumes is not required to disclose the referral fee arrangement to Bastille’s senior
managers as they are not participants of the pension plan and thus are not his
clients. Any disclosure provided is not covered by the Code and Standards.


16. According to the Standards of Practice Handbook, once a compliance program is

in place, a supervisor should:
A. delineate procedures for reporting violations and sanctions.

B. distribute the contents of the program to all firm employees.
C. incorporate a professional conduct evaluation as part of an employee’s
performance review.
Correct Answer: C
Reference:
Once a compliance program is in place, a supervisor should, amongst other

actions:
• distribute the contents of the program to the appropriate personnel and

• incorporate a professional conduct evaluation as part of an employee’s
performance review.
Procedures for delineating reporting violations and sanctions are a quality of

adequate compliance procedures.
17. A key feature of the GIPS standards most likely includes:
A. fair representation and full disclosure of investment performance.

B. the legal requirement to comply with the provisions of the GIPS standards.
C. including all actual, discretionary, non-fee- and fee-paying portfolio in at
least one composite defined by a common investment mandate.
Correct Answer: A
Reference:


Key features of the GIPS standards include:
• The GIPS standards are ethical standards for investment performance

presentation to ensure fair representation and full disclosure of investment
performance.
• Firms must comply with all the requirements of the GIPS standards,
including any updates, guidance statements, interpretations, Questions &
Answers, and clarifications published by CFA Institute and the GIPS
Executive Committee. There is no legal requirement to comply with the
provisions of the standards.
• The GIPS standards require firms to include all actual, discretionary, fee-
paying portfolios in at least one composite defined by investment
mandate, objective or strategy.
18. If a member or candidate comes across material or nonpublic information, he

should:
A. disclose the information to his supervisor.

B. make reasonable efforts to achieve public disclosure of the information.
C. modify the current investment recommendation so it is contrary to the
information.
Correct Answer: B
Reference:
If a member or candidate comes across material, nonpublic information, he should

make reasonable efforts to achieve public dissemination of the information by
encouraging the issuing company to make the information public. If public
dissemination is not possible, the member should communicate the information to
his supervisor or the firm’s compliance department.
However, he should not alter current investment recommendations on the basis of

the information.


19. Mark Richards is Tilk Enterprises’ project manager. He is evaluating two pairs of
construction projects (coded A, B, C and D). Out of the four projects Richards
will be selecting only one; he intends to evaluate each pair independently using
the NPV and IRR rule. Details concerning the projects are summarized in the
exhibit below:
Exhibit:
Details Concerning Project Pairs
Pair 1 (A & B) Pair 2 (C & D)
A: End of period C: End of period
Cash flow timing B: End of period D: Mid-period
A: $150,000 C: $200,000
Initial investment B: $95,000 D: $200,000
Based on the information presented in the exhibit, there will be a conflict in

ranking generated by NPV and IRR for:
A. Pair 1 only.
B. Pair 2 only.
C. both pairs.
Correct Answer: C
Reference:
The NPV and IRR will generate conflict rankings when the timing of projects’
cash flows differs (as is the case with Pair 2) or when the size or scale of the
projects differs (as is the case with Pair 1).
20. Compared to the time-weighted return, the money-weighted return will:
A. remove the effect of cash flow timing on project return.

B. be less sensitive to the timing of cash flows into or out of the portfolio.
C. be depressed if a client gives the investment manager more funds to invest
at an unfavorable time.
Correct Answer: C


Reference:
Compared to the time-weighted return, the money-weighted return will be

depressed if a client gives the investment manager more funds to invest at an
unfavorable time. The money-weighted return is sensitive to both the timing and
amount of cash withdrawals or additions out of or into the portfolio. On the
contrary, the time-weighted rate of return is insensitive to the timing of cash flows
and amount of cash flows into or out of the portfolio.
21. Yard Inc. maintains a defined contribution plan permitting employees to make
annual contributions of $35,000 into the plan. In order to generate the required
annual contribution, several of Yard’s employees invest $35,000 per year in an
exchange-traded fund that will pay an annual return of 8% for the next 35 years.
If the plan generates its promised return, the amount of money each employee will
have for retirement after making the last payment is closest to:
A. $0.8 million.
B. $6.0 million.
C. $6.5 million.
Correct Answer: B
Reference:
The formula below will be used to calculate the future value (FV) of the annuity:
FV =
(1 + r )N − 1 = $35,000 × (1 + 0.08)35 − 1 = $6,031,088.13
r 0.08


22. Lifeline Inc. is a manufacturer of swimming safety gear. Lifeline intends to

expand production by purchasing and converting vacant property for factory use.
Total purchase costs will amount to $350,000. Lifeline will make a down payment
of $50,000 and intends to finance the remainder using a 20-year loan with
quarterly payments. The bank has quoted an interest rate of 6% with quarterly
compounding and the first loan payment is due one year from the present day.
Each quarterly payment paid by Lifeline Inc. to its bank is closest to:
A. $4,568.
B. $6,464.
C. $7,542.
Correct Answer: B
Reference:
Present value annuity factor =

⎡ 1 ⎤ 1
⎢1 − (1 + r / m )mN ⎥ 1 − (1 + 0.06 4)4×20
S
⎢ ⎥ = = 46.407323
⎢ rS / m ⎥ 0.06 4
⎢ ⎥
⎣ ⎦
A = PV/Present value of annuity factor

= $300,000/46.4072 = $6,464.4500
23. Which of the following probabilities is estimated using little to no data and is
relevant to investment decision-making?
A. priori probability.
B. empirical probability.
C. subjective probability.
Correct Answer: C
Reference:


The subjective probability is drawn based on personal or subjective judgment

requiring very little data and is of great importance in investments. Investors
making buy and sell decisions that determine asset prices, often draw on
subjective probabilities.
24. Lance Hope is a portfolio manager selecting global stocks for his clients’
portfolios. Put of the sixteen being analyzed, Hope will shortlist five countries
from which stocks will be purchased.
The possible combinations of five country stocks Hope can create are closest to:
A. 174.
B. 4,368.
C. 524,160.
Correct Answer: B
Reference:
CFA Level 1, Volume 1, Study Session 3, Reading 8, LOS o
⎛ n ⎞ n! 16!
n C r = ⎜⎜ ⎟⎟ = = = 4,368
⎝ r ⎠ (n − r )!r! (16 − 5)!5!
25. A desirable statistical property of an estimator most likely includes:
A. precision.
B. consistency.
C. effectiveness.
Correct Answer: C
Reference:
Desirable properties of an estimator include unbiasedness, efficiency, and

consistency.


26. Selena Roberts manages an equity fund allocated to U.S. and Canadian equities in
the proportions 45% and 55% respectively. The expected returns and covariances
between the two equities are illustrated in the exhibit below:
Exhibit:
Equity Fund, Expected Returns & Covariances
U.S. Canadian
Equity E(R) = 15% E(R) = 25%
Covariance Matrix
U.S. Canadian
U.S. 200 125
Canadian 125 350
The correlation between the two stocks is closest to:
A. 0.00.
B. 0.05.
C. 0.47.
Correct Answer: C
Reference:
p(RU .S ., Camadian ) = Cov (RU .S ., RCanadian )/ σ (RU .S . )σRCanadian )

= 125/[(200)0.5(350)0.5]= 0.47
27. The Central Limit Theorem:
A. requires a finite population variance.

B. requires the population to be normally distributed.
C. asserts that for small sample sizes the distribution of sample mean will be
approximately normal.
Correct Answer: A
Reference:


The Central Limit Theorem requires the population variance to be finite and
assets that if the sample size is large, the distribution of sample mean will be
approximately normal. The assertions made by the Central Limit Theorem are not
restricted to a normally distributed population.
28. Martin Kallos is an equity market analyst who is forecasting that the market price
of Nathan Inc.’s stock will increase over the next quarter. Kallos predicts that the
market price will increase by 2% in the first month, with a probability of 0.35,
followed by 3%, with a probability of 0.15, over the remaining three months. The
second price increase will only occur if the first materializes.
The probability that the stock price will increase by 3% given that it has increased
by 2% is closest to:
A. 0.018.
B. 0.123.
C. 0.429.
Correct Answer: C
Reference:
If the price increases by 3%, it is certain that the price has already increased by
2%. Therefore, P (Price increases by 2%/Price increases by 3%) = 1.
The joint probability of the occurrence of both events is expressed as:
P(Prices increases by 3% and price increases by 2%) = P (Price increases by

2%/Price increases by 3%)P(Price increases by 3%).
P(Price increases by 3% and price increases by 2%) = 1(0.15) = 0.15
The joint probability can also be expressed as:
P(Prices increases by 3% and price increases by 2%) = P (Price increases by

3%/Price increases by 2%)P(Price increases by 2%).
0.15 = P (Price increases by 3%/Price increases by 2%)(0.35)

(Price increases by 3%/Price increases by 2%) = 0.4286


29. Which of the following assumptions most likely underlies technical analysis?
A. Market trends and patterns reflect rational human behavior.

B. Impact on market pricing is based on the collective sentiment of traders.
C. Trends and patterns are often unpredictable giving an opportunity to earn
abnormal returns.
Correct Answer: B
Reference:
A key tenet of technical analysis is that the market reflects the collective
knowledge and sentiment of varied participants and the amount of buying and
selling in a particular security. Therefore, only those buying and/or selling a
security will have an impact on price.
Technicians believe that market trends and patterns tend to repeat themselves and
are somewhat predictable.
Technicians assume that market trends and patterns reflect irrational human
behavior.
30. Janice Mackintosh is performing statistical analysis on the equity market of

Algeria. She is attempting to predict the effects of a recent technology regulation
on the forecasted EPS of software houses. She collects financial data concerning
40 software houses. Mackintosh calculates population mean using EPS values of
$25.6 and $40.5. Based on her collected sample she forecasts that the EPS value
is expected to equal $35.2.
Based on the data collected and using the central limit theorem, the standard error
of the sample mean is closest to:
A. 0.0087.
B. 0.0187.
C. 0.1185.
Correct Answer: B


Reference:
n
2
∑ (X i −X ) [35.2 − 33.05 *]2
s2 = i =1
= = 0.118526
n −1 40 − 1
* X = (40.5 + 25.6 ) / 2 = 33.05
Since the population standard deviation is unknown, the formula below is used to
calculate the standard error of the sample mean:
s 0..18529
sX = = = 0.018741
n 40
31. Karim Heth is a technical analyst following the stock of Brown Enterprises, a
textile manufacturer. He believes that a double-bottom pattern exists based on
data concerning average price changes observed over the recent most four
financial years (Exhibit). He decides to exit his existing long position by selling
the Brown stock and estimates that the strategy can be executed at a price target
of $16.62.
Exhibit:
Price Change Data:2010-2013
Month Market Price ($)
2010 38.87
2011 54.40
2012 35.50
2013 54.38
Based on Heth’s analysis, he is most likely incorrect regarding the:
A. price target.
B. position to be taken.
C. identified chart pattern.
Correct Answer: C
Reference:


Heth is incorrect regarding the identified chart pattern. The observed price pattern
illustrated is characteristic of a double-top pattern as the price peaked at $54.40
before declining to $35.50 and rebounding once again to a level around the peak.
Heth has correctly estimated the price target as $16.62 [$35.50 – ($54.38 –
$35.50)].
Since the price is forecasted to decline and then rebound, a short position will
allow Heth to capitalize on the anticipated trend reversal.
32. A rate of change (ROC) oscillator which crosses into positive territory signals that
the asset:
A. is overbought.
B. should be purchased.
C. price will experience a trend reversal.
Correct Answer: B
Reference:
A ROC oscillator that crosses into positive territory is a signal that the asset
should be purchased (a buy signal).


33. If the income effect dominates the substitution effect, the impact of higher interest
rates on the level of savings is most likely:
A. neutral.
B. positive.
C. negative.
Correct Answer: C
Reference:
If the income effect dominates the savings effect, higher interest rates will suggest
less savings are required to attain a given sum of money for the future resulting in
individuals substituting present consumption for future consumption. In this
event, it is possible to observe higher interest rates resulting in lower savings.
34. Recordia is a German seller of smart music players. Recordia’s monthly supply of
music players is given by the equation,
Qssp = - 50.5 + 28.5Psp – 4.5W
where Qssp is the number of smart music players sold, Psp is the price of players
sold in euros, and W is the wage rate in euros paid by smart music player sellers
to laborers. Per unit price of a smart music player is €225 and wage is €13.50.
There are currently five sellers producing smart music players identical to
Recordia.
Based on the data provided, the slope of the aggregate market supply curve is
closest to:
A. 0.007.
B. 50.500.
C. 142.500.
Correct Answer: A


Reference:
The slope of the supply curve is the coefficient on Qsp in the inverse supply
function. The inverse supply function is calculated below.
Holding W constant at 13.50 and inserting it in the supply function provided, the
value of Psp needs to be determined.
Qssp = 5[- 50.5 + 28.5Psp – 4.5(13.5)] = - 556.25 + 142.5Psp
Inverting the supply function, Psp = 3.904 + 0.007 Qssp
35. A decrease in the price of a good is followed by a decrease in consumption if:
A. the good is normal.

B. income effect dominates the substitution effect and the good is inferior.
C. a positive income effect dominates the substitution effect and the good is
Giffen.
Correct Answer: B
Reference:
A decrease in the price of a good will result in the consumer reducing its
purchases if the good is inferior and the income effect dominates the substitution
effect. Although a decrease in price will cause a consumer to buy more, the effect
is mitigated due to the income effect; the consumer will want to purchase less of
that good as income rises.
In the case of Giffen goods, a decrease in price will decrease consumption if the
decrease in price is strong enough as well as negative to overpower the
substitution effect.


36. The exhibit below summarizes financial data for ABC Inc., which was
Exhibit:
Financial Data for ABC Inc. for the Year 2013
closest to:
A. $1,755.
B. $13,245.
C. $25,315.
Correct Answer: A
Reference:
defined as normal profit.
Economic profit = Total revenue – Total economic costs = $38,560 – $25,315 =

$13,245
Accounting profit = Economic profit + Normal profit
Normal profit = Accounting profit – Economic profit = $15,000 – $13,245 =

$1,755
37. A fiscal policy may be able to stabilize aggregate demand completely because:
A. relevant data often appear well before a policy decision needs to be made.
B. there is uncertainty of where the economy will be heading independent of
policy changes.
C. private sector behavior may change as discretionary fiscal adjustments are
announced.


Correct Answer: A
Reference:
CFA Level 1, Volume 2, Study Session 5, Reading 19, LOS q
The fiscal policy may not be able to stabilize aggregate demand completely as a
policymaker may not have complete information on how the economy functions.
For instance, it may take several months for a policymaker to realize an economy
is slowing because data may appear with a considerable lag.
Secondly, there is uncertainty of where the economy will be heading independent

of policy changes.
Thirdly, when fiscal adjustments are announced private sector behavior may
change leading to rises in consumption or investment, both of which will
reinforce the effects of a rise in government expenditure.
38. The exhibit below illustrates economic data concerning Giyata (local currency,
GT), a developing country in Africa.
Exhibit:
Economic Data Concerning Giyata
GT (millions)
Domestic business investment in capital goods 45.7
Domestic business investment in inventories 23.6
Exports 12.2
Domestic business investment in owner-occupied
property 21.0
Government spending on final goods and services 28.8
Transfer payments 8.9
Imports 10.5
Net tax revenue collections 14.2
The GDP for Giyata, based on the expenditure approach, is closest to (in GT
millions):
A. 99.8.
B. 122.9.
C. 143.9.


Correct Answer: A
Reference:
All figures are in GT millions.
GDP = Consumer spending on final goods and services + Gross domestic private
investment* +
Government spending on final goods and services** + Exports – Imports
GDP = 45. 7 + 23.6 + 28.8 + (12.2 – 10.5) = 99.8
*Gross domestic private investment includes business investment in capital goods

and inventory investment
**Transfer payments are not included in government spending on final goods and
services because they are a monetary transfer by the government of tax revenue
back to individuals with no corresponding receipt of goods and services.
39. In an effort to boost economic growth, the ratio of government spending to tax
collection revenue in Belarus has exceeded 1.0 for the past two years. This trend
is expected to continue for the foreseeable future. For the aggregate income to
equal aggregate expenditure, the:
A. country should run a trade surplus.

B. country should increase foreign borrowings.
C. private sector should increase domestic investment.
Correct Answer: B
Reference:
When a country runs a fiscal deficit, G – T > 0, the private sector must save more
than it invests S – I > 0, the country should run a trade deficit (X – M < 0) with a
corresponding inflow of foreign saving, or both.


40. In the year 2013 the quantity of money on hand in a country, in local currency
units, amounted to 450 million. During the year the average number of times the
local currency changed hands was equal to 58. The country’s GDP, in real terms,
amounted to 300 million.
If money neutrality holds and all else is held constant, an increase in the supply of
money by 2% will most likely:
A. decrease velocity to 56.86.

B. increase price level to 88.74.
C. increase real output to $306 million.
Correct Answer: B
Reference:
Based on the quantity theory of money, if money neutrality holds, then an

increase in the money supply (M) will not affect Y, real output, or the speed with
which money changes hands, V. However, it would cause the aggregate price
level to rise. To determine the level to which price level rises, the following
equation is used:
M×V=P×Y
P (before increase in money supply) = (450,000,000 × 58)/300,000,000 = 87.00
P (after increase in money supply) = 87 × 1.02 = 88.74
41. Which of the following fiscal stances will be most effective in boosting aggregate
demand?
A. Expanding the supply of money.

B. Exploration of natural resources.
C. Enhanced public spending on social goods.
Correct Answer: C
Reference:


An expansionary fiscal policy helps in boosting aggregate demand. An

expansionary policy can include enhanced (new) public spending on schools,
social goods, hospitals and infrastructure.
42. Currently the USD/GBP spot rate is 1.6736 while the three month forward rate is
1.6745.
Which of the following is the best interpretation of the forward

discount/premium?
A. The interest rates in Great Britain are higher than those in United States.
B. The real value of the USD/GBP spot rate will appreciate in the next 90
days.
C. The interest rates in the United States are higher than those in Great
Britain.
Correct Answer: A
Reference:
The GBP is selling at a forward premium of 0.009 (1.6745 – 1.6736). A forward

premium indicates that interest rates in the foreign currency (the United States,
which uses dollars) are higher than those in the base currency (Great Britain,
which uses the pound).
43. The Moroccan government authorities have launched a program whereby they
intend to enhance spending on public infrastructure as well as develop schools
and hospitals. To offset the effects of the fiscal policy, the country’s central bank
is reducing money supply.
What are the implications of the two policies on Morocco’s economy?
A. Interest rates will be reduced.

B. Reduction in private sector demand.
C. Growth in private and public sectors.
Correct Answer: B


Reference:
CFA Level 1, Volume 2, Study Session 5, Reading 19, LOS s
An easy fiscal policy will lead to a rise in aggregate output. If this policy is
accompanied by a tight monetary policy, interest rates will rise and have a
negative effect on private sector demand. While the public sector may expand due
to increased government spending, the private sector will shrink due to a fall in
demand.
44. Lance Richard is a British investor holding Malaysian equities in his investment
portfolio. The current nominal spot value of a MGR is GBP 5.56 and is expected
to increase by 5% by the end of the year. The current annual British and
Malaysian price level is 103 and 98, respectively.
The GBP price level is forecasted to decrease by 2% while the Malaysian price
level will increase by 3%.
Based on the forecast data, the real value of the MGR will:
A. rise to 5.84.
B. rise to 6.14.
C. decline to 5.28.
Correct Answer: A
Reference:
Spot real exchange rate (GBP/MGR) = 5.56 × (98/103) = 5.29

Change in real exchange rate =
⎛ ΔPf ⎞
⎛ ΔS d ⎞ ⎜1 + ⎟
⎜ ⎟ ⎜ P ⎟ 1 + 3%
⎟ × ⎝
f f ⎠
⎜1 + − 1 = (1 + 5% ) × − 1 = 0.10357
⎜⎜ Sd ⎟⎟ ⎛ ΔPd ⎞ 1 − 2%
⎠ ⎜1 + P ⎟
⎜ ⎟
⎝ f
⎝ d ⎠
Forecasted real exchange rate (GBP/MGR) = 1.10357 × 5.29 = 5.84


45. Which audit opinion most likely signals to investors that a company’s financial
statements are unreliable?
A. Adverse
B. Unqualified
C. Disclaimer of opinion
Correct Answer: A
Reference:
An adverse audit opinion is issued when the financial statements materially depart
from the accounting standards and are not fairly presented. The opinion signals to
investors that financial statements cannot be relied on.
An unqualified audit opinion is issued when the financial statements give a true
and fair view or are fairly presented in accordance with the applicable accounting
standards.
A disclaimer of opinion is issued when there is a scope limitation and the auditors
are unable to issue an opinion.
46. Blue Ridge had an average-days-of-sales outstanding (DSO) period of 65 days in

2011. Total sales (all on credit) were $2.5 million in the same year. Company
management believes days on sales outstanding will decline to 60 days in
response to a more stringent credit collection policy. Credit sales are anticipated
to increase to $2.8 million. There are 365 days in a fiscal year.
In order to meet management projections, the required change in average accounts

receivable should be closest to:
A. – 8.33%.
B. + 3.38%.
C. + 12.00%.
Correct Answer: B


Reference:
DSO = (Average accounts receivable/Total credit sales) × number of days
Average accounts receivable (2011) = (DSO × total credit sales)/number of days

= (65 × $2,500,000)/365 = $445,205.48
Average accounts receivable (2012) = (60 × $2,800,000)/365 = $460,273.97
Required change in accounts receivable = ($460,273.97/$445,205.48) – 1 =

3.38%
47. A company has reported total deferred tax assets and liabilities amounting to
$35,000 and $50,000 respectively in its balance sheet for the year ended 2012. In
the fiscal year 2013, the statutory tax rate increased from 30% to 35%.
Which of the following most accurately illustrates the effect of the increase in tax
rate on the deferred tax accounts?
Deferred Deferred tax

tax asset: liability:
A. Increase Increase
B. Decrease Increase
C. Increase Decrease
Correct Answer: A
Reference:
An increase in the statutory tax rate should increase the deferred tax asset and
liabilities reported on the company’s balance sheet.


48. Clay Corp issued a €2,100,000 face-value seven year bonds on January 1, 2010,
when the prevailing market interest rate was 5%. The bonds pay 4% interest
annually on December 31.
Using the effective interest rate method, at year end Clay Corp will report:
A. a liability with a carrying value of €1,993,410.

B. interest expense of €84,000 on its income statement.
C. sale proceeds of €2,100,000 in association with the bond issue.
Correct Answer: A
Reference:
At the time of issue, sale proceeds are equal to €2,221,514 (see below).
PMT = 84,000 (2,100,000 × 4%); N = 7; I/Y = 5%; FV = 2,100,000
CPT PV = €1,978,486.16
On January 1, 2010 the bond is reported at a value equal to the sale proceeds at
issuance.
Interest expense (2010) = €1,978,486.16× 5% = €98,924.3
Carrying amount (December 31, 2010) = Sales proceeds + (interest expense –

interest payments)
Carrying amount = €1,978,486.16 + [€98,924.31 – (€2,100,000 × 4%)]
= €1,993,410
49. Oxygenic Corp recognized a deferred tax asset of $50,000 in relation to

differences in acceptable depreciation methods for tax and accounting purposes.
The deferred tax asset was reduced by $5,000 using a valuation allowance in the
following year.
Which of the following reasons most accurately justifies the reason for the
reduction?
A. The deferred tax item is more relevant to equity.

B. There will be taxable income available in the near future.
C. There is a high probability that the deferred tax asset will not be realized.


Correct Answer: C
Reference:
The reduction of a deferred tax asset by a valuation allowance suggests that there
is a doubt about the recovery of the deferral.
50. Lica, a garment manufacturer, purchased an item of equipment for $300,000 in

2011. The original estimated life of the equipment was five years and residual
value $25,000. The company originally applied the double declining balance
method of depreciation to the equipment. The company’s management revised the
method to straight line in the beginning of the 2012 fiscal year.
Compared to the previously used depreciation method, the company’s reported

depreciation expense in 2012 will be higher by:
A. $17,000.
B. $21,000.
C. $33,250.
Correct Answer: C
Reference:
The decision to change the useful life estimate will decrease depreciation expense
by $33,250 ($72,000 – $38,750).
Double declining method:

Depreciation expense (2011) = 1/5 × 2 × $300,000 = $120,000
Net book value (2011) = $300,000 – $120,000 = $180,000
Depreciation expense (2012) = 1/5 × 2 × ($180,000) = $72,000
If the straight line method is adopted in 2012, the annual depreciation expense
will amount to $38,750 [($180,000 – $25,000)/4].


51. Cross-sectional analysis can be performed as long as the companies under

analysis:
A. are of roughly equal size.

B. are in the same time period.
C. operate in the same currency.
Correct Answer: B
Reference:
Cross-sectional analysis is typically performed by comparing companies in one
time period. The companies might be of different sizes and/or operate in different
currencies.
52. Lightline, a component manufacturer, has reported average payables and ending
payables of $12,450 and $10,785 respectively for the year 2013. On average
Lightline takes 57 days to pay its suppliers. The company would like to shorten
this to a minimum of 45 days next year in order to take advantage of early
payment discounts. The company expects to make $80,000 worth of purchases in
2014.
Assuming there are 365 days in a financial year and Lightline achieves its targets,
the company’s closing balance of account payables in 2014 will be closest to:
A. $8,941.05.
B. $9,863.03.
C. $32,444.44
Correct Answer: A
Reference:


To reduce number of days of payables to 45, the payables turnover measure

should equal 8.1111 (see below).
Number of days of payables = number of days in period/payables turnover
Payables turnover (2014) = 365/45 = 8.1111
Payables turnover = Purchases/average trade payables

Average trade payables (2014) = $80,000/8.1111 = $9,863.03
Average trade payables (2014) = (Beginning payables + Ending payables)/2
Ending payables = [($9,863.03 × 2) – 10,785] = $8,941.05
53. Which of the following factors will most likely contribute to an extension of the
cash conversion cycle?
A. Faster repayments to creditors.

B. Stringent customer credit policy.
C. Shorter inventory holding period.
Correct Answer: A
Reference:
Cash conversion cycle = Days of sales outstanding + Days of inventory on hand –

Number of days of payables
Faster repayment to creditors suggests lower number of days of payables and thus
a longer cash conversion cycle.
A stringent customer credit collection policy will reduce the number of days of
sales outstanding and thus shorten the cash conversion cycle.
Shorter inventory holding periods will reduce the number of days of inventory on
hand and thus shorten the cash conversion cycle.


54. The exhibit below highlights data concerning total assets reported by two
manufacturing concerns, Greena and Ice, in their respective balance sheets.
Greena Ice
Percent of Total Percent of Total
Assets Assets
Cash 2 7
Receivables 11 16
Inventory 9 11
Fixed assets net of
depreciation 70 58
Investments 8 8
Total assets 100 100
Using vertical common-size analysis, which of the following conclusions is least

valid? Relative to:
A. Ice, Greena is more liquid.

B. Greena, Ice has a lower proportion of credit sales.
C. Greena, Ice is deploying its fixed assets in a more effective manner.
Correct Answer: B
Reference:
Fixed asset turnover is measured as Revenue/Fixed assets. Greena’s fixed asset

turnover is 1.429 (1/0.70) while Ice’s turnover ratio is equal to 1.724 (1/0.58).
Since Ice has a higher ratio, it is deploying its fixed assets in a more effective
manner relative to its competitor.
Ice is more liquid relative to Greena as the former has 7% of assets available in
cash.
Based on the percentage of receivables to sales, one can conclude that Greena has
a relatively lower proportion of credit sales.


55. Lance Mansfield is a financial analyst examining Westmore’s sales and purchase
activities for the month of April, its first month of operations. She has collected
the relevant data in the exhibit below. Westmore applies the LIFO method of
Exhibit:
Sale and Purchase Activity For the Month of April
Date Transaction Unit Price
Westmore’s ending inventory balance is closest to:
A. $1,640.
B. $2,260.
C. $3,965.
Correct Answer: B
Reference:
Ending inventory using the LIFO method comprises of the oldest units of
inventory on hand.
Total units sold in April = 100 + 220 = 320
Under this method the 45 units purchased last are assumed to be sold first
followed by the 80 units purchased on April 18. The remainder 195 units (320 –
45 – 80) are assumed to be sold from the 350 units purchased on April 15. Only
155 units remain unsold from the April 15 purchase while the units purchased on
April 1 are assumed to remain unsold.
Ending inventory = (50 × $8) + (155 × $12) = $2,260.


56. Rochedale is a manufacturing concern preparing and presenting its financial

statements in accordance with IFRS. Thomas Gayle, an independent financial
analyst, is attempting to ascertain whether the company’s ability to meet interest
obligations has improved between the years 2012 and 2013. Rochedale classifies
the interest and dividends being paid as a use of cash in the operating section of
the cash flow statement. The company does not have any preferred shares of stock
outstanding.
Exhibit:
Selecting Financial Information for Rochedale
£’000s 2013 2012
Cash flow from operations 352 380
Interest paid 48 40
Taxes paid 68 65
Dividends paid 183 50
Between 2012 and 2013, Rochedale’s ability to meet interest obligations has most
likely:
A. improved.
B. deteriorated.
Correct Answer: A
Reference:
Ability to meet interest obligations is measured by the interest coverage ratio.

Given that this ratio has increased (see below), the company’s ability to meet
interest obligations has improved.
Interest coverage = (CFO + Interest paid + Taxes paid)/Interest paid

Interest coverage (2012) = (380 + 50* + 40 + 65)/40 = 13.375
Interest coverage (2013) = (352 + 183* + 48 + 68)/48 = 13.563
*If the company reports dividends paid as a use of cash in the operating section,
total dividends should be added back to CFO.


57. The payment of a stock dividend is most likely:
A. not disclosed on the cash flow statement.

B. disclosed as an operating cash flow under U.S. GAAP.
C. disclosed as either a (n) operating or financing cash flow under IFRS.
Correct Answer: A
Reference:
The payment of a stock dividend represents a non-cash transaction; no cash

changes hands when dividend payments are made by issuing shares of stock. Non-
cash transactions are not reported (or disclosed) on the cash flow statement but are
instead required to be disclosed either in a separate note or a supplementary
schedule to the cash flow statement. The treatment for stock dividends is the same
under IFRS and U.S. GAAP.
58. The exhibit below highlights selective financial information from Klienveldt
Incorporated’s balance sheet and cash flow statement for the years 2012 and
2013. The company uses the direct format for preparing its cash flow statement.
$’000s 2013 2012 Change

Wages payable 48 35 + 13
Taxes payable 169 180 – 11
Deferred tax asset 32 30 +2
Cash paid for income taxes 78 74 +4
Cash paid to employees 15 15 0
The amount of income tax and wages expense reported by Kleinveldt in its
income statement for the year 2013 is closest to:
income tax wages

expense: expense:
A. ($5,000) $13,000.
B. $67,000 $28,000.
C. $89,000 $2,000.
Correct Answer: B


Reference:
All figures are in $’000s
Cash paid for income taxes = Income tax expense – increase in income tax
payable
Income tax expense = 78 + (– 11) = 67
Cash paid to employees = Wages expense – Increase in wages payables
Wages expense = 15 + 13 = 28
59. In 2013, Trans Inc. reported $250,000 as income tax payable based on income for
tax purposes. The tax expense reported on its income statement is equal to
$180,000. Trans Inc. will most likely report the difference between the two tax
amounts as:
A. a deferred tax asset.

B. a deferred tax liability.
C. comprehensive income.
Correct Answer: A
Reference:
When the actual income tax payable based on income for tax purposes exceeds (is
lower than) the amount of income tax based on reported financial statement
income, a deferred tax asset (liability) is reported on a company’s balance sheet.


60. On March 30, 2013 Builders, a construction firm, recorded an impairment loss of
$4,500 in relation to one its cement mixing units. One year later, the company
was able to recover 30% of the decline in asset value following an improvement
in the unit’s productivity. Builders prepares and presents its financial statements
in accordance with U.S. GAAP.
In relating to the mixing unit, Builders will most likely:
A. make no further accounting adjustments.

B. report a gain of $1,350 in its income statement.
C. report a gain of $1,350 in other comprehensive income.
Correct Answer: A
Reference:
U.S. GAAP does not permit reversals of impairment losses. Therefore, Builders
will not make any accounting adjustments to reverse the impairment loss.
61. Cash and cash equivalents are most likely:
A. measured at amortized cost.

B. classified as marketable securities.
C. associated with a moderate degree of interest rate risk.
Correct Answer: A
Reference:
Cash and cash equivalents are financial assets which are so close to maturity that
interest rate risk is minimal (risk that their value will change significantly with
changes in interest rates). These assets are classified at either amortized cost or
fair value with little difference between the two, in the case of cash and cash
equivalents.


62. For the year ended December 31, 2013 Lakner plc reported net income of $8.5
million and depreciation charges of $0.9 million. In addition, the company
reported a $0.3 million gain on the retirement of debt. The exhibit below
illustrates selective balance sheet information between the financial years 2012
and 2013.
$ Millions 2013 2012 Change

Accounts payable 35 40 –5
Income tax payable 12 10 +2
Deferred tax liability 6 10 –4
Interest payable 5 8 –3
Accounts receivable 14 7 +7
Inventory 9 1 +8
Cash 3 1 +2
Which of the adjustments is most likely required to reconcile net income with
operating cash flow?
A. Add 20.1.
B. Subtract 11.9.
C. Subtract 15.9.
Correct Answer: C
Reference:
To reconcile net income with operating cash flow:

• Depreciation charges are added to net income
• Gain on the retirement of debt is subtracted
• Decrease in deferred income tax liability is subtracted
• Increase in current operating liabilities is added (income tax
payable)
• Decrease in current operating liabilities is subtracted (accounts
payable and interest payable)
• Increase in current operating assets is subtracted (accounts
receivable and inventory)
All figures are in $ millions

Operating cash flow = 8.5 + 0.9 – 0.3 – 4 + 2 – 5 – 3 – 7 – 8 = - 15.9


63. Long-term financial liabilities issued at a price differing from par are reported on
the balance sheet at an amount equal to their:
A. fair value.
B. face value.
C. amortized cost.
Correct Answer: C
Reference:
Long-term financial liabilities are reported on the balance sheet at an amount

equal to their amortized cost. For bonds issued at either a discount or premium,
the amortized cost (carrying value) of the bond is equal to their par value at
maturity.
64. Allen Luther, a financial analyst, is analyzing the financial statements of Jack &
Prime, a newspaper agency. The agency complies with U.S. GAAP. Between
2012 and 2013 the company did not issue any additional debt but repurchased $5
million shares of common stock. Any other changes in the common stock account
were purely due to increase in share market value. He has summarized selective
financial information in the exhibit below:

Retained earnings 42 37
Net income 8 6
Using the direct method, Jack & Prime’s net cash used in financing activities is
closest to (in millions):
A. $9.
B. $11.
C. $14.
Correct Answer: C


Reference:
All calculations are in $ millions.
Cash flow from financing activities = cash paid to retire long-term debt + cash
paid to retire common stock + cash paid for dividends.
Cash paid to retire long-term debt = 75 – 69 = 6
Cash paid for dividends = Beginning retained earnings + net income – ending
retained earnings
Cash paid for dividends = 37 + 8 – 42 = 3
Net cash used in financing activities = 6 + 5 + 3 = 14
Note: Changes in share market values does not constitute a cash outflow or
inflow.
65. Rector Associates is a wealth management firm which has recently purchased
shares of foreign equity stock for its client portfolios. The shares will be held for
an eight-month term after which they will be sold. The primary objective behind
the investment is to profit from short-term market fluctuations in the foreign
equity market. Six months into the investment, the stock has increased in value by
$5.
With respect to the gain, Rector Associates will most likely:
A. make disclosure in its footnotes.

B. report it in other comprehensive income.
C. report it as an unrealized gain in the income statement.
Correct Answer: C
Reference:


Rector’s equity investment will classify as held for trading. This is because these
securities are to be held for a short period of time and were acquired for the
purpose of reselling them in the short-term. Rector will record $5 in its income
statement as an unrealized gain.
66. Narcus Limited is a chip manufacturer operating in the U.S. The sales process
involves the manufacturer first delivering chips to customers followed by the
dispatch of a representative to its customers’ respective sites for installation.
During the financial year 2013 Narcus sold 3,500 chips at a unit price of $250;
10% of the units sold are yet to be installed by year end while 5% of the chips
were returned due to technical issues.
For the financial year 2013, Narcus will report net revenue of:
A. $743,750.
B. $831,250.
C. $875,000.
Correct Answer: A
Reference:
U.S. GAAP requires revenue to be recognized when it is “realized or realizable

and earned”. This would disallow the practice of recognizing revenue in a period
by delivering the product just before the end of the accounting period and
completing the sales contract after the period end.
Narcus’s sales contract includes the delivery and installation of chips. Therefore,
it cannot recognize revenue for those chips which have been delivered but not yet
installed. Furthermore, net revenue is a figure calculated after accounting for sales
returns and allowances.
Narcus’ net revenue (2013) = (3,500 × $250) [(1 – (0.10 + 0.05)]

= $743,750


67. Rex Corp. has reported the following amounts with respect to equity for the
financial year 2013:
Beginning shareholder’s equity $950,270

Net income 45,040
Dividends paid 37,370
Shares issued 256,970
Ending shareholder’s equity 1,534,000
The amount that has bypassed the income statement and is classified as other
comprehensive income is closest to:
A. $0.
B. $244,350.
C. $319,090.
Correct Answer: C
Reference:
Other comprehensive income = $1,534,000 – $(950,270 + 45,040 – 37,370 +

256,970)
= $319,090
68. A company reported the following figures in its financial statements for the most
recent financial year:
Ending liabilities $4.5 million

Ending contributed capital 1.2 million
Beginning retained earnings 1.1 million
Net income 0.9 million
Revenue 3.3 million
Distributions to owners 0.4 million
The company’s total assets at the end of the year are closest to:
A. $5.7 million.
B. $7.3 million.
C. $9.7 million.


Correct Answer: B
Reference:
Assets = Liabilities + Contributed capital + Ending retained earnings

Ending retained earnings = Beginning retained earnings + Net income –
Dividends
= $1.1 million + $0.9 million – $0.4 million
= $1.6 million
Assets = $4.5 million + $1.2 million + $1.6 million = $7.3 million


69. Land Solutions (LS) specializes in the manufacture of cultivators used for
agricultural purposes. This year LS manufactured 34,000 units at a sales price of
$2,000. Variable costs per unit were $1,050 and fixed costs totaled $12 million.
Total fixed financing expenses amount to $2 million.
LS’s revenue at its operating breakeven is closest to:
A. $21,052,631.
B. $25,262,000.
C. $68,000,000.
Correct Answer: B
Reference:
! $'(,***,***
Operating breakeven quantity = = = 12,631
"#$ $(,***#$',*+*
Revenue at operating breakeven = 12,631 × $2,000 = $25,262,000
70. Which of the following dividend policies should most likely have an economic
effect on a shareholder’s total cost basis?
A. Cash dividends
B. Stock dividends
C. Reverse stock split
Correct Answer: A
Reference:
Cash dividends reduce shareholder’s equity by reducing retained earnings. Stock

dividends have no economic impact on shareholder’s equity; the total cost basis
remains the same as investors receive more shares with a lower cost per share.
Reverse stock splits increase the share price and reduce the number of shares
outstanding having no impact on the market value or total cost basis of
shareholder’s equity.


71. Thirty days have passed since a company invested in a 150-day Treasury security
with a par value and face value of $1,000.00 and 969.31, respectively.
The bond-equivalent yield of the Treasury security is closest to:
A. 8.93%.
B. 9.18%.
C. 9.63%.
Correct Answer: C
Reference:
!012 40562 # "6718092 :7;12 <=+

Bond equivalent yield =
"6718092 :7;12 >6?@27 AB C0D9 EA ?0E67;ED
$',***.**#$G=G.<' <=+
=
$G=G.<' '+*#<*
= 9.63%
72. A company has announced an annual dividend per share of Brazilian Leros (BRL)
2, which will be payable on a quarterly basis, on January 28. The stock price at
the time of the announcement is BRL 40. Company management has calculated
that the share will first trade at an ex-dividend price of BRL 38 on January 30,
which is a business day. Shareholders will be entitled the right to receive
dividends on Sunday, February 1. Payment of dividends will occur on February
15, which happens to be the first national holiday of the year.
Which of the following dates is most likely inconsistent with the dividends
payment chronology?
A. January 30
B. February 1
C. February 15
Correct Answer: B
Reference:


The holder of record date typically occurs two business days after the ex-dividend
date. The holder of record date is the date shareholders listed in the corporation’s
records will be deemed to have ownership of the shares for the purposes of
receiving the upcoming dividend. Although February 1 falls two days after the ex-
dividend date (January 30), the holder of record date should have been fixed at the
next business day, February 3.
Unlike the holder-of-record and ex-dividend dates, which can only occur on
business days, the payment date can occur on a weekend or holiday.
73. Cash dividends and repurchases are economically equivalent when:
A. earnings yield and after-tax cost of borrowing are equal.

B. the market price per share is equal to the book value per share.
C. the information content and taxation of cash dividends and share
repurchases are the same.
Correct Answer: C
Reference:
Cash dividends and share repurchases are economically equivalent when the
information content and taxation of both are the same.
The equivalence of earnings yield and after-tax cost of borrowing implies that the
share repurchase has no impact on EPS. However, it does not necessarily imply
that cash dividends and share repurchases are economically equivalent.


74. The exhibit below summarizes key financial results for Krayack Limited, a steel
processor, between the years 2012 and 2013.
Exhibit:
Key Financial Results for Krayack Limited
$ Millions (where applicable) 2013 2012
Credit sales 100 150
Inventory 40 25
Cash and marketable securities 15 10
Net operating cycle 65 days 83 days
Between 2012 and 2013, Krayack Limited’s day’s payables outstanding has most
likely:
A. increased.
B. decreased.
C. remained constant.
Correct Answer: A
Reference:


The day’s payables outstanding has increased.
To determine day’s payables outstanding, the formula for net operating cycle is
used:
Net operating cycle = Number of days of receivables + Number of days of

inventory – Number of days of payables.
Number of days of payables (2013):

65 days = [50 ÷ (100/365)] + [40 ÷ (65/365)] – Number of days of payables
Number of days of payables = 342
Number of days payables (2012):

83 days = [70 ÷ (150/365)] + [25 ÷ (50/365)] – Number of days of payables
Number of days of payables = 270
75. Which of the following practices is least consistent with strong corporate
governance?
A. Board members are held accountable for any decisions taken on advice
provided by external consultants.
B. Board members of a manufacturing firm occasionally receive
remuneration for providing investment advice.
C. Allocating the position of board chair and chief executive officer to one
executive board member while appointing an objective individual as lead
independent director.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 40, LOS c & d


Although best practices dictate that the position of chair and CEO should be held
by two separate individuals, the positions can be held by one individual if the
company appoints a lead independent director based on his or her objectivity.
It is important that board members are held accountable for any decisions taken
by advice provided by external consultants.
The company’s ethical code or board procedures should limit circumstances in
which board members can accept remuneration or in-kind benefits from the
company for consulting or other services provided outside the scope of their
position as board members. As directors of a manufacturing firm, providing
investment advice is clearly outside the scope of their relationship.
76. A company’s executive is in the process of selecting a liquidity source that can be
used without affecting the normal operations of a company. The executive will
most likely:
A. utilize the cash in the company’s bank account.

B. negotiate a debt contract on behalf of the firm.
C. file for bankruptcy protection and reorganization.
Correct Answer: A
Reference:
Primary sources of liquidity such as cash in bank accounts represent readily

accessible resources whose use is not likely to affect the normal operations of the
company.
On the other hand, the use of secondary sources may result in a change in the
company’s financial and operating position; these include negotiated debt
contracts and filing for bankruptcy protection and reorganization.


77. Jesse Mackintosh is constructing a portfolio that will be benchmarked to a

market-capitalization-weighted equity index. He is in the process of calculating
the index’s total return for the most recent period. Mackintosh has collected the
necessary data for the calculation in an exhibit.
Exhibit:
Index Price and Income Return Data
Beginning of
Beginning of End of period Total Period
Security market cap market cap Dividends Weight (%)
A 56,500 53,000 500 49.3
B 37,500 40,000 0 32.8
C 20,500 37,000 100 17.9
Total 114,500 130,000 100.0
The total return on the index is closest to:
A. 6.67%.
B. 14.06%.
C. 22.93%.
Correct Answer: B
Reference:
Total return = [(53.0 – 56.5 + 0.5)/56.5][0.493] + [(40 – 37.5)/37.5][0.328] +

[(37.0 – 20.5 + 0.1)/20.5][0.179]
= 14.06%


78. Which of the following statements accurately compares market-capitalization

(cap)-weighted with price-weighted indexes (which are identical in all respects)?
A. Market-cap-weighted indexes are most sensitive to the effects of

reconstitution.
B. Reconstitution affects market-cap- and price-weighted indexes in a similar
manner.
C. The value of price-weighted indexes may depart from a market-cap-
weighted index due to rebalancing.
Correct Answer: A
Reference:
Reconstitution creates turnover particularly in market-cap-weighted indexes.

When one security is removed and another is added, the index provider has to
change the weights of all other securities in order to maintain the market-
capitalization weighting of the index.
Price-weighted indexes are not rebalanced because the weight of each constituent
security is determined by its price. Rebalancing is less of a concern for market-
cap-weighted index providers because they largely rebalance themselves.
79. Which of the following voting mechanisms is most likely used to meet the
interests of shareholders who own a small number of shares?
A. Proxy
B. Statutory
C. Cumulative
Correct Answer: C
Reference:


In order to meet the voting interests of shareholders with limited share ownership,
cumulative voting is often used. This voting mechanism allows shareholders to
direct their total voting rights to a specific candidate, providing them with a
higher level of representation on the board than would be allowed under statutory
voting. In case of the latter, each share only represents one vote.
Proxy voting provides shareholders with the convenience of casting their votes
without the need to attend board meetings.
80. A trader serving a securities trading firm has purchased a stock priced at $80 on
margin using 40% equity. The maintenance requirement for the position is 25%.
The trader will receive a margin call if the stock price:
A. falls below $20.

B. falls below $64.
C. rises above $80.
Correct Answer: B
Reference:
Initial equity is $32 per share ($80 × 40%). Subsequent changes in equity per
share are equal to the sum of the initial equity per share plus change in share
price, $32 + (P – $80). The margin call will take place if equity drops below the
25% maintenance margin requirement.
The following equation is used to determine the price below which a margin call
will be received.
($32 + P – 80)/P = 25%
P = $64
If the price drops below $64, the trader will receive a margin call.


81. Donald Grant is a junior market analyst writing a report on the role of dealers and
arbitrageurs in equity markets. He discusses the role of both parties in providing
liquidity to markets with his senior editor,
Statement: “While dealers typically provide liquidity to buyers and sellers in

equity markets, arbitrageurs do not; the latter are primarily concerned with
exploiting any security misvaluations.”
Grant is most likely correct with respect to the role of:
A. dealers only.
B. arbitrageurs only.
C. both dealers and arbitrageurs.
Correct Answer: A
Reference:
Grant is only correct with respect to the role of dealers who provide liquidity to
buyers and sellers arriving at the same market at different times. On the other
hand, arbitrageurs sell to buyers in one market and buy from sellers in other
markets thus providing liquidity at the same time.
82. A British investor is expecting to receive $10 million in three month’s time and
would like to hedge against an unfavorable movement in the US dollar (USD). He
purchases USD denominated put options with a strike price of 1.55, paying a
premium of 0.30. The current GBP/USD spot exchange rate is 1.66.
The investor will exercise the put option if the spot exchange rate:
A. rises above 1.55.

B. declines below 1.25.
C. declines below 1.55.
Correct Answer: C
Reference:


Since the investor is expected to receive USD, he is long the dollar and is
concerned that the GBP/USD may depreciate lowering the value of his proceeds.
Therefore, he has purchased a put
option which will only be exercised if the GBP/USD spot rate declines below the
option strike price (1.55).
83. A major use of a market index is that it:
A. can be used for modeling unsystematic risk.

B. accurately reflects the overall attitudes of investors in a market.
C. it can serve as a market proxy when measuring risk-adjusted performance.
Correct Answer: C
Reference:
Market indexes can be used to gauge investor confidence or market sentiment.

However it may not represent an accurate measure of overall investor attitude or
market sentiment because an index comprises only a sample of stocks traded in
the market.
A security market index can be used to represent the market portfolio in CAPM,
measuring and modeling systematic risk and market returns.


84. Mark Patel and Eliza Butler are equity investors seeking to purchase a
manufacturer’s share of stock currently trading at $43. They place the orders with
their respective brokers who issue the following instructions on behalf of the two
individuals:
Patel - “This order should be executed at the best price available but by no means
can a price higher than $50 be accepted.”
Butler - “Any shares received should automatically be transferred by us, the

brokerage firm, to Butler’s security account.”
The instructions issued on behalf of the clients can be respectively classified as:
Patel Butler
A. Execution validity.
B. Validity execution.
C. Execution clearing.
Correct Answer: C
Reference:
The instructions issued on behalf of Patel are classified as execution, which

indicate how to fill an order. The order issued by the broker is a limit buy order
(placing a limit of $50 on the purchase price). Limit orders convey execution
instructions.
The instructions issued on behalf of Butler are classified as clearing, which

indicate how to arrange the final settlement of the trade.
85. An investor is evaluating the degree of regulation in a country’s financial markets.

Which of the following factors is a sign of high degree of market regulation?
A. Pension funds are required to maintain adequate reserves to ensure future

liabilities can be funded.
B. Allowing diversity in accounting standards to ensure a wide range of
reporting situations are adequately addressed.
C. Private financial companies are exempt from minimum capital
requirement regulations in an effort to promote corporate growth.


Correct Answer: A
Reference:
CFA Level I, Volume 5, Study Session 13, Reading 46, LOS l
By requiring pension funds to maintain adequate reserves, regulators aim to

ensure that they will be able to fund their liabilities.
In the absence of common reporting standards investors may refuse to invest in

companies that do not report to a common reporting standard. Common reporting
standards ease comparability amongst companies.
Similarly requiring financial companies to maintain minimum levels of capital

ensures companies will be able to meet their contractual commitments when
unexpected market declines or poor decisions cause them to lose money.
Secondly, they ensure that owners of financial firms have substantial interests in
the decisions they make.
86. The exhibit below illustrates the share price and earnings per share (EPS) for
three companies (Tecra, Cosmos, and Latle) in the technology sector for the most
recent financial year (2013).
Exhibit:
Price and EPS Data for Tecra, Cosmos & Latle for the Financial Year 2013
£ Tecra Cosmos Latle
Price per share 782.5 560.2 430.6
EPS 446.1 450.1 220.5
Using the method of comparables, which of the following companies appears to

be the most undervalued?
A. Tecra
B. Cosmos
C. Latle
Correct Answer: B
Reference:


Cosmos appears to be the most undervalued based on P/E multiples.
Using the method of comparables, the P/E ratio for the three companies is as
follows:
Tecra = 782.5/446.1 = 1.7541

Cosmos = 560.2/450.1 = 1.245
Latle = 430.6/220.5 = 1.953
87. The performance of commodity indices:
A. reflects the risk-free interest rate.

B. is affected solely by changes in commodity prices.
C. is identical to the performance of underlying commodities.
Correct Answer: A
Reference:
The performance of commodity indices can be quite different from the

performance of their underlying commodities because indices consist of futures
contracts on the commodities rather than the actual commodities. Index returns
reflect the risk-free rate, the changes in futures prices and the roll yield.
88. During the year 2010, an index portfolio benchmarked to a newly formed equity
index generated a total capital gain of $125 while cumulative dividend generated
by index securities amounted to $50. The total price of the constituent securities at
the end of the period was $1,250.
The total return of the index portfolio is closest to:
A. 14.00%.
B. 14.58%.
C. 15.56%.
Correct Answer: C
Reference:


Total return = (Capital appreciation + dividend income)/Price of the index at the

beginning of the period
Total return = ($125 + $50) ÷ ($1,250 - $125*)

= 15.56%
*The index appreciated by $125 from its level at the beginning of the period.
Removing the capital appreciation amount will generate the index price level at
the beginning of the period.


89. An American style put option on a bond expires in 80 days and has an exercise
price of $0.90 per $1 of par. The bond is currently worth $1.20 per $1 par and
makes no cash payments during the life of the option. The risk-free rate of interest
is 3.5% and the notional principal of the contract is $1,000. The bond is expected
to be worth $1.40 per $1 par at option expiration.
The highest and lowest possible prices (per $1 par value) for the put option are
respectively closest to:
Highest price Lowest price

($): ($):
A. 0.89 0.20.
B. 0.90 0.00.
C. 1.40 1.20.
Correct Answer: B
Reference:
The maximum value of an American put is the exercise price, $0.90 per 1 par
value while the minimum value of any option is 0.
90. Which of the following statements most accurately illustrates a consequence of

arbitrage?
A. Short selling becomes restrictive.

B. The same good can sell for different prices in different markets in the
future.
C. The combined actions of traders would force the convergence of trading
prices.
Correct Answer: C


Reference:
The principles of arbitrage are based on the law of one price. This implies that the
same good cannot sell for different prices in different markets once the forces of
arbitrage hold. This is because the combined actions of traders will push down the
higher price and up the lower prices up resulting in convergence of trading prices.
In order for arbitrage to be possible, traders should be able to sell and buy assets
without any restrictions.
91. Derivatives most likely:
A. include mutual funds.

B. trade in spot and over-the-counter markets.
C. have a definite life span similar to insurance contracts.
Correct Answer: C
Reference:
Similar to insurance, derivative contracts have a definite life span and maturity
date.
Derivatives derive their value from underlying assets by transforming their
performances before paying them out in derivatives transactions while mutual
funds simply pass on the net returns of their underlying securities. Therefore,
derivatives are not used to describe mutual funds.


92. The exhibit below illustrates details concerning otherwise identical call and put
options on a U.S. small-cap stock.
Exhibit:
Details Concerning Call and Put on US Small-Cap Stock
Call: Put:
Time to expiration (days) 120 120
Exercise price ($) 85 85
Option price ($) 14 9
Volatility (Annual standard deviation, %) 14 12
Type of option American American
Risk-free rate 5.50%
Holding all else constant, which of the following changes will increase the value
of the option in question?
A. Decreasing the volatility of the call option.

B. Decreasing the exercise price of the put option.
C. Increasing the time to expiration of the put option.
Correct Answer: C
Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 59, LOS o
Increasing a put option’s time to expiration will be beneficial to the holder of an

American put option as the option can always be exercised; thus, there is no
opportunity cost associated with waiting for option exercise. Therefore, a longer-
term put will be at least as expensive relative to its shorter-term counterpart.
The value of an American put with a higher exercise price must be at least as
great as the value of an American put with a lower exercise price. Therefore,
increasing the exercise price will increase the value of the put option.
Higher (lower) volatility will increase (decrease) the value of call options.


93. Which of the following factors most likely differentiate American call prices from
European call prices? .
A. volatility
B. right to exercise early
C. cash flows of the underlying
Correct Answer: C
Reference:
Option C is correct.
American call prices can differ from European call prices only if there are cash
flows on the underlying, such as dividends or interest.
American put prices can differ from European put prices, because the right to
exercise early always has value for a put.
94. An analyst has gathered the following data for an underlying stock selling for
$146.
Exercise Price Call price Put Price

$150 $7.50 $8.20
The breakeven price for the put option buyer is closest to:
A. 136.80
B. 141.80
C. 158.20
Correct Answer: B
Reference:
Breakeven point for put option buyer = ST = X – PO = 150 – 8.2 = 141.8.


95. The spread measure which accounts for future interest rate volatility is the:
A. Z-spread.
B. G-spread.
C. option-adjusted spread.
Correct Answer: C
Reference:
The option-adjusted spread accounts for future interest rate volatility.
96. Each bond comprising the par curve:
A. is priced at par value.

B. is a zero-coupon issue.
C. has a full price equal to par value between coupon payment dates.
Correct Answer: A
Reference:
A par curve is a sequence of maturities such that each bond is priced at par value.
Bonds comprising the par curve are coupon paying bonds.
Between coupon payment dates, the flat price (not the full price) is assumed to be
equal to par value.
97. A decline in the effective duration of a callable bond most likely implies that a
bond’s:
A. yield-to-worst has risen.

B. yield-to-maturity has risen.
C. benchmark yield curve has shifted upwards.
Correct Answer: C


Reference:
Effective duration measures interest rate risk in terms of a change in the

benchmark yield curve.
Therefore a decline in effective duration could be triggered by an upward shift in

the benchmark yield curve.
The duration of a callable bond is not the sensitivity of a bond’s price to a change
in the yield-to-worst. Modified duration is a yield duration statistic measuring
interest rate risk in terms of a bond’s own yield-to-maturity.
98. A 5%-annual coupon paying bond issue has a term to maturity of six years. The
bond’s par value is $1,000 and is trading at a yield to maturity of 7%.
The bond is most likely trading at:
A. par.
B. a discount to par.
C. a premium to par.
Correct Answer: B
Reference:
To determine the bond’s price, the present value of the bond needs to be
determined. Using the present value functions on the financial calculator, the
present value is determined as follows:
FV = 1,000
PMT = 50
I/Y = 7%
N=6
PV = - 904.669
The bond is said to be trading at 90.47 (904.669/1,000 × 100) of its par value or at
a discount to par.


99. A one-year zero coupon bond issue was purchased at a price of $850. The
principal value of the bond is $1,000.
The zero-coupon bond:
A. will be redeemed at $850.

B. will pay a fixed rate of interest.
C. has an implied interest of $150.
Correct Answer: C
Reference:
The zero-coupon bond has an implied interest of $150 ($1,000 – $850).
Zero-coupon bonds do not make periodic coupon payments and are redeemed at
par.
100. An increase in market interest rates will most likely benefit the holder of a:
A. call option.
B. put option.
C. conversion option.
Correct Answer: B
Reference:
CFA Level I, Study Session 15, Reading 52, LOS f


An increase in market interest rates will benefit a put option holder. The option
holder will exercise his/her right to sell the bond back to the issuer and receive
cash proceeds; these proceeds can then be re-invested at higher market interest
rates.
A decrease in market interest rates will benefit a call option holder who can
exercise the option, redeem the callable bond and issue a new bond at the lower
market interest rate.
The value of the conversion option to the holder depends on how the issuer
company’s stock price changes relative to the exercise price of the conversion
option.
101. A company has purchased a bond at a price of $956. The par value of the bond is
$1,000 and the original term to maturity is five years. The applicable capital gains
tax rate is 25%.
Based on the information provided on the bond issue, the company:
A. will not need to pay any capital gains taxes on the maturity of the bond
issue.
B. will need to declare capital gains of $44 at the maturity of the bond issue
only.
C. will need to include $8.8 in taxable income every tax year for 5 years and
declare a capital gain of $44 at maturity.
Correct Answer: A
Reference:
CFA Level I, Study Session 15, Reading 52, LOS d
A prorated portion of the $44 ($1,000 – $956) original issue discount is included
in taxable income every year until maturity; this amounts to $44/5 = $8.8. The
original issue discount will allow the investor to increase their cost basis in the
bonds so they do not face any capital gains or losses at maturity.


102. The interest income generated by a municipal bond issued in the United States is
most likely:
A. exempt from federal income tax and from the income tax of the state in
B. taxed at the income tax of the state in which the bonds are issued but
exempt from federal income tax.
C. taxed at the federal income tax rate but exempt from the income tax of the
state in which the bonds are issued.
Correct Answer: A
Reference:
The interest income generated by a municipal bond issued in the United States is
often exempt from federal income tax and from the income tax of the state in
103. The number of common shares per bond is closest to:
A. 8.
B. 18.
C. 20.
Correct Answer: A
Reference:
Number of common shares per bond = $1,000/$120 = 8
Number of common shares per bond (Conversion ratio) = Par value/conversion

price
Conversion price = Price per share at which the convertible bond can be
converted into shares


104. Which of the following factors least likely distinguishes investment-grade from
high-yield bond issues?
A. Liquidity
B. Coupon rate
C. Credit quality
Correct Answer: B
Reference:
In the global bond market, investment-grade bond markets tend to be more liquid
than high-yield bond markets.
Investment-grade bond issues are perceived to have higher credit quality relative
to high-yield issues.
105. The settlement date of which of the following bonds occurs the day following the
transaction date?
A. Eurobonds
B. Corporate bonds
C. Quasi-government bonds
Correct Answer: C
Reference:
In the case of quassi-government and government bonds settlement takes place

one day after the transaction date.
In the case of corporate bonds, settlement occurs three days following the
transaction date.


106. An analyst is comparing two corporate bond issues, X and Y. He has compiled
statistics for the two bonds (Exhibit). The analyst would like to determine which
bond offers a higher yield-to-maturity when the yields are stated on a monthly
bond basis.
Exhibit:
Statistics for Bond X and Y
X Y
Annual coupon rate 5.00% 8.00%
Coupon payment frequency Quarterly Monthly
Yield-to-maturity 5.67% 6.15%
Believing that Bond Y is riskier than X, the analyst will most likely conclude that
the additional compensation offered by the former is closest to:
A. 47.0 bps.
B. 50.7 bps.
C. 51.2 bps.
Correct Answer: B
Reference:
5.67% for a periodicity of four converts to 5.64% for a periodicity of twelve.

*.*+=I J KLMNO '(
1+ = 1+ , APR12 = 0.05643
J '(
The additional compensation for greater risk in Bond Y is 50.7 basis points
(0.0615 – 0.05643) when both are annualized for monthly compounding.


107. Which of the following is not the characteristic of hedge fund?
Hedge funds:
A. impose restrictions on redemptions.

B. are primarily used to provide diversification benefits for the portfolio.
C. are generally set up as private investment partnership open to a limited
number of investors willing and able to make a large initial investment.
Correct Answer: B
Reference:
Both options A and C are the characteristics of hedge funds. However option B is
incorrect because the hedge funds have goal of generating high returns, either in
an absolute sense or over a specified market benchmark.
108. In which of the following private equity strategy, the current management team is
being replaced and the acquiring team is involved in managing the company?
A. Venture capital
B. Management buy-ins.
C. Management buyouts.
Correct Answer: B
Reference:
There are two specific types of leveraged buyouts (LBOs):
1. Management buyouts: (the current team is involved in acquisition)

2. Management buy-ins: (the current management team is being replaced and
the acquiring team is involved in managing the company)


109. Which of the following is least likely an income based approach to appraisal for
an income producing property?
A. Comparable sales approach

B. Direct capitalization approach
C. Discounted cash flow approach
Correct Answer: A
Reference:
Direct capitalization and discounted cash flow approaches are two income based
approaches to appraisal for an income-producing property.
110. Which of the following sources of venture capital (VC) financing can be used to
support a major marketing campaign of a company that has recently initiated
commercial production and sales?
A. Seed-stage financing.
B. Later stage financing.
C. Formative stage financing.
Correct Answer: B
Reference:
Later stage financing is usually provided to companies who have already initiated
commercial production and need financing to support a major market campaign.


111. Luna Babbage is an investor who has invested $150,000 each in the hedge funds
ART and EDD at the beginning of the calendar year. Both funds have a “2 and
10” fee structure with management and incentive fees being paid at the end of the
year. For both funds, the incentive fee is calculated based on returns in excess of a
6% hurdle rate. At the end of the calendar year the value of ART appreciates by
10% while EDD depreciates by 4%.
The incentive fee paid to the management of ART is closest to:
A. $270.
B. $600.
C. $3,300.
Correct Answer: A
Reference:
ART End of year capital: $150,000 × 1.10 = $165,000
ART Management fees: $165,000 × 0.02 = $3,300
Hurdle amount (ART & EDD): $150,000 × 0.06 = $9,000
Incentive fee (ART) = ($165,000 – $150,000 – $3,300 – $9,000) × 10% = $270
112. In contrast to traditional investments, alternative investments are characterized by:
A. high absolute returns.

B. low degree of leverage.
C. potential tax disadvantages.
Correct Answer: A
Reference:
In contrast to traditional investments, alternative investments are characterized by

potential tax disadvantages, high expected (absolute) returns and high degree of
leverage.


113. An investor currently owns a portfolio with expected annual return and standard
deviation of 12% and 18% respectively. The investor is considering adding a new
stock in his current portfolio. The standard deviation of the stock is 22% and its
correlation with the current portfolio is 0.35.
Considering 5% risk free rate, the risk adjusted return of the stock from adding to
the investor’s current portfolio is closest to:
A. 7.99%
B. 12.15%
C. 25.67%
Correct Answer: A
Reference:
Risk Adjusted Return = 0.05 + [0.22(0.35)/0.18] × [0.12 – 0.05] = 7.99%
114. A portfolio consists of 30 assets with the correlation being 0.75 among all pairs of
assets. The portfolio variance is 0.0625. The risk of such a portfolio will be
closest to:
A. 4.84%.
B. 15.63%.
C. 22.62%.
Correct Answer: C
Reference:
Portfolio risk: 0.0675/30 + [(30 − 1)/30]0.75(0.0675) = 22.62%


115. A public investor with an asset base of US$50,000 should most likely opt for a
(n):
A. hedge fund.
B. exchange traded fund.
C. separately managed account.
Correct Answer: B
Reference:
Investors will small asset bases should opt for an exchange traded funds which are
open to the general public. In order to qualify for an exemption from statutory
reporting requirements, hedge funds cannot be offered for sale to the general
public; this is why the investor base of this pooled vehicle differs from mutual
fund. Separately managed accounts usually require a minimum investment
between US$100,000 and US$500,000.
116. A portfolio manager forms an investment portfolio with two asset classes, 1 and
2, held in the proportions 60% and 40% respectively. The expected annual returns
and standard deviations of the asset classes are summarized in the exhibit below.
Exhibit:
Expected Annual Standard Deviations and Returns of a Two-Asset Portfolio
1 13.5 15.2
2 20.8 24.0
If the portfolio standard deviation is 14.5%, the correlation between the two asset
classes should be closest to:
A. 0.20.
B. 0.73.
C. 1.00.
Correct Answer: A
Reference:


σ 2 p = σ 21 w21 + σ 2 2 w2 2 + 2σ 1σ 2 w1 w2 p1, 2
0.1452 = (0.152)2(0.6)2 + (0.24)2(0.4)2 + 2(0.152)(0.24)(0.6)(0.4)p1,2
p1,2 = 0.199399 or 0.20
117. One difference between a defined contribution (DC) and defined benefit (DB)
plan is that in the case of the latter:
A. future benefits are undefined.

B. investment risk exposure is low.
C. employees are required to contribute a portion of their wages each period.
Correct Answer: B
Reference:
With respect to DB plans investment risk exposure is minimal. This is because the
responsibility for ensuring that assets invested are sufficient to generate the
promised payments upon employee retirement falls on the employer. However in
the case of DC plans, the responsibility for ensuring that enough funds are
available to meet employee retirement needs lies on the employee itself.
Future benefits are predefined in the case of DB plans.
Employees will need to contribute a portion of their wages each period in the case
of DC plans.
118. What are the implications for investors using the Markowitz efficient frontier for
making investment decisions?
A. The slope of the efficient frontier is concave.

B. Investors are rewarded with increasing increase in returns for assuming
more risk.
C. Portfolios to the right of the global minimum variance portfolio are the
most efficient.
Correct Answer: A


Reference:
The Markowitz efficient frontier contains all the risky assets that rational, risk-
averse investors will choose. The slope of the minimum variance frontier is
concave which implies that investors seeking portfolios above the global
minimum variance portfolio obtain decreasing increases in returns as they assume
more risk. Portfolios to the left of the global minimum variance portfolio (located
along the efficient frontier) are the most efficient. In other words, portfolios
falling to the right of the minimum-variance frontier give a lower return for the
same level of risk, which is undesirable.
119. Which of the following set of non-financial risks is collectively referred to as

compliance risk?
A. Credit risk, tax risk and liquidity risk.

B. Tax risk, regulatory risk and accounting risk.
C. Regulatory risk, solvency risk and model risk.
Correct Answer: B
Reference:
Regulatory risk, tax risk and accounting risk are non-financial risks that are
related and are collectively referred to as compliance risk because they all deal
with the matter of conforming to policies, laws, rules and regulations as set forth
by governments and authoritative bodies.
120. An investor has purchased shares of a large-cap equity stock. The covariance of
the stock with the market index is 0.0320 while standard deviation of the stock
and the market index is 22.5% and 15.7% respectively.
The return of the large-cap equity stock most likely follows a trend which:
A. follows the general market.

B. resembles the general market.
C. moves opposite to the general market.


Correct Answer: A


Reference:
The beta of the equity stock is + 1.30 [0.0320/(0.1572)]. A positive beta indicates
that the return of the equity stock follows the general market trend.

FinQuiz.com
CFA Level I 4th Mock Exam
June, 2016
Revision 1

FinQuiz.com – 4th Mock Exam 2016 (AM Session)
33-44 Economics 18
Total 180

1. Frank Liew is a research analyst who is working with a team of analysts to

produce a report on a large, multinational firm. Each member performs an
independent analysis of the firm based on comprehensive data about the firm’s
financials and its competitor strategies. However, after developing his
recommendation, Liew discovers that the consensus opinion differs significantly.
The report is published with Liew’s name included in the list of analysts.
By opting not to dissociate from the report, Liew has most likely:
A. not violated any Standards.

B. violated Standard V(A) ‘Diligence and reasonable basis’.
C. violated Standard V(A) ‘Diligence and reasonable basis and Standard
II(B) ‘Market Manipulation’.
2. To be compliant with the GIPS standards, a firm’s total assets must be the
aggregate of the:
A. market value of all discretionary fee and non-fee paying accounts.

B. fair value of all discretionary and non-discretionary fee-paying accounts.
C. fair value of all discretionary and non-discretionary accounts including
both fee paying and non-fee paying portfolios.

3. Rafael Stuart is a research analyst at Grand Investment Associates (GIA), a U.S.

based financial advisory firm that targets private wealth clients. Stuart, along with
a group of research analysts at GIA, is preparing a report on Tetragonal
Corporation (TETCO), a large-cap technology firm. Based on a comprehensive
analysis of the firm’s pro forma financial statements, Stuart reached the
conclusion that TETCO’s next quarter’s EPS would be at least 5% lower than
consensus. Stuart’s research team, however, disagrees, and publishes the report
including a ‘buy’ recommendation.
To be in compliance with CFA Institute Standards of Professional Conduct, Stuart

should most likely:
A. remove his name from the report before it is published.

B. report the disagreement to supervisory authorities and ask for corrective
action.
C. remove his name from the report and report the disagreement to
supervisory authorities.
4. If local laws are in conflict with the GIPS standards, a GIPS compliant firm
should comply with:
A. the law that is more stringent.

B. GIPS standards and disclose the conflict in the compliant presentation.
C. the local laws and make full disclosure of the conflict in the complaint
presentation.

5. Jim Chao works for an investment management firm that is developing marketing
material to promote its business and attract prospective clients. The firm utilizes
the past 15-years return to a composite that includes only the firm’s successful
client accounts that have generated an average return of at least 10% during the
time period. Chao does not prepare the marketing material, but is required to use
to it during preliminary meetings with prospective clients.
With regards the use of the marketing material, to be in compliance with Standard
I-A of the CFA Institute Standards of Professional Conduct, Chao should most
likely:
A. use the marketing material when soliciting business for the firm.
B. use the marketing material, and disclose the calculation methodology to
the clients.
C. not use the marketing material, and bring the situation to the attention of
the supervisor.
6. In the absence of regulatory guidance, CFA Institute recommends that firms

should maintain records for at least:
A. 5-years.
B. 7-years.
C. 10-years.
7. Edward Li is an analyst at an equity management firm in the U.S. During a

meeting with one of his clients, Vincent Yan, Li discovered that Yan has a surplus
of $30,000 to invest in a diversified mutual fund. A few days later, Li attended a
conference of reputable financial analysts and portfolio managers. There he met
Wilbert Ho, the manager of one of the area’s best performing mutual funds. In an
attempt to help his client, Li told Ho to contact Yan, one of his clients who had
$30,000 cash, and offer him performance details of his mutual fund.
By revealing information about his client, Li has most likely:
A. violated Standard III (E)—Preservation of Confidentiality.

B. not violated Standard III (E)—Preservation of Confidentiality because the
information was not confidential.
C. not violated Standard III (E)—Preservation of Confidentiality because Li’s
intent was to help his client as is stipulated by his duty of loyalty to the
client.

8. J&J Investment Advisors (J&J) is an investment firm that is in the process of

being a GIPS compliant firm. As such, J&J has calculated the portfolio
performance of its largest institutional client in accordance with the GIPS
standards. During a meeting with the client, J&J refers to the calculation
methodology as being consistent with GIPS standards.
In making this statement, J&J is in:
A. violation of the GIPS standards, because such statements are strictly

prohibited.
B. violation of the GIPS standards, because such statements can only be
made in a firm’s prospectus and marketing material.
C. compliance with the GIPS standards, because J&J is in the process of
being GIPS compliant and as such, has prepared the performance data in
accordance with the standards.
9. To be fully compliant with the required and recommended procedures of Standard

II(A) ‘Material nonpublic information’, a firm should:
A. create a restricted list and a watch list in combination.

B. broadly distribute a restricted list when in possession of material
C. Restrict all trading within the firm when in possession of material
10. Elaine Sen manages a trust fund worth $50,000. The trust documents transfer
effective control of the funds to Sen and prohibit investing in non-U.S. stocks and
bonds. Sam Kim, a 15 year old girl, is the primary beneficiary of the fund. Just
recently, Kim approached Sen to discuss her educational expenses, stating that an
additional cash flow of $20,000 would be needed each year for her to complete
high school. Owing to the heightened need of cash, Sen deems it appropriate to
invest in high-yield emerging market stocks to increase the fund returns.
Consequently, she invests only 5% of the fund in such stocks.
Sen has most likely violated:
A. no Standards.
B. Standard III(C) ‘Suitability’.
C. Standard III(A) ‘Loyalty, Prudence and Care’.

11. The CFA Institute Standards of Professional Conduct require that a client’s
investment policy statement should be reviewed at least:
A. annually.
B. quarterly.
C. semiannually.
12. Alex Lama has just been hired as a research analyst by Exo-Tech Limited (ETL)
to produce a research report on their company. Lama has been provided with all
factual information about the firm that he plans to use to perform a thorough and
unbiased analysis of the firm. ETL has granted Lama 500 stock options in return
for writing the report.
As an independent analyst, has Lama most likely violated best practice with
regards to Standard l-B ‘Independence and Objectivity’ of the CFA Institute
A. No.
B. Yes, because her compensation arrangement is not what best practice
recommends.
C. Yes, because she did not disclose the nature of the compensation to
investors.
13. Jessica Wright is a marketing specialist at Capital Managers (CAPM) an asset

management firm in Houston, Texas. Wright has been asked to develop
promotional material for CAPM’s Emerging Market Equities Fund created by the
firm around ten years ago. Due to a typographical error, the material prepared by
Wright states that the fund includes Russian securities when in fact, it does not.
Wright presents the material to upper management, who approve it for
distribution to clients. After several days, Wright identifies the mistake and
corrects it immediately.
With regards to Standard I(C)-Misrepresentation, Wright has most likely:
A. violated the Standard since he allowed the erroneous material to be

distributed and did not prepare the material with caution.
B. not violated the Standard since he corrected it immediately after
identifying it.
C. not violated the Standard as long as he informs those who have received
the erroneous information about the error.

14. Casey Hart is a fixed-income analyst at Golden Gust Investments (GGIN), an

asset management firm in Indianapolis, USA. Hart is planning to leave the firm to
start her own advisory business with an old friend and an entrepreneur. To ensure
that she does not engage in any unethical or controversial practices, Hart refrains
from soliciting clients while employed at GGIN. In addition, she does not take
documents or other confidential information from the firm. Hart plans to copy and
take with her only her own recommended list of securities and her personal
marketing presentations containing her performance record.
With regards to Standard IV—Duties to Employers, Hart has most likely:
A. violated her duty of loyalty to the firm.

B. not violated her duty of loyalty since she plans to take only personal
information with her.
C. not violated her duty of loyalty since her work and experience gained at
GGIN is her property and not the firm’s.
15. Adam Blank directs all trades of one of his clients through a broker specified by
the client. Doing so does not help Blank achieve best execution and best price.
Blank discloses this fact to the client but continues trading through the same
broker.
Blank will least likely be in violation of Standard III(A)-Loyalty, Prudence, and

Care if he:
A. continues to trade through the broker.

B. finds and selects a broker that offers the best ‘price’.
C. seeks best execution by selecting a different broker and informs the client
about his selection.
16. West & Graham Associates (W&G) is a financial advisory firm that allows its
employees to reissue previously released reports by its own employees without
providing attribution to these prior W&G analysts.
The firm is most likely in violation of:
A. no standards.
B. Standard I(C)-Misrepresentation.
C. Standard I(B)-Independence & Objectivity and Standard l(C)-
Misrepresentation.

17. The duty to clients imposed by Standard III(B)—Fair Dealing is most likely:
A. more critical when changing recommendations than when making initial

recommendations.
B. more critical when making initial recommendations than when changing
recommendations.
C. equally critical when making initial recommendations as well as when
changing recommendations.
18. Money-Etched Investments (MEIN) is a firm that attained considerable popularity

last year owing to high returns on its equity funds. The firm earned at least a 20%
return on its funds with the highest return being 28%. While developing
advertising material for the company, the firm’s CEO, Jeremy Chinn, asked to
include the following statement in the brochure:
“Investors in MEIN’s equity funds can expect the value of their investments to
grow by at least 20% over a year, and hopefully, even more.”
Is MEIN’s advertising material most likely in compliance with the CFA Institute
A. Yes.
B. No, because it violates Standard III(D) ‘Performance Presentation’.
C. No, because it violates Standard III(D) ‘Performance Presentation’ and
Standard I(C) ‘Misrepresentation’.

19. According to the central limit theorem, which of the following is most accurate?
A. The variance of the distribution of the sample will decrease as the sample
size increases.
B. The mean of the distribution of the sample will almost be equal to the
mean of the population from which the sample is drawn.
C. The variance of the distribution of the sample will be equal to the variance
of the population dividend by (n-1).
20. A financial statistician made the following comments while addressing a group of
internees about the various statistical techniques used in equity analysis.
Statement 1: “Sample variance calculated with a divisor of ‘n’ is a biased

estimator of the population variance.”
Statement 2: “An estimator is more efficient and unbiased the larger the sample
size.”
He is most accurate with respect to:
C. Neither statement 1 nor statement 2.
21. Which of the following is least likely a property of binomial distribution?
A. A binomial distribution has fixed number of trials.

B. The trials in a binomial distribution are independent.
C. Each trial in a binomial distribution has only one outcome.

22. An equity analyst is using the P/E ratio to rank the component firms of a broad-
based equity market index. The exhibit below is an excerpt from the information
that the analyst gathered about the 35 companies included in the index.
Exhibit
P/E Data provided in ascending order.
No. Company P/E ratio
1 A 0.55
2 B 0.67
3 C 1.10
4 D 1.47
5 E 2.89
The estimate for the 10th percentile for the P/E ratio is closest to:
A. 1.322.
B. 1.360.
C. 1.391.
23. For a random sample of 200 small-cap U.S. stocks, the average dividend yield is
1.56% and the sample has a standard deviation of 0.40.
The 99% confidence interval for the population mean of all small-cap U.S. stocks
based on the standard normal distribution will be closest to:
A. 1.487% to 1.633%.
B. 1.504% to 1.615%.
C. 1.513% to 1.606%.
24. A stated annual interest rate is the:
A. quoted interest rate that does not account for compounding within the
year.
B. amount by which a unit of currency will grow in a year with interest on
interest included.
C. quoted interest rate per period that equals the periodic rate divided by the
number of compounding periods per year.

25. The Chebyshev’s inequality will most likely hold for:
A. continuous data that is normally distributed.

B. discrete data regardless of the shape of the distribution.
C. continuous and discrete data regardless of the shape of the distribution.
26. Ronald Gibson is a statistical expert that works for an equity management firm.
Gibson believes that the normal distribution describes most common stock
returns, at least in the long-run. Under this assumption, Gibson is estimating the
probability that an emerging market equity portfolio’s return would exceed 22%.
The portfolio mean return is 14% and the standard deviation of returns is 26% per
year. Gibson is using the following excerpt from the table of normal probabilities
to help him with his calculation.
x or z 0 0.01 0.02
0.20 0.5793 0.5823 0.5871
0.30 0.6179 0.6217 0.6255
0.40 0.6554 0.6591 0.6628
Gibson’s estimated probability should be closest to:
A. 37.83%.
B. 38.21%.
C. 39.88%.
27. A portfolio manager is concerned about the occurrence of any structural changes
in the returns data series that he has gathered for non-U.S. stocks.
The manager’s concern is most likely related to the:
A. look-ahead bias.
B. time-period bias.
C. sample selection bias.

28. Edward Burger is meeting with his portfolio manager for the regular, annual
performance review of his portfolio. The portfolio manager has recommended
Burger to cash out of a few investments that he considers are not adding value to
his overall wealth. Burger is presented with the following information about these
investments:
Investment Recent Annual

Sharpe Ratio
A -0.23
B -1.56
C -2.01
Given that Burger wants to cash out of only one investment for the time being, he
selects Investment C.
Burger’s decision regarding investment C is most likely:
A. appropriate.
B. inappropriate, because a shorter evaluation period should be used.
C. inappropriate, because a different evaluation metric should be used.

29. Peter Brook has shortlisted three investments to add to his $10,000 equity
portfolio. Brook needs to pay the first installment on his house in a year’s time
and needs the portfolio to generate enough cash to be able to do so. The table
below reveals certain performance measures for the portfolio after adding each of
the three investments.
Investment Sharpe Ratio Target Semi-Deviation
A 2.3 17%
B 4.6 23%
C 3.5 11%
Which of the above investments should Brook most likely invest in?
A. Investment A.
B. Investment B.
C. Investment C.
30. Jeanette King, a portfolio manager, is constructing the investment policy

statement of one of her firm’s new clients. Currently, the client has most of his
money invested in risk-free T-bills or investment grade corporate bonds. He is
considerably averse to volatility in his portfolio’s returns. King is considering the
following investments for the client.
Company Kurtosis Skewness
A 3 0
B 4.5 -0.5693
C 2.1 0.7955
Which of the above investments will be most suitable for King’s client?
A. Company A.
B. Company B.
C. Company C.

31. In candlestick charts, doji is a pattern where the stock opened:
A. and closed at the same price.

B. at its low and closed near its high.
C. at its high and dropped significantly to close near its low.
32. Bob Harper, a hedge fund manager, lists all the major hedge funds operating in
the industry and categorizes them into different styles. He then assigns a number
to each investment style.
Which of the following measures of central tendency would be most appropriate

for the data Harper is analyzing?
A. Mean.
B. Mode.
C. Median.

33. If the aggregate demand of an economy increases more than increase in the
aggregate supply, an investor should most likely reduce investments in:
B. fixed-income securities.
C. commodity-oriented equities.
34. When a firm’s TR = TC and MR > MC, the firm:
A. is at maximum profit level.

B. is operating at upper breakeven point.
C. should increase quantity to generate profits.
35. An economist is attempting to display, graphically, the income constraint of a

private wealth client with regards to two of his highly consumed products: Petrol
and electricity.
The slope of the income constraint equals the amount of petrol consumption that
the client would have to give up if he were to consume more electricity.
If the price of petrol were to rise, the slope of the income constraint would most
likely:
A. increase.
B. decrease.
36. As a firm increases the quantity of its product produced, the distance between its
ATC and AVC curve:
A. starts increasing.
B. starts decreasing.
C. remains constant.

37. Which of the following will least likely shift an economy’s short-run average
supply leftward but will have no effect on the long-run average supply?
A. A decrease in input prices.

B. An increase in human capital.
C. A decrease in the expectation of future prices.
38. Alex Gerald is examining his budget constraint given his current income and
expenditures. Gerald has a total budget of $125 per week to spend on milk or
juices. The price of milk is $3.5/litre and the price of juice is 2.5/litre.
If the quantity of milk is measured on the horizontal axis of the budget constraint,
the slope of the budget constraint would be closest to:
A. -0.71.
B. -0.95.
C. -1.40.
39. A research analyst is analyzing a retail chain that offers products with downward
sloping demand curves.
Which of the following best describes the retail chain’s profit maximizing output
and break-even point?
A. The breakeven point occurs when TR equals TC, and profit maximization
occurs when MR equals MC.
B. The breakeven point occurs when MC equals MR, and profit
maximization occurs when TR is greater than TC.
C. The breakeven point occurs when TR equals TC, and profit maximization
does not necessarily occur when MR equals MC.

40. A consumer buys both ice cream and cake each week for dessert. The price of ice
cream is $1.25 per scoop and the price of cake is $1.55 per piece. The consumer’s
marginal rate of substitution, MRSIC, equals 0.66.
To maximize utility, the consumer should most likely:
A. not change her consumption.

B. increase her consumption of cake and decrease her consumption of ice-
cream.
C. decrease her consumption of ice-cream and increase her consumption of
cake.
41. Rosy Diaz is a research analyst that follows the Russian automobile industry. As
part of the industry’s competitive analysis, Diaz determined that at a range of
output levels, size does not give a firm a competitive edge. However, over and
above those levels, the larger the business, the greater its potential investment
value.
Given the structure of the Russian automobile industry, the industry’s:
A. long-run supply curve has either a zero slope or a decreasing slope.

B. short-run supply curve is downward sloping over a particular range of
output.
C. long-run supply curve is U-shaped, with the slope decreasing over a range
of output.
42. Which of the following asset categories price will most likely exhibit substantial
price increases when the economy is in boom phase?
A. Riskiest assets.
B. Government Bonds.
C. Shares of exporting companies.

43. Helen Oswald, a portfolio manager, is assessing the effect of a recent increase in
one of her client’s salary on her consumption patterns. Oswald had constructed a
production opportunity frontier with spending on designer dress shirts on the
vertical axis and t-shirts on the horizontal axis.
Given the change in circumstances, the client’s production opportunity frontier

would most likely:
A. shift upward, and the optimal indifference curve would shift rightward.
B. shift upward, and the optimal indifference curve would remain unchanged.
C. remain unchanged, and the optimal indifference curve would shift
leftward.
44. During his research Ross Katz, an economist, reviews the GDP data for the
European economy for the year ended 2005. The following exhibit is an excerpt
from the table provided by the Department of Finance in Europe.
Exhibit
GDP Release for the European economy
(in millions of euros)
Consumer spending 550,000
Government spending 190,678
Government gross fixed investment 30,000
Business gross fixed investment 145,300
Exports 320,666
Imports 312,865
Change in inventories 15,500
Statistical discrepancy 500
Interest income 77,500
Using the expenditure approach, nominal GDP for the European economy is
closest to:
A. €939,779 billion.
B. €1,001,779 billion.
C. €1,1017,279 billion.

45. Which of the following statements is least likely correct regarding gross profit
margin?
Gross profit margin:
A. is inversely related to the competition in the industry.

B. provides a liquidity measure that is independent of the financing of the
firm’s assets.
C. reflects the percentage of revenue available to pay operating and other
expenses and to generate profit.
46. Which of the following would least likely affect a firm’s cash flow from financing
activities?
A. A firm’s employee exercising stock options.

B. A firm increasing its dividend payout ratio effective immediately.
C. An increase in the market interest rates on debt similar to a firm’s
outstanding loans.
47. If a firm’s leverage ratio increases, its return on equity will:
A. increase.
B. decrease.
C. either increase or decrease.
48. Holding everything else constant, assuming a firm does not sell on credit at all,
which of the following ratios for the firm would most likely be equivalent?
A. Cash ratio and quick ratio.

B. Current ratio and cash ratio.
C. Current ratio and quick ratio.
49. Under U.S. GAAP, which of the following items will most likely be reported as
extraordinary in the income statement?
A. Restructuring charges.
B. Losses from a major legal case.
C. A significant gain on the sale of a rare piece of machinery.

50. Sasha Audrey, a financial analyst, is preparing a report on Vault Managers

(VMA), a financial management firm in Chicago, USA. Audrey has accumulated
information about the firm to estimate key financial ratios. The following exhibit
displays this information.
Exhibit
Selective Financial Information of Vault Managers
(in thousands of US dollars)
December 31, 2011
Revenues $405,000
Cost of services $85,200
Interest $135,500
Selling, general, and administrative
75,000
expenses
Depreciation 45,500
Tax Rate 35%
VMA’s operating profit margin is closest to:
A. 10.24%.
B. 15.75%.
C. 49.21%.
51. All Star Products (ASP) reported net income of $2,750,000 for the year ended
December 31, 2010. During the same year the company had an average of
1,050,000 shares of common stock outstanding. In addition to common stock,
ASP also had 50,000 of convertible preferred stock, with each convertible into ten
shares of the firm’s common stock. The firm pays a preferred dividend of
$15/share and a common dividend of $20.
ASP’s diluted EPS is closest to:
A. $1.77.
B. $1.29.
C. $1.90.

52. An analyst is performing a comparative analysis of two firms operating in the

U.S. fashion industry. Firm A has assets of $15.796 million and Firm B has assets
of $22.90 million. The equity of Firm A and Firm B equal $9.876 million and
$15.66 million respectively.
With regards to solvency:
A. Both firms A and B are strong.

B. Firm A is strong but Firm B is weak.
C. Firm B is strong but Firm A is weak.
53. An analyst has been asked to perform a comparative analysis of the financial
statements of Pin Enterprises (PIEN) for the most recent years. She initiated the
analysis with the firm’s profitability ratios and compiled the following data:
2010 2011
Leverage 1.80 2.50
Total asset turnover 2.0 2.3
Tax burden 0.50 0.70
Interest burden 0.60 0.90
EBIT Margin 5.13% 7.29%
Which of the following least describes one of the conclusions given her compiled
data?
A. The major contributor to the increase in the firm’s return on assets was the
rise in net profit margin.
B. The firm’s return on equity increased by 20.87% in 2011, mostly because
of an increase in leverage.
C. The firm’s interest costs decreased more than the decrease in its tax costs
during the 2010-2011 financial period.

54. An overview of specific business lines and the segmentation of income are most
likely found in the:
A. statement of operations.
B. supplementary schedule.
C. management commentary .
55. A portfolio manager is assessing the following information as part of a

comprehensive analysis of a firm’s financial health and investment attractiveness
using cash flow ratios.
Cash flow from operating activities $89,250

Interest paid $45,000
Taxes paid $22,000
Lease payments $15,500
Dividends paid $12,000
Using the information above, the interest coverage ratio is closest to:
A. 2.47.
B. 2.62.
C. 3.47.

56. A portfolio manager has accumulated the following data to carry out a
comparative analysis of firms within the U.S. automobile industry.
Exhibit
SOP Auto Manufacturers Financial Information
Net Income $25,000,000
Weighted average common shares 150,000,000
Beginning of year stock options
75,000
outstanding
Exercise price of stock options $45
Market price of company’s stock $65
Stock option price $11.55
Using the treasury stock method, the diluted EPS for SOP Auto Manufacturers is
closest to:
A. $0.167.
B. $0.159.
C. $1.220.
57. A company engages in the dealing and trading of financial assets that are highly
liquid. Such purchase and sale is not part of the company’s primary business
activity.
In the cash flow statement the above activities would appear as:
A. Investing activities.
B. Operating activities.
C. Financing activities.
58. If a firm’s price to book value ratio is one, the equity investors in the firm will
most likely earn:
A. a normal profit only.

B. excess profits since the ratio is positive.
C. zero profits as return would not exceed risk.

59. The head of a firm’s sales and marketing department is attempting to determine
the appropriate method of reporting revenue under a long-term contractual sale.
Due to the nature of the counterparty involved, the outcome of the contract cannot
be measured reliably and a 30% loss on the contract is expected.
Given the above information, under U.S. GAAP, the:
A. percentage of completion method will be used to recognize the loss

immediately.
B. completed contract method will be used but the loss will be recognized
immediately.
C. loss will be recognized upon completion when revenue is recognized,
unlike IFRS, which will require the loss to be recognized immediately.
60. When the income tax expense in the income statement is greater than current
income tax liability, the difference will most likely increase a firm’s:
A. taxable income.
B. deferred tax assets.
C. deferred tax liabilities.
61. If a firm purchases services on credit, in effect borrowing from the provider, it
would most likely appear on the cash flow statement as an:
A. operating activity.
B. investing activity.
C. financing activity.
62. For a particular firm, holding everything constant and assuming rising prices, the
inventory turnover will be lowest under the:
A. FIFO method of inventory accounting.

B. LIFO method of inventory accounting.
C. average method of inventory accounting.

63. Superior Tech Limited (S-Tech) has a contract to develop a marketing campaign
for a newly established firm. The agreed upon sales price is $15 million and S-
Tech estimates that it would take 4 years to get the job done. Total costs are
estimated to be $9 million. Details about the expenditures incurred in years 1 and
2 are given below:
• At the end of year 1, S-Tech spends $4 million.

• At the end of year 2, the company spends an additional $3.5 million.
Under the percentage-of-completion method, how much revenue will S-Tech

recognize in year 2?
A. $5,833,333.
B. $6,666,667.
C. $12,500,000.
64. Unlike under U.S. GAAP, under IFRS interest received or paid can be reported
either as an:
A. investing activity or operating activity.

B. financing activity or investing activity.
C. operating, investing or financing activity.
65. For an issuing company, interest expense reported for the bonds in its financial
statements is based on the:
A. coupon rate.
B. effective interest rate.
C. market rate of interest.

66. The following data relates to a manufacturing concern’s financial performance

and efficiency.
Beginning inventory 2012 $70,000

Ending inventory 2012 $50,000
Cost of goods sold 2012 $180,000
Cost of goods sold 1st quarter 2013 $45,000
Average inventory 1st quarter 2013 $66,000
Relative to 2012, the firm’s inventory turnover ratio in 2013:
A. improved.
B. deteriorated.
67. Relative to expensing, which of the following least describes the effect of
capitalizing borrowing costs on a firm’s reported financials?
A. Leverage would appear higher for the firm.

B. Operating income would be lower in the future.
C. Operating cash flow would be higher but investing cash flow would be
lower.

68. Wicker Textiles (WTEX) is a well-established firm in central Minneapolis,

Minnesota. WTEX has increased inventory to meet the seasonal demand of its
products. Some information about WTEX’s inventory value is given below:
• The cost of the inventory is $60,000.

• The estimated selling price less costs of completion and costs to make the
sale equals $80,000.
• The market value of the inventory is $55,000.
• A normal profit margin equals 15%.
Under U.S. GAAP, the inventory value on WTEX’s financial statements should
be closest to:
A. $55,000.
B. $60,000.
C. $80,000.

69. Which of the following about financial leverage and unit sales is most accurate?
The farther unit sales are from the break-even points for high leverage companies,
the:
A. magnifying effect becomes unpredictable.

B. lower the magnifying effect of this leverage.
C. greater the magnifying effect of this leverage.
70. Ryan Myers, a financial analyst, has been appointed the task of developing a
valuation estimate for Colors Fashion Label (CFL), a private, U.S. based firm
operating in the fashion industry of the country. Myers gathered the following
information to aid his analysis:
• The long-term yield on U.S. government bonds is 3.5%.

• The historical equity risk premium in the U.S. is 5.6%.
• A comparable firm has a beta of 1.35, a debt-to-equity ratio of 1.20,
and a tax rate of 40%.
• CFL’s tax rate is 33%.
• CFL’s Debt/Equity ratio is 0.75.
Given the aforementioned information, Myers estimate of CFL’s cost of equity

should be closest to:
A. 7.896%.
B. 9.874%.
C. 10.105%.
71. Breakeven point analysis will be least important for a company with a high ratio
of:
A. debt to total assets and low business cycle sensitivity.

B. intangible assets to total assets and high operating income.
C. tangible assets to total assets and low business cycle sensitivity.

72. Xerox Technologies (XETECH) is a well-established firm in the gaming industry

of the United States. Just recently, XETECH upgraded its gaming device and
increased its price to $250. The production of this device cost the firm $65/unit in
variable costs. The total fixed operating costs equaled $10,000,000.
If the firm changes its output from 200,000 units to 220,000 units, operating
income will change by:
A. 1.37%
B. 10.00%.
C. 13.70%.
73. Major drags on liquidity for a firm most likely includes:
A. obsolete inventory.
B. reduced credit limits.
C. making payments early.
74. Which of the following can be least managed or controlled by a firm’s

management?
A. Sales risk.
B. Financial risk.
C. Operating risk.
75. In the face of bankruptcy, the companies least likely to emerge as ongoing
concerns are the ones with high degree of:
A. financial leverage.
B. operating leverage.
C. financial leverage and a low degree of operating leverage.
76. Which of the following is least likely correct regarding staggered boards?
A. Staggered board facilitates better continuity of board expertise.

B. Management uses staggered board as an anti-takeover instrument.
C. A staggered board provides more flexibility to nominate new board
members to meet changes in the marketplace.

77. A fixed-income analyst is considering investing in a pooled investment vehicle.

His friend recommends a closed-ended mutual fund, an open –ended mutual fund
and an exchange-traded fund. The analyst expects to hold the investment for a
year or so and has determined that all options are trading at a discount.
The largest discount will most likely be for the:
A. ETF.
B. Open-ended mutual fund.
C. Close-ended mutual fund.
78. A price-weighted index has an initial value of 45. The prices of the constituent
securities before a stock split on security B are given in Exhibit 1.
Exhibit 1
Before a 2 for 1 Split in Security B
Security Price ($)
A 65.12
B 84.00
C 8.50
D 11.99
To ensure that the value of the index does not change after the split, the new
divisor will be closest to:
A. 1.329.
B. 2.836.
C. 3.769.
79. According to statistical approaches, companies are grouped based on their:
A. principal business activities.

B. relative sensitivities to the business cycle.
C. historical correlations of securities’ returns.

80. Cary Lee just received a performance-based bonus from her employer and desires
to invest that in real estate. Her current portfolio is invested in stocks and bonds
only.
If Lee wants to achieve maximum diversification, she should most likely invest in:
A. Direct real estate.

B. Real estate investment trusts (REITs).
C. Shares of companies that own and operate real estate.
81. Anthony Francisco just received $10,000 as inheritance from his uncle who
passed away last month. Consequently, Francisco advises his portfolio manager to
increase his portfolio’s allocation to domestic stocks from 15% to 25%. The
manager determines that the most appropriate holding period for Francisco is ten
years. He thus invests in non-dividend paying stocks that would yield the required
return over ten years.
Given the information above, Francisco is most likely an:
A. Investor.
B. Speculator.
C. Information-motivated trader.
82. In most financial models, the assumption is that the investors are:
A. risk averse.
B. loss averse.
C. risk takers.
83. A firm has just paid a dividend of $2.5 per share. The required rate of return is
15% per year and dividends are expected to grow at a constant rate of 9.4%. If an
analyst uses Gordon Growth model to calculate the firm’s intrinsic value, how
much does the dividend growth assumption add to the intrinsic value estimate?
A. $22.24
B. $26.59
C. $48.84

84. Bobby Anderson, a portfolio manager, is considering investing in commodities to

diversify the risks held in his personal portfolio. Since he has had minimal prior
exposure to the commodities market and does not have the facilities to hold most
commodities, he is trying to determine the most appropriate way to invest in the
sector.
Which of the following markets will be most suitable for Anderson to achieve his
diversification objective?
A. The spot market.

B. The futures market.
C. The forwards market.
85. Matt Elaine has developed software that enables him to determine the correlation
between economic variables and stock returns. Elaine believes that abnormal
returns could be generated using his investing approach.
Which of the following characteristics of the financial system would least likely
aid Elaine in achieving his objective?
A. Market liquidity.
B. Low cost trading.
C. Transparent financial and economic disclosures.
86. For which of the following indices is rebalancing a major concern?
A. Equal-weighted indices.
B. Equal-weighted and market-capitalization weighted indices.
C. Equal-weighted, market-capitalization weighted and price-weighted
indices.
87. Which of the following is not a time series anomaly?
A. Momentum
B. Holiday effect
C. Earnings surprise

88. Ethan Hawk is analyzing the return to his leveraged stock position that he
invested in last year. The stock’s price at the time of purchase was $50/share.
Hawk purchased 100 shares paying a commission of $0.05/share. The leverage
ratio was 2.0 and the call money rate was 6.0%. At the end of the year, the stock
paid a dividend of $0.50/share and the share price rose to $70/share.
The total return on Hawk’s investment is closest to:
A. 75.45%.
B. 75.64%.
C. 75.80%.

Questions 89 through 94 relate to Derivative Investments
89. Which of the following least represents the rationale of a traditional insurance
product?
A. Credit-linked note.
B. Credit default swap.
C. Credit spread option.
90. Off-market forward is a forward transaction that:
A. starts with a non-zero value.

B. is not made within normal business timings .
C. is used to offset the current forward transaction.
91. Compared to underlying spot markets, derivatives markets offer which of the
following operational advantages?
A. Lower transaction costs.

B. Greater liquidity and easy short selling opportunities.
C. Lower transaction costs, greater liquidity, and easy short selling
opportunities.
92. Steve Hammond is the CEO of a U.S. based company in the oil exploration
business. Hammond is concerned with falling oil prices in the near future.
Specifically, he wants to hedge the risk of the company’s oil production of a
million liters expected in 234 days from now. He wants to ensure near perfect
hedging with minimal investment.
The most appropriate way to hedge the company’s exposure is to use:
A. Futures.
B. Options.
C. Forwards.

93. With regards to equivalence, a swap is closest to a series of:
A. futures expiring at a set of dates coinciding with the swap payment dates.
B. forwards expiring at a set of dates coinciding with the swap payment
dates.
C. options expiring at a set of dates with the options’ exercise prices equal to
the price inherent in the swap.
94. The higher the exercise price of a call option, the greater the:
A. price of an option.
B. opportunity to gain on the upside.
C. premium received by the seller of the call.

95. Which of the following statements about the fixed-income market is least
accurate?
A. Since, globally, the fixed-income market is not as popular as the equity

market, equity securities are far more diverse than debt securities.
B. Institutional investors dominate the fixed-income markets because of
informational barriers to entry and invest directly in such securities.
C. Index weighting in the fixed-income market is based on price or value,
and is rarely ever equally-weighted.
96. A fixed-income analyst is analyzing the following bonds’ performance given

future market conditions.
Exhibit 1
Coupon Rate Maturity
Bond A 5.5% 4 years
Bond B 6.5% 3 years
Bond C 5.0% 3 years
Which of the above bonds will have lowest interest rate risk?
A. Bond A.
B. Bond B.
C. Bond C.

97. An analyst is trying to estimate the implied forward rates as inputs to his bond
valuation process. For this purpose, she gathers the data provided in the following
exhibit.
Exhibit
Zero Coupon Government Bonds
Yield to
Maturity Price
Maturity
2 year 98.77 3.556%
3 year 96.87 3.786%
4 year 93.11 3.980%
*The yields to maturity are stated on a semiannual bond basis
The ‘2y1y’ implied forward rate would be closest to:
A. 4.25%.
B. 4.56%.
C. 4.16%.
98. For bonds with the same time-to-maturity and yield-to-maturity, Macaulay
duration is the lowest for a:
A. zero coupon bond.

B. low coupon bond trading at a discount.
C. high coupon bond trading at a premium.
Similarly a low-coupon bond trading at a discount has a higher duration than a

high coupon bond trading at a premium.
99. A portfolio manager is confused about whether to invest in a bond issue with a
serial maturity structure, or one with a term maturity structure, given everything
else is similar.
Which of the following, if introduced, will make the manager largely indifferent
between the two structures?
A. High credit quality.

B. Moderate liquidity needs.
C. A sinking fund provision.

100. For a fully amortized bond, the annual payment, which includes both the coupon
payment and the principal repayment:
A. remains constant.
B. decreases at constant rate.
C. decreases at decreasing rate.
101. A 7% annual coupon bond is trading at a price of 105.67 and has three years to
maturity. A 5.5% annual payment, 3-year T-note is trading at a price of 107.89. A
5-year 7% annual coupon T-note is trading at a price of 109.77.
Given the above information, the G-spread will be closest to:
A. 0.16%.
B. 1.32%.
C. 2.19%.
102. A dealer believes that the bonds issued by Super-Tee Enterprises (SUTEE) are
considerably overvalued and wants to benefit from the mispricing. For achieving
this objective, the dealer borrows 100 par value bonds of SUTEE from an
institutional investor and lends cash in return. The bonds have a stated coupon
rate of 7.5%.
The above transaction will best be known as a:
A. repurchase agreement, and the coupon will belong to the seller of the
security.
B. reverse repurchase agreement, and the coupon will belong to the borrower
of the security.
C. reverse repurchase agreement, and the coupon will belong to the borrower
of cash.

103. Tony Sam has invested in a floating rate bond based on Libor. Due to changing
market conditions, Sam is particularly concerned with his investment value
deviating from par value.
Sam’s concern is most likely:
A. justified.
B. exaggerated, since floating rate securities have little market risk.
C. exaggerated, since floating rate securities have little interest rate risk.
104. Mega Derivative Dealers (MDD) is a financial management firm that specializes
in derivatives and alternative investments. An analyst at MDD is evaluating three
securities with similar characteristics. The table below displays data about them.
ABC DEF GHI

Z-spread 13% 11% 15%
OAS 9% 8.5% 9.5%
Which of the above securities is most likely undervalued relative to the others?
A. ABC.
B. DEF.
C. GHI.
105. An investor’s fixed-income portfolio includes two 180-day money market

instruments. Exhibit 1 displays some key information about the securities.
Exhibit
Money Market Quotation Quoted
Instrument Basis Rate
A Discount Rate 6.78%
B Add-on Rate 7.02%
Assuming that the credit risks of the instruments are comparable, the instrument
that offers a higher expected rate of return is:
A. A.
B. B.
C. neither, since they both offer almost equivalent returns.

106. Sean Lee has just started work at D&L Dealers Association (DLD), a U.S. based
firm that specializes in dealing in stocks and bonds. During a meeting with one of
the firm’s colleagues, Lee posed the following question:
“I am not sure how the lender of cash in a repurchase agreement would account
for the credit risk of the counterparty and make sure it has a margin of safety?”
The best response to Lee’s question is that the:
A. repo rate will account for this concern.

B. repo margin will account for this concern.
C. collateral’s value will account for this concern.

107. Xoro Investors is a private equity firm that is nearing its exit stage for two of its
profitable investments. The fund plans to achieve the following objectives
through the use of appropriate exit strategies for the investments:
Investment A: “Fast execution, no lock-up period and a higher level of

confidentiality.”
Investment B: “The potential for the highest price.”
Which of the following describes the most appropriate exit strategies for the
investments?
A. A trade sale for investment A and an IPO for investment B.

B. A secondary sale for investment A and a trade sale for investment B.
C. A trade sale for investment A and a secondary sale for investment B.
108. Which of the following hedge fund strategies is least likely to have a zero beta
position?
A. Market Neutral.
B. Quantitative Directional.
C. Fixed Income Convertible Arbitrage.
109. XYZ hedge fund is a U.S. based fund with $200 million of initial investment
capital. The fund specifies a ‘2 and 20’ fee structure with fees calculated using
end-of-period calculation. A 7% hurdle rate is also specified and performance fees
are calculated net of management fees.
If, in its first year, XYZ hedge fund earns a return of 25%, the investor’s net
return will be closest to:
A. 18.4%.
B. 18.7%.
C. 19.1%.

110. During a seminar on the attractiveness of alternative investments, the guest

speaker made the following comment:
“The hedge fund strategy that is closest to the strategy followed by a private
equity fund is the activist hedge fund.”
The distinction between the two that sets them apart is that the hedge fund:
A. does not have a lock-up period.

B. operates in the public equity market only.
C. does not influence the target company as much as private equity.
112. Activist is an event driven strategy that focuses on the:
A. purchase of sufficient equity to influence a company’s policies or

direction.
B. securities of the companies either in bankruptcy or perceived to be near to
bankruptcy.
C. opportunities in the equity of companies that are currently engaged in
restructuring activities.

113. The execution step of portfolio management process most likely includes:
A. portfolio monitoring.
B. portfolio construction.
C. performance measurement.
114. An equity analyst is using the market model to analyze the returns to a stock.
During the recent year, the market rose by 5% and the stock rose by 8%. The beta
for the stock is 0.66 and alpha is 0.02. The company-specific return to the stock
during the recent year is closest to:
A. 2.7%.
B. 4.5%.
C. 4.7%.
115. According to the CAL, an investor should choose the portfolio that lies at the
point where the:
A. efficient frontier is tangent to the capital allocation line.

B. investor’s indifference curve cuts the capital allocation line.
C. highest indifference curve is tangent to the capital allocation line.
116. A portfolio manager has constructed an investment portfolio for one of his firm’s
largest institutional clients. Exhibit 1 displays the composition of the portfolio.
Exhibit
Type Percentage Invested
Stocks 60%
Fixed Income 25%
Alternative Investments 15%
The above portfolio is least suitable for:
A. A foundation.
B. An insurance company.
C. A newly offered defined benefit pension plan.

mathematically derived metrics.
A. Gamma is considered a second order risk because it reflects the risk of

changes in vega.
B. The sensitivity to changes in the volatility of the underlying is reflected in
a measure called rho.
C. Delta captures only small changes in the value of the underlying whereas
large changes are captured by gamma.
118. Which of the following investments is likely to have a negative beta?
A. A risk-free asset.
B. An insurance policy.
C. An asset with returns that have insignificant sensitivity to the market
return.
119. Carlos Long, a financial analyst, is having a meeting with Tony John, one of his
private wealth clients. During the meeting John stated that he wanted to achieve
an expected return of 15% from his portfolio. Long estimated that the market
portfolio has an expected return of 25% and a standard deviation of 37%. The
risk-free rate is 5.0%.
If Long uses the capital allocation line as a benchmark, John’s portfolio will have
a standard deviation closest to:
A. 18.5%.
B. 27.0%.
C. 37.0%.
120. An investor with a risk aversion coefficient of 4 is analyzing an investment with

an expected return of 12% and a risk of 15%.
If the risk-free asset has a return of 5.0%, the investor will most likely prefer:
A. the risk-free asset.

B. the risky investment.
C. either the risk-free asset or the risky investment.

FinQuiz.com
June, 2016
Revision 1


33-44 Economics 18
Total 180


1. Frank Liew is a research analyst who is working with a team of analysts to

produce a report on a large, multinational firm. Each member performs an
independent analysis of the firm based on comprehensive data about the firm’s
financials and its competitor strategies. However, after developing his
recommendation, Liew discovers that the consensus opinion differs significantly.
The report is published with Liew’s name included in the list of analysts.
By opting not to dissociate from the report, Liew has most likely:

B. violated Standard V(A) ‘Diligence and reasonable basis’.
C. violated Standard V(A) ‘Diligence and reasonable basis and Standard
II(B) ‘Market Manipulation’.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 1, Reading 2
Since the consensus opinion has a reasonable and adequate basis and is
independent and objective, Liew need not decline to be identified with the report.
2. To be compliant with the GIPS standards, a firm’s total assets must be the
aggregate of the:
A. market value of all discretionary fee and non-fee paying accounts.

B. fair value of all discretionary and non-discretionary fee-paying accounts.
C. fair value of all discretionary and non-discretionary accounts including
both fee paying and non-fee paying portfolios.
Correct Answer: C
Reference:
Total firm assets must be the aggregate fair value of all discretionary and non-
discretionary assets managed by the firm. This includes both fee-paying and non-
fee paying portfolios.


3. Rafael Stuart is a research analyst at Grand Investment Associates (GIA), a U.S.

based financial advisory firm that targets private wealth clients. Stuart, along with
a group of research analysts at GIA, is preparing a report on Tetragonal
Corporation (TETCO), a large-cap technology firm. Based on a comprehensive
analysis of the firm’s pro forma financial statements, Stuart reached the
conclusion that TETCO’s next quarter’s EPS would be at least 5% lower than
consensus. Stuart’s research team, however, disagrees, and publishes the report
including a ‘buy’ recommendation.
To be in compliance with CFA Institute Standards of Professional Conduct, Stuart

should most likely:
A. remove his name from the report before it is published.

B. report the disagreement to supervisory authorities and ask for corrective
action.
C. remove his name from the report and report the disagreement to
supervisory authorities.
Correct Answer: A
Reference:
Rafael should remove his name from the written report since he disagrees with the
report’s conclusions. Reporting to supervisory authorities may not be necessary
since it is not evident that the rest of the research team is engaging in any illegal
conduct.
4. If local laws are in conflict with the GIPS standards, a GIPS compliant firm
should comply with:
A. the law that is more stringent.

B. GIPS standards and disclose the conflict in the compliant presentation.
C. the local laws and make full disclosure of the conflict in the complaint
presentation.
Correct Answer: C
Reference:


In cases in which laws and/or regulations conflict with the GIPS standards, firms
are required to comply with the laws and regulations and make full disclosure of
the conflict in the compliant presentation.
5. Jim Chao works for an investment management firm that is developing marketing
material to promote its business and attract prospective clients. The firm utilizes
the past 15-years return to a composite that includes only the firm’s successful
client accounts that have generated an average return of at least 10% during the
time period. Chao does not prepare the marketing material, but is required to use
to it during preliminary meetings with prospective clients.
With regards the use of the marketing material, to be in compliance with Standard
I-A of the CFA Institute Standards of Professional Conduct, Chao should most
likely:
A. use the marketing material when soliciting business for the firm.
B. use the marketing material, and disclose the calculation methodology to
the clients.
C. not use the marketing material, and bring the situation to the attention of
the supervisor.
Correct Answer: C
Reference:
The firm is only using the surviving accounts’ returns in the composite, which
will inflate the performance figure. Disclosing it to clients does not absolve the
firm from inappropriately representing firm performance (many clients may not
fully understand the implications of the calculation methodology). Hence, Chao
should not use the marketing material and bring the situation to the attention of
the supervisor.


6. In the absence of regulatory guidance, CFA Institute recommends that firms

should maintain records for at least:
A. 5-years.
B. 7-years.
C. 10-years.
Correct Answer: B
Reference:
CFA Institute recommends maintaining records for at least seven years.
7. Edward Li is an analyst at an equity management firm in the U.S. During a

meeting with one of his clients, Vincent Yan, Li discovered that Yan has a surplus
of $30,000 to invest in a diversified mutual fund. A few days later, Li attended a
conference of reputable financial analysts and portfolio managers. There he met
Wilbert Ho, the manager of one of the area’s best performing mutual funds. In an
attempt to help his client, Li told Ho to contact Yan, one of his clients who had
$30,000 cash, and offer him performance details of his mutual fund.
By revealing information about his client, Li has most likely:
A. violated Standard III (E)—Preservation of Confidentiality.

B. not violated Standard III (E)—Preservation of Confidentiality because the
information was not confidential.
C. not violated Standard III (E)—Preservation of Confidentiality because Li’s
intent was to help his client as is stipulated by his duty of loyalty to the
client.
Correct Answer: A
Reference:


Even though his intentions were good, Li has violated Standard lll (E) by
revealing confidential information about his client.
8. J&J Investment Advisors (J&J) is an investment firm that is in the process of

being a GIPS compliant firm. As such, J&J has calculated the portfolio
performance of its largest institutional client in accordance with the GIPS
standards. During a meeting with the client, J&J refers to the calculation
methodology as being consistent with GIPS standards.
In making this statement, J&J is in:
A. violation of the GIPS standards, because such statements are strictly

prohibited.
B. violation of the GIPS standards, because such statements can only be
made in a firm’s prospectus and marketing material.
C. compliance with the GIPS standards, because J&J is in the process of
being GIPS compliant and as such, has prepared the performance data in
accordance with the standards.
Correct Answer: A
Reference:
Such statements are strictly prohibited, unless the firm is GIPS-compliant already
and it reports the performance of an individual client’s portfolio to that client.
9. To be fully compliant with the required and recommended procedures of Standard

II(A) ‘Material nonpublic information’, a firm should:
A. create a restricted list and a watch list in combination.

B. broadly distribute a restricted list when in possession of material
C. Restrict all trading within the firm when in possession of material
Correct Answer: A
Reference:


The broad distribution of a restricted list often triggers the sort of trading the list
was developed to avoid. Therefore, a watch list shown to only the few people
responsible for compliance should be used to monitor transactions in specified
securities. Restricting all trading is also counterproductive.
10. Elaine Sen manages a trust fund worth $50,000. The trust documents transfer
effective control of the funds to Sen and prohibit investing in non-U.S. stocks and
bonds. Sam Kim, a 15 year old girl, is the primary beneficiary of the fund. Just
recently, Kim approached Sen to discuss her educational expenses, stating that an
additional cash flow of $20,000 would be needed each year for her to complete
high school. Owing to the heightened need of cash, Sen deems it appropriate to
invest in high-yield emerging market stocks to increase the fund returns.
Consequently, she invests only 5% of the fund in such stocks.
Sen has most likely violated:
A. no Standards.
B. Standard III(C) ‘Suitability’.
C. Standard III(A) ‘Loyalty, Prudence and Care’.
Correct Answer: C
Reference:
Sen has custody of the client assets so her level of responsibility is heightened.
Sen is obligated to manage the funds in accordance with the terms of the
governing documents of the trust. In this case, the trust documents clearly prohibit
investing in non-U.S. stocks and bonds. Hence, by investing in high-yield
emerging market stocks, Sen has violated Standard III-A loyalty, prudence, and
care.
11. The CFA Institute Standards of Professional Conduct require that a client’s
investment policy statement should be reviewed at least:
A. annually.
B. quarterly.
C. semiannually.
Correct Answer: A


Reference:
The IPS should be reviewed at least annually.
12. Alex Lama has just been hired as a research analyst by Exo-Tech Limited (ETL)
to produce a research report on their company. Lama has been provided with all
factual information about the firm that he plans to use to perform a thorough and
unbiased analysis of the firm. ETL has granted Lama 500 stock options in return
for writing the report.
As an independent analyst, has Lama most likely violated best practice with
regards to Standard l-B ‘Independence and Objectivity’ of the CFA Institute
A. No.
B. Yes, because her compensation arrangement is not what best practice
recommends.
C. Yes, because she did not disclose the nature of the compensation to
investors.
Correct Answer: B
Reference:
Best practice is for independent analysts to negotiate only a flat fee for their work
that is not linked to their conclusions or recommendations. A stock option will
increase in value if Lama issues a positive report. Hence, the compensation
arrangement does not follow best practice.


13. Jessica Wright is a marketing specialist at Capital Managers (CAPM) an asset

management firm in Houston, Texas. Wright has been asked to develop
promotional material for CAPM’s Emerging Market Equities Fund created by the
firm around ten years ago. Due to a typographical error, the material prepared by
Wright states that the fund includes Russian securities when in fact, it does not.
Wright presents the material to upper management, who approve it for
distribution to clients. After several days, Wright identifies the mistake and
corrects it immediately.
With regards to Standard I(C)-Misrepresentation, Wright has most likely:
A. violated the Standard since he allowed the erroneous material to be

distributed and did not prepare the material with caution.
B. not violated the Standard since he corrected it immediately after
identifying it.
C. not violated the Standard as long as he informs those who have received
the erroneous information about the error.
Correct Answer: C
Reference:
Because Wright did not knowingly makes this mistake he did not violate Standard
I(C)- Misrepresentation. However, if he does not inform those who have received
the material about the mistake and does not cease distribution until the mistake is
rectified, he would be violating the Standard.


14. Casey Hart is a fixed-income analyst at Golden Gust Investments (GGIN), an

asset management firm in Indianapolis, USA. Hart is planning to leave the firm to
start her own advisory business with an old friend and an entrepreneur. To ensure
that she does not engage in any unethical or controversial practices, Hart refrains
from soliciting clients while employed at GGIN. In addition, she does not take
documents or other confidential information from the firm. Hart plans to copy and
take with her only her own recommended list of securities and her personal
marketing presentations containing her performance record.
With regards to Standard IV—Duties to Employers, Hart has most likely:
A. violated her duty of loyalty to the firm.

B. not violated her duty of loyalty since she plans to take only personal
information with her.
C. not violated her duty of loyalty since her work and experience gained at
GGIN is her property and not the firm’s.
Correct Answer: A
Reference:
Hart has violated her duty of loyalty to the firm. She made the recommendations
and prepared the presentations using GGIN’s resources while being employed at
the firm. Hence, such documents are the property of GGIN and Hart will be in
violation of her duty of loyalty to the firm if she plans to take them with her
without permission.


15. Adam Blank directs all trades of one of his clients through a broker specified by
the client. Doing so does not help Blank achieve best execution and best price.
Blank discloses this fact to the client but continues trading through the same
broker.
Blank will least likely be in violation of Standard III(A)-Loyalty, Prudence, and

Care if he:
A. continues to trade through the broker.

B. finds and selects a broker that offers the best ‘price’.
C. seeks best execution by selecting a different broker and informs the client
about his selection.
Correct Answer: A
Reference:
Since the client specifically instructed Blank to trade through a particular broker,
Blank is obligated to do so. However, Blank should disclose to the client that the
broker does not help him in achieving best execution.
16. West & Graham Associates (W&G) is a financial advisory firm that allows its
employees to reissue previously released reports by its own employees without
providing attribution to these prior W&G analysts.
The firm is most likely in violation of:
A. no standards.
B. Standard I(C)-Misrepresentation.
C. Standard I(B)-Independence & Objectivity and Standard l(C)-
Misrepresentation.
Correct Answer: B
Reference:


Standard l(C)-Misrepresentation, does not allow a member or candidate to reissue

a previously released report solely under his or her name (even if his independent
and objective research supports it).
17. The duty to clients imposed by Standard III(B)—Fair Dealing is most likely:
A. more critical when changing recommendations than when making initial

recommendations.
B. more critical when making initial recommendations than when changing
recommendations.
C. equally critical when making initial recommendations as well as when
changing recommendations.
Correct Answer: A
Reference:
The duty to clients imposed by Standard III(B)-Fair Dealing may be more critical
when changing recommendations. The member or candidate must make sure that
the change is communicated in a fair manner especially to those who have been
affected by the earlier advice.
18. Money-Etched Investments (MEIN) is a firm that attained considerable popularity

last year owing to high returns on its equity funds. The firm earned at least a 20%
return on its funds with the highest return being 28%. While developing
advertising material for the company, the firm’s CEO, Jeremy Chinn, asked to
include the following statement in the brochure:
“Investors in MEIN’s equity funds can expect the value of their investments to
grow by at least 20% over a year, and hopefully, even more.”
Is MEIN’s advertising material most likely in compliance with the CFA Institute
A. Yes.
B. No, because it violates Standard III(D) ‘Performance Presentation’.
C. No, because it violates Standard III(D) ‘Performance Presentation’ and
Standard I(C) ‘Misrepresentation’.


Correct Answer: C
Reference:
MEIN has misrepresented performance information, since the 20%-28% return

was only in a single year and is not representative of what investors could earn
every year. It is not apparent from the information provided that the firm can earn
such high returns for the years to come. Hence, the brochure is in violation of the
Standards.


19. According to the central limit theorem, which of the following is most accurate?
A. The variance of the distribution of the sample will decrease as the sample
size increases.
B. The mean of the distribution of the sample will almost be equal to the
mean of the population from which the sample is drawn.
C. The variance of the distribution of the sample will be equal to the variance
of the population dividend by (n-1).
Correct Answer: A
Reference:
The variance of the distribution of the sample mean equals the variance of the
population divided by sample size. Hence, as sample size increases, the variance
decreases.
20. A financial statistician made the following comments while addressing a group of
internees about the various statistical techniques used in equity analysis.
Statement 1: “Sample variance calculated with a divisor of ‘n’ is a biased

estimator of the population variance.”
Statement 2: “An estimator is more efficient and unbiased the larger the sample
size.”
C. Neither statement 1 nor statement 2.
Correct Answer: A
Reference:


Statement 1 is correct.
Statement 2 is incorrect, Un-biasedness and efficiency are properties of an

estimator’s sampling distribution that hold for any size sample.
21. Which of the following is least likely a property of binomial distribution?
A. A binomial distribution has fixed number of trials.

B. The trials in a binomial distribution are independent.
C. Each trial in a binomial distribution has only one outcome.
Correct Answer: C
Reference:
A distribution that involves binary outcome is referred to as binomial distribution.

It has following properties.
i. A binomial distribution has fixed number of trials.

ii. Each trial in a binomial distribution has two possible outcomes.
iii. Probability of success is denoted as P (success) = p and probability of
failure is denoted as P (failure) = 1-p.
iv. The trials are independent.


22. An equity analyst is using the P/E ratio to rank the component firms of a broad-
based equity market index. The exhibit below is an excerpt from the information
that the analyst gathered about the 35 companies included in the index.
Exhibit
P/E Data provided in ascending order.
No. Company P/E ratio
1 A 0.55
2 B 0.67
3 C 1.10
4 D 1.47
5 E 2.89
The estimate for the 10th percentile for the P/E ratio is closest to:
A. 1.322.
B. 1.360.
C. 1.391.
Correct Answer: A
Reference:
n =35, L10 = (35+1)(10/100) = 3.6
The estimate of the 10th percentile is:

1.10 +(3.6-3)(1.47-1.10) = 1.322
23. For a random sample of 200 small-cap U.S. stocks, the average dividend yield is
1.56% and the sample has a standard deviation of 0.40.
The 99% confidence interval for the population mean of all small-cap U.S. stocks
based on the standard normal distribution will be closest to:
A. 1.487% to 1.633%.
B. 1.504% to 1.615%.
C. 1.513% to 1.606%.


Correct Answer: A
Reference:
Here, z0.005 = 2.58
The confidence interval will be:
1.56-2.58(0.40/√200) to 1.56+2.58(0.40/√200)
1.487% to 1.633%
24. A stated annual interest rate is the:
A. quoted interest rate that does not account for compounding within the
year.
B. amount by which a unit of currency will grow in a year with interest on
interest included.
C. quoted interest rate per period that equals the periodic rate divided by the
number of compounding periods per year.
Correct Answer: A
Reference:
• A stated annual interest rate is the quoted interest rate that does not
account for compounding within the year.
• An effective annual rate is the amount by which a unit of currency will
grow in a year with interest on interest included.
• A periodic rate is the quoted interest rate per period and it equals the
stated annual interest rate divided by the number of compounding periods
per year.
25. The Chebyshev’s inequality will most likely hold for:
A. continuous data that is normally distributed.

B. discrete data regardless of the shape of the distribution.
C. continuous and discrete data regardless of the shape of the distribution.


Correct Answer: C
Reference:
The inequality holds for samples and populations and for discrete and continuous
data regardless of the shape of the distribution.
26. Ronald Gibson is a statistical expert that works for an equity management firm.
Gibson believes that the normal distribution describes most common stock
returns, at least in the long-run. Under this assumption, Gibson is estimating the
probability that an emerging market equity portfolio’s return would exceed 22%.
The portfolio mean return is 14% and the standard deviation of returns is 26% per
year. Gibson is using the following excerpt from the table of normal probabilities
to help him with his calculation.
x or z 0 0.01 0.02
0.20 0.5793 0.5823 0.5871
0.30 0.6179 0.6217 0.6255
0.40 0.6554 0.6591 0.6628
Gibson’s estimated probability should be closest to:
A. 37.83%.
B. 38.21%.
C. 39.88%.
Correct Answer: A
Reference:
z = 22-14/26 = 0.307692
Rounding off N(0.31) = 0.6217 (from the table), Thus 1-0.6217 = 0.3783 or
37.83%.


27. A portfolio manager is concerned about the occurrence of any structural changes
in the returns data series that he has gathered for non-U.S. stocks.
The manager’s concern is most likely related to the:
A. look-ahead bias.
B. time-period bias.
C. sample selection bias.
Correct Answer: B
Reference:
A long time series has the potential for a structural change occurring during the
time frame that would result in two different return distributions. This relates to
time-period bias.
28. Edward Burger is meeting with his portfolio manager for the regular, annual
performance review of his portfolio. The portfolio manager has recommended
Burger to cash out of a few investments that he considers are not adding value to
his overall wealth. Burger is presented with the following information about these
investments.
Investment Recent Annual Sharpe Ratio

A -0.23
B -1.56
C -2.01
Given that Burger wants to cash out of only one investment for the time being, he
selects Investment C.
Burger’s decision regarding investment C is most likely:
A. appropriate.
B. inappropriate, because a shorter evaluation period should be used.
C. inappropriate, because a different evaluation metric should be used.
Correct Answer: C


Reference:
In a comparison of portfolios with negative Sharpe ratios, we cannot generally

interpret the larger Sharpe ratio to mean better risk-adjusted performance. Hence,
either the evaluation period needs to be increased so that one or more of the
Sharpe ratios become positive, or a different performance evaluation metric
should be used.
29. Peter Brook has shortlisted three investments to add to his $10,000 equity
portfolio. Brook needs to pay the first installment on his house in a year’s time
and needs the portfolio to generate enough cash to be able to do so. The table
below reveals certain performance measures for the portfolio after adding each of
the three investments.
Sharpe Target Semi-

Investment
Ratio Deviation
A 2.3 17%
B 4.6 23%
C 3.5 11%
Which of the above investments should Brook most likely invest in?
A. Investment A.
B. Investment B.
C. Investment C.
Correct Answer: C
Reference:
Investment C is most appropriate. This is because it has a positive, relatively high

Sharpe ratio and the lowest target semi-deviation. Since Brook needs to cover the
cash outflow with his portfolio’s returns, a target return needs to be specified. The
portfolio with the lowest target semi-deviation will have the least risk of falling
short of Brook’s cash flow needs (target return).


30. Jeanette King, a portfolio manager, is constructing the investment policy

statement of one of her firm’s new clients. Currently, the client has most of his
money invested in risk-free T-bills or investment grade corporate bonds. He is
considerably averse to volatility in his portfolio’s returns. King is considering the
following investments for the client.
Company Kurtosis Skewness
A 3 0
B 4.5 -0.5693
C 2.1 0.7955
Which of the above investments will be most suitable for King’s client?
A. Company A.
B. Company B.
C. Company C.
Correct Answer: C
Reference:
Since the client is highly risk-averse as is apparent from his current asset
allocation and his averseness to portfolio volatility, a positively skewed
distribution with thinner tails (less extreme values) would be most appropriate.
This is given by Company C, which has a platykurtic, positively skewed
distribution of returns.
31. In candlestick charts, doji is a pattern where the stock opened:
A. and closed at the same price.

B. at its low and closed near its high.
C. at its high and dropped significantly to close near its low.
Correct Answer: A


Reference:
In candlestick chart, when stock’s high price is same as low price and opening
and closing price is same, it creates a cross pattern and is referred to as ‘doji’
(used in Japanese terminology).
32. Bob Harper, a hedge fund manager, lists all the major hedge funds operating in
the industry and categorizes them into different styles. He then assigns a number
to each investment style.
Which of the following measures of central tendency would be most appropriate

for the data Harper is analyzing?
A. Mean.
B. Mode.
C. Median.
Correct Answer: B
Reference:
The data that Harper has gathered is nominal data. The mode is the only measure
of central tendency that can be used with nominal data.


33. If the aggregate demand of an economy increases more than increase in the
aggregate supply, an investor should most likely reduce investments in:
B. fixed-income securities.
C. commodity-oriented equities.
Correct Answer: B
Reference:
The question describes the emergence of an inflationary gap. In such a scenario,

fixed-income securities would decline in value as interest rates rise, so exposure
to them should be decreased.
34. When a firm’s TR = TC and MR > MC, the firm:
A. is at maximum profit level.

B. is operating at upper breakeven point.
C. should increase quantity to generate profits.
Correct Answer: C
Reference:
When TR = TC and MR > MC, the firm is operating at lower breakeven point.
The firm should increase quantity to enter profit territory.


35. An economist is attempting to display, graphically, the income constraint of a

private wealth client with regards to two of his highly consumed products: Petrol
and electricity.
The slope of the income constraint equals the amount of petrol consumption that
the client would have to give up if he were to consume more electricity.
If the price of petrol were to rise, the slope of the income constraint would most
likely:
A. increase.
B. decrease.
Correct Answer: B
Reference:
An increase in the price of petrol will pivot the budget constraint downward (as
petrol plots on the vertical axis). Hence, the budget constraint would become less
steep meaning that the slope will decrease.
36. As a firm increases the quantity of its product produced, the distance between its
ATC and AVC curve:
A. starts increasing.
B. starts decreasing.
C. remains constant.
Correct Answer: B
Reference:
The distance equals the AFC. As quantity produced increases, the average fixed
cost starts decreasing because it spreads over a greater number of units.


37. Which of the following will least likely shift an economy’s short-run average
supply leftward but will have no effect on the long-run average supply?
A. A decrease in input prices.

B. An increase in human capital.
C. A decrease in the expectation of future prices.
Correct Answer: B
Reference:
An increase in human capital will shift the SRAS rightward, and it will also shift
the LRAS rightward.
38. Alex Gerald is examining his budget constraint given his current income and
expenditures. Gerald has a total budget of $125 per week to spend on milk or
juices. The price of milk is $3.5/litre and the price of juice is 2.5/litre.
If the quantity of milk is measured on the horizontal axis of the budget constraint,
the slope of the budget constraint would be closest to:
A. -0.71.
B. -0.95.
C. -1.40.
Correct Answer: C
Reference:
Slope: -3.5/2.5 = -1.4


39. A research analyst is analyzing a retail chain that offers products with downward
sloping demand curves.
Which of the following best describes the retail chain’s profit maximizing output
and break-even point?
A. The breakeven point occurs when TR equals TC, and profit maximization
occurs when MR equals MC.
B. The breakeven point occurs when MC equals MR, and profit
maximization occurs when TR is greater than TC.
C. The breakeven point occurs when TR equals TC, and profit maximization
does not necessarily occur when MR equals MC.
Correct Answer: C
Reference:
Under imperfect competition (downward sloping demand curves), the breakeven

point occurs when TR equals TC. However profit maximization does not
necessarily occur when MR equals MC (it may occur at a point where MR is
greater than MC).
40. A consumer buys both ice cream and cake each week for dessert. The price of ice
cream is $1.25 per scoop and the price of cake is $1.55 per piece. The consumer’s
marginal rate of substitution, MRSIC, equals 0.66.
To maximize utility, the consumer should most likely:
A. not change her consumption.

B. increase her consumption of cake and decrease her consumption of ice-
cream.
C. decrease her consumption of ice-cream and increase her consumption of
cake.
Correct Answer: B


Reference:
MRSIC = 1.25/1.55 = 0.806. Since the consumer’s MRS is smaller, he should

spend a little more on cake and a little less on ice cream.
41. Rosy Diaz is a research analyst that follows the Russian automobile industry. As
part of the industry’s competitive analysis, Diaz determined that at a range of
output levels, size does not give a firm a competitive edge. However, over and
above those levels, the larger the business, the greater its potential investment
value.
Given the structure of the Russian automobile industry, the industry’s:
A. long-run supply curve has either a zero slope or a decreasing slope.

B. short-run supply curve is downward sloping over a particular range of
output.
C. long-run supply curve is U-shaped, with the slope decreasing over a range
of output.
Correct Answer: A
Reference:
For a range of output levels, size does not matter, so the slope of the long-run
supply curve is zero or constant. For levels above that, size matters, so the
LRATC curve decreases as output increases (meaning that slope decreases).
42. Which of the following asset categories price will most likely exhibit substantial
price increases when the economy is in boom phase?
A. Riskiest assets.
B. Government Bonds.
C. Shares of exporting companies.
Correct Answer: A


Reference:
Option A is correct. During the boom phase, the riskiest assets will often have
substantial price increases.
Option B is incorrect as safe assets such as government bonds that are normally
highly priced during recessions may have lower prices and thus higher yields
during the boom phase.
Option C is incorrect as investors may try to buy shares of exporting companies,

as a result of restrictive economic policy or during slowdowns within the country.
43. Helen Oswald, a portfolio manager, is assessing the effect of a recent increase in
one of her client’s salary on her consumption patterns. Oswald had constructed a
production opportunity frontier with spending on designer dress shirts on the
vertical axis and t-shirts on the horizontal axis.
Given the change in circumstances, the client’s production opportunity frontier

would most likely:
A. shift upward, and the optimal indifference curve would shift rightward.
B. shift upward, and the optimal indifference curve would remain unchanged.
C. remain unchanged, and the optimal indifference curve would shift
leftward.
Correct Answer: B
Reference:
The optimal indifference curve would shift leftward. The new point of tangency
of the indifference curve and the POF would indicate a rise in the consumption of
designer shirts and a fall in the consumption of t-shirts. This is because as income
rises, consumption of normal goods increase (dress shirts) and of inferior goods
decreases.


44. During his research Ross Katz, an economist, reviews the GDP data for the
European economy for the year ended 2005. The following exhibit is an excerpt
from the table provided by the Department of Finance in Europe.
Exhibit:
GDP Release for the European economy (in millions of euros)
Consumer spending 550,000
Government spending 190,678
Government gross fixed investment 30,000
Business gross fixed investment 145,300
Exports 320,666
Imports 312,865
Change in inventories 15,500
Interest income 77,500
Using the expenditure approach, nominal GDP for the European economy is
closest to:
A. €939,779 billion.
B. €1,001,779 billion.
C. €1,1017,279 billion.
Correct Answer: A
Reference:
Nominal GDP = 550,000+145,300+15,500+190,678+30,000+320,666-

312,865+500 = €939,779 billion.


45. Which of the following statements is least likely correct regarding gross profit
margin?
Gross profit margin:
A. is inversely related to the competition in the industry.

B. provides a liquidity measure that is independent of the financing of the
firm’s assets.
C. reflects the percentage of revenue available to pay operating and other
expenses and to generate profit.
Correct Answer: B
Reference:
Options A and C are correct however option B is incorrect. Gross profit margin is
not a liquidity measure but a performance/profitability measure.
46. Which of the following would least likely affect a firm’s cash flow from financing
activities?
A. A firm’s employee exercising stock options.

B. A firm increasing its dividend payout ratio effective immediately.
C. An increase in the market interest rates on debt similar to a firm’s
outstanding loans.
Correct Answer: C
Reference:
Increase in market interest rates would decrease the fair value of the firm’s debt.
But fair value is not reported in financial statements, and hence, will not affect a
firm’s CFF (it is not a cash inflow).


47. If a firm’s leverage ratio increases, its return on equity will:
A. increase.
B. decrease.
C. either increase or decrease.
Correct Answer: C
Reference:
ROE will only increase if borrowing costs exceed the marginal rate earned on
investing in the business.
48. Holding everything else constant, assuming a firm does not sell on credit at all,
which of the following ratios for the firm would most likely be equivalent?
A. Cash ratio and quick ratio.

B. Current ratio and cash ratio.
C. Current ratio and quick ratio.
Correct Answer: A
Reference:
The firm has no accounts receivables, so the cash ratio and the quick ratio would
be equal.
49. Under U.S. GAAP, which of the following items will most likely be reported as
extraordinary in the income statement?
A. Restructuring charges.
B. Losses from a major legal case.
C. A significant gain on the sale of a rare piece of machinery.
Correct Answer: B


Reference:
Under U.S. GAAP, only those items that are unusual and infrequent can be
recognized as extraordinary. Only Option B fits this criteria.
50. Sasha Audrey, a financial analyst, is preparing a report on Vault Managers

(VMA), a financial management firm in Chicago, USA. Audrey has accumulated
information about the firm to estimate key financial ratios. The following exhibit
displays this information.
Exhibit: Selective Financial Information of Vault Managers

(in thousands of US dollars)
December 31, 2011
Revenues $405,000
Cost of services $85,200
Interest $135,500
Selling, general, and administrative
75,000
expenses
Depreciation 45,500
Tax Rate 35%
VMA’s operating profit margin is closest to:
A. 10.24%.
B. 15.75%.
C. 49.21%.
Correct Answer: C
Reference:
Operating profit: 405,000-85,200-75,000-45,500= 63,800/405,000 = 15.75%


51. All Star Products (ASP) reported net income of $2,750,000 for the year ended
December 31, 2010. During the same year the company had an average of
1,050,000 shares of common stock outstanding. In addition to common stock,
ASP also had 50,000 of convertible preferred stock, with each convertible into ten
shares of the firm’s common stock. The firm pays a preferred dividend of
$15/share and a common dividend of $20.
ASP’s diluted EPS is closest to:
A. $1.77.
B. $1.29.
C. $1.90.
Correct Answer: A
Reference:
Diluted EPS:
$2,750,000/1,050,000+500,000 (additional shares if converted) = $1.77
52. An analyst is performing a comparative analysis of two firms operating in the

U.S. fashion industry. Firm A has assets of $15.796 million and Firm B has assets
of $22.90 million. The equity of Firm A and Firm B equal $9.876 million and
$15.66 million respectively.
With regards to solvency:
A. Both firms A and B are strong.

B. Firm A is strong but Firm B is weak.
C. Firm B is strong but Firm A is weak.
Correct Answer: A
Reference:


Solvency Ratios:
Firm A: $15.796/$9.876 = 1.60
Firm B: $22.90/$15.66 = 1.46
Both companies have leverage ratios that are low, so their solvency positions are
strong.
53. An analyst has been asked to perform a comparative analysis of the financial
statements of Pin Enterprises (PIEN) for the most recent years. She initiated the
analysis with the firm’s profitability ratios and compiled the following data.
2010 2011
Leverage 1.80 2.50
Tax burden 0.50 0.70
Interest burden 0.60 0.90
EBIT Margin 5.13% 7.29%
Which of the following least describes one of the conclusions given her compiled
data?
A. The major contributor to the increase in the firm’s return on assets was the
rise in net profit margin.
B. The firm’s return on equity increased by 20.87% in 2011, mostly because
of an increase in leverage.
C. The firm’s interest costs decreased more than the decrease in its tax costs
during the 2010-2011 financial period.
Correct Answer: A
Reference:


Interest costs decreased by 0.30 whereas tax costs decreased by 0.20.
Return on assets:
2010: 0.0513(0.60)(0.50)(2) = 3.078%
2011: 0.0729(0.90)(0.70)2.3) = 10.56%
ROE:
2010: 3.078%(1.80)= 5.54%
2011: 10.56%(2.50) = 26.41%
Although ROE increased by 20.87%, most of the increase was because of an

increase in ROA.
Net profit margin contributed the most to the increase in ROA.
54. An overview of specific business lines and the segmentation of income are most
likely found in the:
A. statement of operations.
B. supplementary schedule.
C. management commentary .
Correct Answer: B
Reference:
Supplementary schedules provide additional information and details regarding

assets and liabilities of a company e.g. information regarding natural resources,
overview of specific business lines, or the segmentation of business or other line
items.


55. A portfolio manager is assessing the following information as part of a

comprehensive analysis of a firm’s financial health and investment attractiveness
using cash flow ratios.
Cash flow from operating activities $89,250

Interest paid $45,000
Taxes paid $22,000
Lease payments $15,500
Dividends paid $12,000
Using the information above, the interest coverage ratio is closest to:
A. 2.47.
B. 2.62.
C. 3.47.
Correct Answer: C
Reference:
89,250+45,000+22,000/45,000 = 3.47


56. A portfolio manager has accumulated the following data to carry out a
comparative analysis of firms within the U.S automobile industry.
Exhibit
SOP Auto Manufacturers Financial Information
Net Income $25,000,000
Weighted average common shares 150,000,000
Beginning of year stock options
75,000
outstanding
Exercise price of stock options $45
Market price of company’s stock $65
Stock option price $11.55
Using the treasury stock method, the diluted EPS for SOP Auto Manufacturers is
closest to:
A. $0.167.
B. $0.159.
C. $1.220.
Correct Answer: A
Reference:
75,000 (45) = $3,375,000 (if options exercised)
3,375,000/65 = 51,923 shares could be repurchased
Incremental shares issued is 75,000-51,923 = 23,077
Diluted EPS: 25,000,000/ (150,000,000+23,077) = $0.167


57. A company engages in the dealing and trading of financial assets that are highly
liquid. Such purchase and sale is not part of the company’s primary business
activity.
In the cash flow statement the above activities would appear as:
A. Investing activities.
B. Operating activities.
C. Financing activities.
Correct Answer: B
Reference:
Operating activities include cash receipts and payments related to dealing

securities or trading securities, even if they are not part of the company’s primary
business activity.
58. If a firm’s price to book value ratio is one, the equity investors in the firm will
most likely earn:
A. a normal profit only.

B. excess profits since the ratio is positive.
C. zero profits as return would not exceed risk.
Correct Answer: A
Reference:
A P/BV ratio of 1 means that a company’s expected future returns are exactly
equal to the returns required by the market. Hence, investors would earn a normal
profit only.


59. The head of a firm’s sales and marketing department is attempting to determine
the appropriate method of reporting revenue under a long-term contractual sale.
Due to the nature of the counterparty involved, the outcome of the contract cannot
be measured reliably and a 30% loss on the contract is expected.
Given the above information, under U.S. GAAP, the:
A. percentage of completion method will be used to recognize the loss

immediately.
B. completed contract method will be used but the loss will be recognized
immediately.
C. loss will be recognized upon completion when revenue is recognized,
unlike IFRS, which will require the loss to be recognized immediately.
Correct Answer: B
Reference:
Under U.S. GAAP, the completed contract method is used when the outcome
cannot be measured reliably. However, even under this method, if a loss is
expected on a contract, it is reported immediately.
60. When the income tax expense in the income statement is greater than current
income tax liability, the difference will most likely increase a firm’s:
A. taxable income.
B. deferred tax assets.
C. deferred tax liabilities.
Correct Answer: C
Reference:
When the income tax expense in the income statement is greater than current
income tax liability, the difference will increase a firm’s deferred tax liabilities.


61. If a firm purchases services on credit, in effect borrowing from the provider, it
would most likely appear on the cash flow statement as an:
A. operating activity.
C. financing activity.
Correct Answer: A
Reference:
Indirect borrowing using accounts payable is not considered a financing

activity—such borrowing is classified as an operating activity.
62. For a particular firm, holding everything constant and assuming rising prices, the
inventory turnover will be lowest under the:
A. FIFO method of inventory accounting.

B. LIFO method of inventory accounting.
C. average method of inventory accounting.
Correct Answer: A
Reference:
FIFO will result in the highest inventory values and lowest cost of sales values.
Thus it will result in the lowest inventory turnover.


63. Superior Tech Limited (S-Tech) has a contract to develop a marketing campaign
for a newly established firm. The agreed upon sales price is $15 million and S-
Tech estimates that it would take 4 years to get the job done. Total costs are
estimated to be $9 million. Details about the expenditures incurred in years 1 and
2 are given below:
• At the end of year 1, S-Tech spends $4 million.

• At the end of year 2, the company spends an additional $3.5 million.
Under the percentage-of-completion method, how much revenue will S-Tech

recognize in year 2?
A. $5,833,333.
B. $6,666,667.
C. $12,500,000.
Correct Answer: A
Reference:
In year 1: 4/9 = 44.44% of the costs have been spend so 44.44%(15) =

$6,666,666.67 of revenue will be recognized.
In year 2: total cost spent will equal 7.5/9 = 83.33% so total revenue recognized:
0.8333(15) = $12,500,000. Since it has already recognized $6,666,666.67, in year
2 it will recognize 12,500,000-6,666,666.67 = $5,833,333
64. Unlike under U.S. GAAP, under IFRS interest received or paid can be reported
either as an:
A. investing activity or operating activity.

B. financing activity or investing activity.
C. operating, investing or financing activity.
Correct Answer: C
Reference:


Under IFRS, interest paid can be reported either as an operating activity or a

financing activity. Interest received can be reported as an operating activity or an
investing activity.
65. For an issuing company, interest expense reported for the bonds in its financial
statements is based on the:
A. coupon rate.
B. effective interest rate.
C. market rate of interest.
Correct Answer: B
Reference:
For an issuing company interest expense reported for the bonds in the financial
statements is based on effective interest rates i.e. the market rate at the time of
issuance.
66. The following data relates to a manufacturing concern’s financial performance

and efficiency.
Beginning inventory 2012 $70,000

Ending inventory 2012 $50,000
Cost of goods sold 2012 $180,000
Cost of goods sold 1st quarter 2013 $45,000
Average inventory 1st quarter 2013 $66,000
Relative to 2012, the firm’s inventory turnover ratio in 2013:
A. improved.
B. deteriorated.
Correct Answer: A


Reference:
Inventory turnover 2012: 180,000/(70,000+50,000) = 1.5
Inventory turnover 2013: 45,000/66,000 = 0.682 Since this is quarterly, we must

annualize by multiplying by 4: 4 (0.682) = 2.73
Hence, the ratio improved.
67. Relative to expensing, which of the following least describes the effect of
capitalizing borrowing costs on a firm’s reported financials?
A. Leverage would appear higher for the firm.

B. Operating income would be lower in the future.
C. Operating cash flow would be higher but investing cash flow would be
lower.
Correct Answer: A
Reference:
If a firm capitalizes, assets would appear higher (because the capitalized amount
is added to assets) but debt would remain the same, so leverage would appear
lower.


68. Wicker Textiles (WTEX) is a well-established firm in central Minneapolis,

Minnesota. WTEX has increased inventory to meet the seasonal demand of its
products. Some information about WTEX’s inventory value is given below:
• The cost of the inventory is $60,000.

• The estimated selling price less costs of completion and costs to make the
sale equals $80,000.
• The market value of the inventory is $55,000.
• A normal profit margin equals 15%.
Under U.S. GAAP, the inventory value on WTEX’s financial statements should
be closest to:
A. $55,000.
B. $60,000.
C. $80,000.
Correct Answer: B
Reference:
Under U.S. GAAP, inventory is reported at lower of cost or market. Market value
is current market value but with upper and lower limits: it cannot exceed NRV
and cannot be lower than NRV less a normal profit margin. Therefore, the lower
limit is $80,000-(15% of 80,000) = $68,000 Hence, $68,000 is the lower limit for
market value. Hence lower of cost or market is: $60,000.


69. Which of the following about financial leverage and unit sales is most accurate?
The farther unit sales are from the break-even points for high leverage companies,
the:
A. magnifying effect becomes unpredictable.

B. lower the magnifying effect of this leverage.
C. greater the magnifying effect of this leverage.
Correct Answer: C
Reference:
The farther unit sales are from the breakeven point for high-leverage companies,
the greater the magnifying effect of leverage.
70. Ryan Myers, a financial analyst, has been appointed the task of developing a
valuation estimate for Colors Fashion Label (CFL), a private, U.S. based firm
operating in the fashion industry of the country. Myers gathered the following
information to aid his analysis:
• The long-term yield on U.S. government bonds is 3.5%.

• The historical equity risk premium in the U.S. is 5.6%.
• A comparable firm has a beta of 1.35, a debt-to-equity ratio of 1.20,
and a tax rate of 40%.
• CFL’s tax rate is 33%.
• CFL’s Debt/Equity ratio is 0.75.
Given the aforementioned information, Myers estimate of CFL’s cost of equity

A. 7.896%.
B. 9.874%.
C. 10.105%.
Correct Answer: C


Reference:
1.35/(1+[(1-0.4)(1.20)] = 0.785
Levered beta for private company: 0.785[1+(1-0.33)(0.75)] = 1.179
Cost of equity: 3.5+ 1.179(5.6) = 10.105%
71. Breakeven point analysis will be least important for a company with a high ratio
of:
A. debt to total assets and low business cycle sensitivity.

B. intangible assets to total assets and high operating income.
C. tangible assets to total assets and low business cycle sensitivity.
Correct Answer: C
Reference:
Breakeven analysis of firms with low business cycle sensitivity and low operating
and financial leverage, and lower intangibles is relatively less important.
72. Xerox Technologies (XETECH) is a well-established firm in the gaming industry

of the United States. Just recently, XETECH upgraded its gaming device and
increased its price to $250. The production of this device cost the firm $65/unit in
variable costs. The total fixed operating costs equaled $10,000,000.
If the firm changes its output from 200,000 units to 220,000 units, operating
income will change by:
A. 1.37%
B. 10.00%.
C. 13.70%.
Correct Answer: C
Reference:


DOL@200,000 units = 200,000(250-65)/200,000(250-65)-10,000,000 = 1.37037

Units sold have changed by 10% so operating income will change by 1.37037
(10%) = 13.7037%
73. Major drags on liquidity for a firm most likely includes:
A. obsolete inventory.
B. reduced credit limits.
C. making payments early.
Correct Answer: A
Reference:
Major drags on liquidity include:
• Uncollected receivables
• Tight credit
• Obsolete inventory
Major pulls on liquidity include:
• Making payments early

• Reduced credit limits
• Limits on short-term lines of credit
• Low liquidity positions
74. Which of the following can be least managed or controlled by a firm’s

management?
A. Sales risk.
B. Financial risk.
C. Operating risk.
Correct Answer: A
Reference:


Management has more opportunity to manage and control operating risk than
sales risk. DFL is also most often the choice of upper management. Hence, sales
risk is least likely to be controlled by a firm’s management.
75. In the face of bankruptcy, the companies least likely to emerge as ongoing
concerns are the ones with high degree of:
A. financial leverage.
B. operating leverage.
C. financial leverage and a low degree of operating leverage.
Correct Answer: B
Reference:
Companies with high operating leverage have less flexibility in making changes,
and bankruptcy protection does little to help reduce operating costs. However,
companies with high financial leverage can use bankruptcy laws and protection to
change their capital structure and emerge as ongoing concerns.
76. Which of the following is least likely correct regarding staggered boards?
A. Staggered board facilitates better continuity of board expertise.

B. Management uses staggered board as an anti-takeover instrument.
C. A staggered board provides more flexibility to nominate new board
members to meet changes in the marketplace.
Correct Answer: C
Reference:
On a staggered basis, only a portion of board members is re-elected every year. A

staggered board can be used by management as an anti-takeover instrument.
However staggered board facilitates better continuity of board expertise. An
annually elected board may provide more flexibility to nominate new board
members to meet changes in the marketplace, if needed, than a staggered board.


77. A fixed-income analyst is considering investing in a pooled investment vehicle.

His friend recommends a closed-ended mutual fund, an open –ended mutual fund
and an exchange-traded fund. The analyst expects to hold the investment for a
year or so and has determined that all options are trading at a discount.
The largest discount will most likely be for the:
A. ETF.
B. Open-ended mutual fund.
C. Close-ended mutual fund.
Correct Answer: C
Reference:
ETF’s trade very close to their underlying NAV. Open-ended mutual funds also
have market prices close to the underlying NAV. Close ended funds, however,
most often trade at discounts or premiums to NAV.
78. A price-weighted index has an initial value of 45. The prices of the constituent
securities before a stock split on security B are given in Exhibit 1.
Exhibit 1
Before a 2 for 1 Split in Security B
Security Price ($)
A 65.12
B 84.00
C 8.50
D 11.99
To ensure that the value of the index does not change after the split, the new
divisor will be closest to:
A. 1.329.
B. 2.836.
C. 3.769.


Correct Answer: B
Reference:
Sum after the split: 65.12+42(after split)+8.50+11.99 = 127.61

127.61/45 = 2.835778
79. According to statistical approaches, companies are grouped based on their:
A. principal business activities.

B. relative sensitivities to the business cycle.
C. historical correlations of securities’ returns.
Correct Answer: C
Reference:
According to statistical approaches companies are grouped into industries based

on historical correlations of their securities’ returns.
80. Cary Lee just received a performance-based bonus from her employer and desires
to invest that in real estate. Her current portfolio is invested in stocks and bonds
only.
If Lee wants to achieve maximum diversification, she should most likely invest in:
A. Direct real estate.

B. Real estate investment trusts (REITs).
C. Shares of companies that own and operate real estate.
Correct Answer: A
Reference:
Relative to the other options, direct real estate has the smallest correlation with
the returns to stocks and bonds. REITs and shares in companies that own real
estate have returns that are similar to the returns of the overall stock market.


81. Anthony Francisco just received $10,000 as inheritance from his uncle who
passed away last month. Consequently, Francisco advises his portfolio manager to
increase his portfolio’s allocation to domestic stocks from 15% to 25%. The
manager determines that the most appropriate holding period for Francisco is ten
years. He thus invests in non-dividend paying stocks that would yield the required
return over ten years.
Given the information above, Francisco is most likely an:
A. Investor.
B. Speculator.
C. Information-motivated trader.
Correct Answer: A
Reference:
Francisco is an investor. He is trying to generate wealth by investing extra income

in attractive securities. There is no indication of the use of superior information by
Francisco to profit from price changes.
82. In most financial models, the assumption is that the investors are:
A. risk averse.
B. loss averse.
C. risk takers.
Correct Answer: A
Reference:
Rationally investors should be risk averse therefore in most financial models, the
assumption is that the investors are risk averse.


83. A firm has just paid a dividend of $2.5 per share. The required rate of return is
15% per year and dividends are expected to grow at a constant rate of 9.4%. If an
analyst uses Gordon Growth model to calculate the firm’s intrinsic value, how
much does the dividend growth assumption add to the intrinsic value estimate?
A. $22.24
B. $26.59
C. $48.84
Correct Answer: A
Reference:
Firm’s intrinsic value using Gordon Growth Model (GGM):
!! !!! !.! (!!!.!%)

Vo = !!!
= !"%!!.!%
= $48.84
$22.24 is the amount that the dividend growth assumption added to the intrinsic
value estimate, as calculated below:
$𝟐.𝟓
$48.84 – = $22.24
𝟗.𝟒%
84. Bobby Anderson, a portfolio manager, is considering investing in commodities to

diversify the risks held in his personal portfolio. Since he has had minimal prior
exposure to the commodities market and does not have the facilities to hold most
commodities, he is trying to determine the most appropriate way to invest in the
sector.
Which of the following markets will be most suitable for Anderson to achieve his
diversification objective?
A. The spot market.

B. The futures market.
C. The forwards market.
Correct Answer: B


Reference:
The futures market would provide greatest liquidity in addition to minimal credit
risk. Also, Anderson does not have the facilities to hold most commodities, so the
spot market is not suitable.
85. Matt Elaine has developed software that enables him to determine the correlation
between economic variables and stock returns. Elaine believes that abnormal
returns could be generated using his investing approach.
Which of the following characteristics of the financial system would least likely
aid Elaine in achieving his objective?
A. Market liquidity.
B. Low cost trading.
C. Transparent financial and economic disclosures.
Correct Answer: C
Reference:
Elaine is trying to use superior information to generate abnormal returns.

Transparent financial and economic disclosures do not necessarily help informed
trades profit because they are competing with each other. The most profitable are
those that have unique insights into future values.
86. For which of the following indices is rebalancing a major concern?
A. Equal-weighted indices.
B. Equal-weighted and market-capitalization weighted indices.
C. Equal-weighted, market-capitalization weighted and price-weighted
indices.
Correct Answer: A
Reference:


Price-weighted indices are not rebalanced. For market-cap indices, rebalancing is

less of a concern because the indices largely rebalance themselves. Hence,
rebalancing is most important for equal-weighted indices.
87. Which of the following is not a time series anomaly?
A. Momentum
B. Holiday effect
C. Earnings surprise
Correct Answer: C
Reference:
Both options A and B are time series anomalies while option C is not a time series
anomaly.
88. Ethan Hawk is analyzing the return to his leveraged stock position that he
invested in last year. The stock’s price at the time of purchase was $50/share.
Hawk purchased 100 shares paying a commission of $0.05/share. The leverage
ratio was 2.0 and the call money rate was 6.0%. At the end of the year, the stock
paid a dividend of $0.50/share and the share price rose to $70/share.
The total return on Hawk’s investment is closest to:
A. 75.45%.
B. 75.64%.
C. 75.80%.
Correct Answer: A
Reference:


Proceeds on sale: $7,000

Payoff loan: -$2,500 (50% borrowed)
Margin interest paid: -$150 (@ 6%)
Dividends received: $50
Sales commission paid: -$5
Remaining equity: $4,395
Return on investment: 4,395-2505/2,505 = 75.45%


89. Which of the following least represents the rationale of a traditional insurance
product?
B. Credit default swap.
C. Credit spread option.
Correct Answer: C
Reference:
The buyer of a credit-linked note effectively insures the credit risk of the
underlying reference security. A CDS also captures many of the essential features
of insurance. A credit spread option behaves more like a call option.
90. Off-market forward is a forward transaction that:
A. starts with a non-zero value.

B. is not made within normal business timings .
C. is used to offset the current forward transaction.
Correct Answer: C
Reference:
A forward transaction that starts with a nonzero value is called an off-market

forward.
91. Compared to underlying spot markets, derivatives markets offer which of the
following operational advantages?
A. Lower transaction costs.

B. Greater liquidity and easy short selling opportunities.
C. Lower transaction costs, greater liquidity, and easy short selling
opportunities.


Correct Answer: C
Reference:
Derivatives markets provide greater liquidity as smaller amount of capital is

required to trade derivatives.
Transaction costs of derivatives are typically low compared to the value of

underlying.
With derivatives it is nearly as easy to take short position as to take a long

position. In case of underlying, its almost always much more difficult to go short
than to go long.
92. Steve Hammond is the CEO of a U.S. based company in the oil exploration
business. Hammond is concerned with falling oil prices in the near future.
Specifically, he wants to hedge the risk of the company’s oil production of a
million liters expected in 234 days from now. He wants to ensure near perfect
hedging with minimal investment.
The most appropriate way to hedge the company’s exposure is to use:
A. Futures.
B. Options.
C. Forwards.
Correct Answer: C
Reference:
Hammond wants to hedge the risk of the company’s oil production 234 days from
now. The time-horizon does not coincide with the standardized time horizons of
futures contracts. Also, since he wants near perfect hedging, a customized
contract that considers all his concerns would be most appropriate. This can be
achieved using a forward contract. Options require a premium to be paid and
Hammond wants minimal upfront investment.


93. With regards to equivalence, a swap is closest to a series of:
A. futures expiring at a set of dates coinciding with the swap payment dates.
B. forwards expiring at a set of dates coinciding with the swap payment
dates.
C. options expiring at a set of dates with the options’ exercise prices equal to
the price inherent in the swap.
Correct Answer: B
Reference:
A swap is closest to a series of forwards expiring at a set of dates coinciding with

the swap payment dates.
94. The higher the exercise price of a call option, the greater the:
A. price of an option.
B. opportunity to gain on the upside.
C. premium received by the seller of the call.
Correct Answer: B
Reference:
The higher the exercise price of a call option, the lower the price of the option and
the lower the premium received by the seller of the call but the greater the
opportunity to gain on the upside.


95. Which of the following statements about the fixed-income market is least
accurate?
A. Since, globally, the fixed-income market is not as popular as the equity

market, equity securities are far more diverse than debt securities.
B. Institutional investors dominate the fixed-income markets because of
informational barriers to entry and invest directly in such securities.
C. Index weighting in the fixed-income market is based on price or value,
and is rarely ever equally-weighted.
Correct Answer: A
Reference:
Fixed-income securities are far more diverse than equity securities. The other two
options are correct.
96. A fixed-income analyst is analyzing the following bonds’ performance given

future market conditions.
Exhibit 1
Coupon Rate Maturity
Bond A 5.5% 4 years
Bond B 6.5% 3 years
Bond C 5.0% 3 years
Which of the above bonds will have lowest interest rate risk?
A. Bond A.
B. Bond B.
C. Bond C.
Correct Answer: B


Reference:
The bond with the highest coupon rate and lowest maturity will have the lowest
interest rate risk. This is Bond B.
97. An analyst is trying to estimate the implied forward rates as inputs to his bond
valuation process. For this purpose, she gathers the data provided in the following
exhibit.
Exhibit:
Zero Coupon Government Bonds
Maturity Price Yield to Maturity
2 year 98.77 3.556%
3 year 96.87 3.786%
4 year 93.11 3.980%
*The yields to maturity are stated on a semiannual bond basis
The ‘2y1y’ implied forward rate would be closest to:
A. 4.25%.
B. 4.56%.
C. 4.16%.
Correct Answer: A
Reference:
(1+0.03556/2)4 × (1+x)2 = (1+ 0.03786/2)6
x = 0.021234 × 2 = 4.24678%
98. For bonds with the same time-to-maturity and yield-to-maturity, Macaulay
duration is the lowest for a:
A. zero coupon bond.

B. low coupon bond trading at a discount.
C. high coupon bond trading at a premium.


Correct Answer: C
Reference:
For the same time to maturity and yield to maturity, the Macaulay duration for a
zero coupon bond tends to be higher than for a low coupon bond trading at a
discount.
Similarly a low-coupon bond trading at a discount has a higher duration than a

high coupon bond trading at a premium.
99. A portfolio manager is confused about whether to invest in a bond issue with a
serial maturity structure, or one with a term maturity structure, given everything
else is similar.
Which of the following, if introduced, will make the manager largely indifferent
between the two structures?
A. High credit quality.

B. Moderate liquidity needs.
C. A sinking fund provision.
Correct Answer: C
Reference:
The sinking fund arrangement on a term maturity structure accomplishes the same
goal as the serial maturity structure—both resulted in a portion of the bond issue
being paid off each year.
100. For a fully amortized bond, the annual payment, which includes both the coupon
payment and the principal repayment:
A. remains constant.
B. decreases at constant rate.
C. decreases at decreasing rate.
Correct Answer: A


Reference:
For a fully amortized bond, the annual payment, which includes both the coupon
payment and the principal repayment, is constant.
101. A 7% annual coupon bond is trading at a price of 105.67 and has three years to
maturity. A 5.5% annual payment, 3-year T-note is trading at a price of 107.89. A
5-year 7% annual coupon T-note is trading at a price of 109.77.
Given the above information, the G-spread will be closest to:
A. 0.16%.
B. 1.32%.
C. 2.19%.
Correct Answer: C
Reference:
Yield on the corporate bond: 4.92% (using financial calculator)
Yield on the T-note with same maturity: 2.725%
G-Spread: 4.92%-2.725% = 2.195%


102. A dealer believes that the bonds issued by Super-Tee Enterprises (SUTEE) are
considerably overvalued and wants to benefit from the mispricing. For achieving
this objective, the dealer borrows 100 par value bonds of SUTEE from an
institutional investor and lends cash in return. The bonds have a stated coupon
rate of 7.5%.
The above transaction will best be known as a:
A. repurchase agreement, and the coupon will belong to the seller of the
security.
B. reverse repurchase agreement, and the coupon will belong to the borrower
of the security.
C. reverse repurchase agreement, and the coupon will belong to the borrower
of cash.
Correct Answer: C
Reference:
From the dealer’s perspective, this is a reverse repurchase transaction (borrowing

securities and lending cash). The coupon will belong to the owner, that is, the
borrower of cash or the lender of the securities.
103. Tony Sam has invested in a floating rate bond based on Libor. Due to changing
market conditions, Sam is particularly concerned with his investment value
deviating from par value.
Sam’s concern is most likely:
A. justified.
B. exaggerated, since floating rate securities have little market risk.
C. exaggerated, since floating rate securities have little interest rate risk.
Correct Answer: A
Reference:


Floating rate securities have little interest rate risk. However, they are subject to
credit risk, and changing market conditions can result in a significant downgrade
of such securities. As a result, they may deviate considerably from par value.
104. Mega Derivative Dealers (MDD) is a financial management firm that specializes
in derivatives and alternative investments. An analyst at MDD is evaluating three
securities with similar characteristics. The table below displays data about them.
ABC DEF GHI

Z-spread 13% 11% 15%
OAS 9% 8.5% 9.5%
Which of the above securities is most likely undervalued relative to the others?
A. ABC.
B. DEF.
C. GHI.
Correct Answer: B
Reference:
Option cost:
ABC: 13-9 = 4%
DEF: 11-8.5 = 2.5%
GHI: 15-9.5 = 5.5%
DEF has the lowest option cost so it is the most undervalued relative to others.


105. An investor’s fixed-income portfolio includes two 180-day money market

instruments. Exhibit 1 displays some key information about the securities.
Exhibit 1
Money Market
Quotation Basis Quoted Rate
Instrument
A Discount Rate 6.78%
B Add-on Rate 7.02%
Assuming that the credit risks of the instruments are comparable, the instrument
that offers a higher expected rate of return is:
A. A.
B. B.
C. neither, since they both offer almost equivalent returns.
Correct Answer: C
Reference:
For security A:
PV = 100 × (1-180/360 ×0.0678) = 96.61
To get the BEY:

(365/180) × (100-96.61/96.61) = 0.071154
For security B:
FV = 100 + (100 × 180/360 × 0.0702)
FV = 103.51
BEY:
(365/180) × (103.51-100/100) = 0.071175
The yields are almost equivalent.


106. Sean Lee has just started work at D&L Dealers Association (DLD), a U.S. based
firm that specializes in dealing in stocks and bonds. During a meeting with one of
the firm’s colleagues, Lee posed the following question:
“I am not sure how the lender of cash in a repurchase agreement would account
for the credit risk of the counterparty and make sure it has a margin of safety?”
The best response to Lee’s question is that the:
A. repo rate will account for this concern.

B. repo margin will account for this concern.
C. collateral’s value will account for this concern.
Correct Answer: B
Reference:
The lender of cash accounts for credit risk by lending less than the collateral’s
market value. This difference is called the repo margin.


107. Xoro Investors is a private equity firm that is nearing its exit stage for two of its
profitable investments. The fund plans to achieve the following objectives
through the use of appropriate exit strategies for the investments:
Investment A: “Fast execution, no lock-up period and a higher level of

confidentiality.”
Investment B: “The potential for the highest price.”
Which of the following describes the most appropriate exit strategies for the
investments?
A. A trade sale for investment A and an IPO for investment B.

B. A secondary sale for investment A and a trade sale for investment B.
C. A trade sale for investment A and a secondary sale for investment B.
Correct Answer: A
Reference:
A trade sale has the advantage of fast execution, higher confidentiality and no
lock-up periods. So it is suitable for investment A. An IPO has the potential for
the highest price so it is appropriate for investment B.
108. Which of the following hedge fund strategies is least likely to have a zero beta
position?
A. Market Neutral.
B. Quantitative Directional.
C. Fixed Income Convertible Arbitrage.
Correct Answer: B


Reference:
The quantitative directional strategy takes long and short positions, however, the
fund typically varies levels of net long or short exposure, depending upon the
anticipated direction of the market. The other two have a zero beta exposure.
109. XYZ hedge fund is a U.S. based fund with $200 million of initial investment
capital. The fund specifies a ‘2 and 20’ fee structure with fees calculated using
end-of-period calculation. A 7% hurdle rate is also specified and performance fees
are calculated net of management fees.
If, in its first year, XYZ hedge fund earns a return of 25%, the investor’s net
return will be closest to:
A. 18.4%.
B. 18.7%.
C. 19.1%.
Correct Answer: B
Reference:
25%(200) = $50 million

250 million (2%) = $5 million
(250-200-7-5) (20%) = $7.6 million incentive fee
Total fees: $12.6 million
Return: 250-200-12.6/200 = 18.7%


110. During a seminar on the attractiveness of alternative investments, the guest

speaker made the following comment:
“The hedge fund strategy that is closest to the strategy followed by a private
equity fund is the activist hedge fund.”
The distinction between the two that sets them apart is that the hedge fund:
A. does not have a lock-up period.

B. operates in the public equity market only.
C. does not influence the target company as much as private equity.
Correct Answer: B
Reference:
The activist hedge fund operates in the public market only, unlike private equity.
111. Which of the following category of alternative investments most likely include
metals and crude oil?
A. Real Estate
B. Commodities
C. Other alternative investments
Correct Answer: B
Reference:
Commodities include grains, metals and crude oil.


112. Activist is an event driven strategy that focuses on the:
A. purchase of sufficient equity to influence a company’s policies or

direction.
B. securities of the companies either in bankruptcy or perceived to be near to
bankruptcy.
C. opportunities in the equity of companies that are currently engaged in
restructuring activities.
Correct Answer: A
Reference:
Activist is an event driven strategy that focuses on the purchase of sufficient

equity to influence a company’s policies or direction.


113. The execution step of portfolio management process most likely includes:
A. portfolio monitoring.
B. portfolio construction.
C. performance measurement.
Correct Answer: B
Reference:
The execution step includes asset allocation, security analysis and portfolio
construction.
The feedback step includes portfolio monitoring and rebalancing and performance
measurement and reporting.
114. An equity analyst is using the market model to analyze the returns to a stock.
During the recent year, the market rose by 5% and the stock rose by 8%. The beta
for the stock is 0.66 and alpha is 0.02. The company-specific return to the stock
during the recent year is closest to:
A. 2.7%.
B. 4.5%.
C. 4.7%.
Correct Answer: A
Reference:
Specific return: 0.08 - (0.02 + 0.66 × 0.05) = 2.7%


115. According to the CAL, an investor should choose the portfolio that lies at the
point where the:
A. efficient frontier is tangent to the capital allocation line.

B. investor’s indifference curve cuts the capital allocation line.
C. highest indifference curve is tangent to the capital allocation line.
Correct Answer: C
Reference:
An investor should choose the portfolio that lies at the point where his highest
indifference curve is tangent to the capital allocation line. This will define his
optimal portfolio.
116. A portfolio manager has constructed an investment portfolio for one of his firm’s
largest institutional clients. Exhibit 1 displays the composition of the portfolio.
Exhibit 1
Type Percentage Invested
Stocks 60%
Fixed Income 25%
Alternative Investments 15%
The above portfolio is least suitable for:
A. A foundation.
B. An insurance company.
C. A newly offered defined benefit pension plan.
Correct Answer: B
Reference:


An insurance company’s risk tolerance is typically quite low and the time horizon
is short. Hence, a large proportion of stocks and alternative investments would not
be appropriate. Foundations have a very long time horizon, and risk tolerance is
typically high. For a newly offered DB plan, risk tolerance would be high and
time horizon would be long.
mathematically derived metrics.
A. Gamma is considered a second order risk because it reflects the risk of

changes in vega.
B. The sensitivity to changes in the volatility of the underlying is reflected in
a measure called rho.
C. Delta captures only small changes in the value of the underlying whereas
large changes are captured by gamma.
Correct Answer: C
Reference:
CFA Level I, Volume 4, Study Session 12, Reading 42, LOS-g.
Option C is correct. Delta captures only small changes in the value of the
underlying whereas large changes are captured by gamma.
Option A is incorrect. Gamma is considered a second order risk because it reflects

the risk of changes in delta.
Option B is incorrect. The sensitivity to changes in the volatility of the underlying

is reflected in a measure called vega.
A. an ETF.
B. an index mutual fund.
C. either an ETF or an index mutual fund.
Correct Answer: C
Reference:


The tax advantage of ETFs over index mutual funds is not related to dividends but
rather to capital gains. Hence, the investor would be indifferent.
118. Which of the following investments is likely to have a negative beta?
A. A risk-free asset.
B. An insurance policy.
C. An asset with returns that have insignificant sensitivity to the market
return.
Correct Answer: B
Reference:
An insurance policy has a negative beta. Option C will have a very low beta and
option A will have a zero beta.


119. Carlos Long, a financial analyst, is having a meeting with Tony John, one of his
private wealth clients. During the meeting John stated that he wanted to achieve
an expected return of 15% from his portfolio. Long estimated that the market
portfolio has an expected return of 25% and a standard deviation of 37%. The
If Long uses the capital allocation line as a benchmark, John’s portfolio will have
a standard deviation closest to:
A. 18.5%.
B. 27.0%.
C. 37.0%.
Correct Answer: A
Reference:
Slope: 25%-5%/37% = 0.54054
Standard deviation is calculated using the following CAL equation:

0.15 = 0.05+0.540541(SD)
SD = 18.49998% or 18.5%.
120. An investor with a risk aversion coefficient of 4 is analyzing an investment with

an expected return of 12% and a risk of 15%.
If the risk-free asset has a return of 5.0%, the investor will most likely prefer:
A. the risk-free asset.

B. the risky investment.
C. either the risk-free asset or the risky investment.
Correct Answer: B
Reference:


Utility from risky investment: 0.12-0.5(4)(0.15)2 = 0.075

To get the same utility, the risk free return must be 7.5%(because the second term
disappears). Since the risk-free return is only 5.0%, the risky investment is better.

FinQuiz.com
June, 2016
Revision 1

FinQuiz.com – 4th Mock Exam 2016 (PM Session)

33-44 Economics 18
Total 180

1. Jackie Mills has just joined an equity management firm as a financial analyst. To
complete her first assignment, Mills utilizes comprehensive data sorting software
developed by an ex-employee of the firm. By the help of the software, Mills is
able to establish a relationship between stock market returns and the GDP growth
rate. Mills writes a report stating her conclusions without attributing the analyst
who developed the software.
With regards to writing the report, has Mills violated any CFA Institute Standards
of Professional Conduct?
A. No.
B. Yes, specifically Standard I(C)-‘Misrepresentation’.
C. Yes, Standard I(C)-‘Misrepresentation’ and Standard III(A)-‘Loyalty,
Prudence and Care’.
2. Limelight Associates (LLA) is a well-established investment management firm in

San Jose, California. The firm manages both discretionary and non-discretionary
accounts as well as fee-paying and non-fee paying accounts. For buy
recommendations, stock purchases are first made for discretionary accounts and
then for non-discretionary accounts. The same holds for ‘sell’ recommendations.
According to Standard III(B)-Fair Dealing, LLA’s trade allocation procedures are

most likely:
A. ethical, as long as LLA discloses its trade allocation policies to its clients.
B. ethical, as long as LLA discloses its trade allocation policies to its clients
and prospects.
C. unethical, even if LLA discloses its trade allocation policies to its clients
and prospects.

3. Chris Harvey is planning to leave his current employer to work for a newly
established investment advisory firm. Harvey plans to take with him the computer
models he developed for stock selection, and has disclosed this fact to his
employer. The employer permits Harvey to keep the models after employment
ends.
If Harvey takes with him the computer models he developed, his actions would be
in:
A. compliance with the Standards.

B. violation of Standard IV(A)-‘Loyalty’.
C. violation of Standard IV-(A)’Loyalty’ and Standard I-(D)-‘Misconduct’.
4. While advising his client to move at least 10% of his portfolio from corporate
bonds to bank-sponsored certificates of deposit, a portfolio manager makes the
following comment:
“I guarantee that your principal value will not fall on these investments.”
The portfolio manager has most likely:

B. violated the Standards by misleading investors.
C. violated the Standards by misrepresenting information and guaranteeing
preservation of investment capital.
5. Ryan English, a portfolio manager, offers only a few of his clients review
meetings every month in addition to the regular annual review meetings. For the
rest of his clients, Ryan has review meetings annually unless circumstances state
otherwise.
Is English most likely in compliance with the CFA Institute Standards of

A. Yes.
B. No, because he does not treat his clients fairly.
C. No, because his meetings should be much more frequent.

6. ‘Standard III(E)-‘Preservation of Confidentiality’ states that if applicable law

requires members or candidates to maintain confidentiality, even if the
information concerns illegal activities on the part of the client, members and
candidates should not disclose such information.’
The above statement is most likely:
A. Correct.
B. Incorrect, since the more strict law applies and members are obligated to
disclose illegal activities on part of clients.
C. Incorrect, since members should consult their compliance department and
disclose the information only if the compliance personnel say so.
7. With regards to proprietary trading procedures, the CFA Institute Standards of

Professional Conduct impose a trading prohibition that is:
A. more strict for market-making than risk-arbitrage trading.

B. more strict for risk-arbitrage trading than for market making.
C. equally stringent for market-making and risk-arbitrage trading.
8. If a designated officer discovers that violation of the Code and Standards occurred
by a member or candidate:
A. the designated officer can propose a disciplinary sanction that must be

accepted by the member or candidate.
B. the designated officer can propose a disciplinary sanction that may be
accepted or rejected by the member or candidate.
C. the matter must be referred to the hearing panel composed of disciplinary
review committee (DRC) members and CFA Institute member volunteers.

9. If a member or candidate has reason to believe that a colleague is engaging in

illegal activities, the best course of action as stipulated by the CFA Institute
Standards of Professional Conduct will be to:
A. leave the firm after disclosing to legal authorities about the illegal activity.
B. report the activity to legal authorities and discontinue any association with
the colleague.
C. inform the firm’s compliance department or appropriate legal counsel to
determine whether applicable laws require reporting the illegal activity.
10. Ella Asset Managers (ELLAM) has just launched the ‘High-Yield Market Fund’ a
fund that targets high dividend paying domestic and international stocks. To
promote the fund and boost visibility amongst investors, ELLAM offers three of
its most prominent clients to commit at least $10,000 in the fund in exchange for
lower advisory fees. ELLAM previously determines that the fund is suitable for
each of the three clients.
Has ELLAM most likely violated Standard II-‘Integrity of Capital Markets’ of the
CFA Institute Standards of Professional Conduct?
A. No, as long as it fully discloses its agreement with the clients to boost
visibility.
B. Yes, since ELLAM is engaging in an illegal act and should be held
accountable for it.
C. Yes, since ELLAM is intentionally misleading investors and is thus
compromising the integrity of capital markets.
11. While preparing advertising material at a new firm, an analyst utilizes his past
investment record at a prior firm; to be in accordance he should most likely
disclose:
A. where the performance took place.

B. where the performance took place and his specific role in achieving that
performance.
C. the source of the historical performance, along with details of the prior
firm and the funds managed.

12. Vivid Optics (VIOP) is a U.S. firm that specializes in the productions of eye-sight
glasses and eye-care equipment. Even though the firm has been successful in the
past, it’s stock has not gained much popularity amongst investors. To increase
visibility in financial markets, VIOP hires Al Bailey, a research analyst, to write a
report analyzing their company. In return, VIOP promises to pay Bailey a fee that
is 10% greater than the fee paid for similar research work. Bailey conducts a
thorough, independent analysis and issues a ‘buy’ recommendation for the firm.
In preparing the report, to be in compliance with Standard I(B)-‘Independence

and Objectivity’ of the CFA Institute Standards of Professional Conduct, Bailey
should most likely:
A. refuse writing the report and accepting a higher fee since it contradicts
with best conduct.
B. write the report, but disclose the nature of compensation and potential
conflicts of interests to investors.
C. write the report, but not accept the higher fee and ask for a fee that is
comparable to similar research work.
13. Zenith Futures Exchange has launched a new futures contract and is trying to
promote it amongst traders and arbitrageurs. In order to boost liquidity of the
contract, the exchange enters into agreements with members to commit to a
substantial trading volume on the contract. While marketing the contract to
investors, the exchange fully discloses the liquidity enhancing strategy it used.
With respect to Standard II-B ‘Market Manipulation’ of the CFA Institute

Standards of Professional Conduct, Zenith Futures Exchange is most likely in:
A. compliance.
B. violation, because engaging in a pump-priming strategy is illegal.
C. violation, because disclosure does not absolve the exchange from its
unethical intent.

14. One-Stop Products (OSP) is a large toy manufacturer with a number of retail
shops throughout USA. OSP has hired Cathy John as a portfolio manager for part
of its newly offered pension plan. The OSP pension fund is also partly invested in
an equity mutual fund.
Which of the following fund managers are bound by the duty of loyalty to OSP?
A. Cathy John only.

B. Both Cathy John and the mutual fund manager.
C. Neither Cathy John nor the mutual fund manager.
15. Laura Culpitt is the compliance officer at her investment firm. Culpitt just found
out that a portfolio manager at the firm was engaging in inequitable trading
practices, giving preference to his personal portfolio over client accounts.
Immediately after identifying the malpractice, Culpitt talks to the manager who
assures her that the wrongdoing would not recur.
To fulfill her duty as a supervisor, according to best practice, Culpitt:
A. has performed her duty as a supervisor.

B. should report the misconduct up the chain of command and warn the
employee to cease the unfair practice.
C. should place limits on the employee’s activities and/or increase
monitoring of the employee’s activities.
16. An investment firm is taking steps to comply with the GIPS standards to be at par
with global competition. The firm, however, operates in a country that has
existing laws and industry standards that impose requirements related to the
calculation and presentation of investment performance.
The firm should most likely comply with:
A. GIPS Standards only.

B. local laws and standards only.
C. GIPS Standards in addition to applicable regulatory requirements.

17. Kelly Jesper is the portfolio manager for a large endowment fund. Since the fund
is invested in international stocks and bonds, Jesper plans to hire a currency
manager as a sub-advisor. To select the appropriate sub-advisor, Jesper went
through the fee structure of a number of eligible firms and selected the firm with
the lowest fees for the job.
Jesper’s selection process has most likely:
A. violated the Standards.

B. not violated the Standards because Jesper is in a position to deem what is
the appropriate eligibility criteria.
C. not violated the Standards because Jesper’s selection will have the least
impact on the firm’s cost structure.
18. Walter & Associates (W&A) is a GIPS compliant firm that makes compliant
presentations to all prospective clients. On January 1, 2012, the firm provided a
compliant presentation to all prospects. Six months later, it provided another
compliant presentation to only few selected clients.
W&A’s actions have most likely:
A. ensured compliance with the GIPS standards.

B. not met the requirements of the GIPS standards.
C. violated the standards as a consequence of being selective in their
disclosure policy.

19. Betty Williams is constructing an appropriate asset allocation for a client with a
$500,000 portfolio. The client has stipulated the need to withdraw $50,000 from
the portfolio in six months’ time to meet medical expenses. The overall time
horizon for the portfolio is more than 20 years. The client does not want her
capital to depreciate in any way. The table below shows the allocations that
Williams is considering. The risk-free rate is 7.5%.
Allocation A B C
Expected annual return 27 17 14
Standard deviation 30 19 8
The allocation that would be most appropriate for William’s client is:
A. Allocation A.
B. Allocation B.
C. Allocation C.
20. John Hedges has invested a part of his portfolio in a well-diversified mutual fund
consisting of U.S. stocks only. Even though the fund’s return was 3.5% for the
most recent month, the mean monthly return equaled 1.5% with a standard
deviation of 4.5% for a total of 260 observations. Hedges is utilizing this
information to understand the investment’s risk characteristics.
Using the Chebyshev’s inequality, the return interval in which at least 195
observations will lie is closest to:
A. -3.0% to 6.0%.
B. -7.5% to 10.5%.
C. -12.0% to 15.0%.

21. Which of the following sampling biases would most likely result in an
underestimated standard deviation of returns?
A. Look-ahead bias.
B. Data mining bias.
C. Survivorship bias.
22. Flags and pennants are least likely considered to be:
A. minor continuation patterns.

B. similar to each other and have same uses.
C. bullish indicators and are formed in an uptrend.
23. Red-Dot Enterprises (RDE) is choosing between the two projects that have cash
flows displayed in the following exhibit.
Project CFO($) CF1($) CF2($) CF3($)

A -50,000 65,000 0 0
B -50,000 0 0 78,000
The IRR of Project A is 45% whereas the IRR of Project B is 23%. However,
using the NPV criterion, Project B ranks higher than Project A using a discount
rate.
Compared to crossover rate, the discount rate used for NPV analysis is:
A. lower.
B. equal.
C. higher.

24. Irene Elinor, a research analyst, is using the safety-first ratio to assess several
asset allocations for her personal portfolio. Given her threshold return of 6%,
Elinor has selected a portfolio with an expected annual return of 15% and
standard deviation of 19%. Elinor assumed a normal distribution of returns for her
portfolio. She used the following table to assist her selection process.
x or z 0.05 0.06 0.07

0.3 0.6368 0.6406 0.6443
0.4 0.6736 0.6772 0.6808
0.5 0.7088 0.7123 0.7157
The probability that Elinor’s selected portfolio will return less than the shortfall
level is closest to:
A. 31.92%.
B. 47.37%.
C. 68.08%.
25. An analyst is interested in three independent events R,V and T with probabilities
of 0.21, 0.34 and 0.45 respectively. The probability that all three will occur is
closest to:
A. 0.03.
B. 0.32.
C. 1.00.
26. A T-bill has a face value of $1 million and 180 days until maturity. The security is
selling for $970,000. The yield on a bank discount basis is closest to:
A. 1.94%.
B. 6.00%.
C. 6.18%.

27. Which of the following statements is least accurate regarding measures of central
tendency and measures of location?
A. Measures of location include not only measures of central tendency but

also illustrate the distribution of the data.
B. Measures of location illustrate the distribution and location of the data but
fail to specify where the data are centered.
C. Measures of central tendency specify where the data are centered but
illustrate nothing about the distribution of the data.
28. If a return distribution has small but frequent gains and only a few extreme losses,
which of the following measures for the distribution will most likely be the
highest?
A. Mean.
B. Mode.
C. Median
29. “Continuously compounded returns need to be normally distributed for asset

prices to be log-normally distributed.”
Which of the following would most likely refute the above condition?
A. Law of probabilities.
B. Central limit theorem.
C. Lognormal distribution theorem.
30. Harold Burst, a portfolio manager, is evaluating international investments for

diversification purposes. Burst has compiled 15-years data regarding the returns
to a broad-based Russian equity index. To analyze the data gathered, Burst
proceeds with estimating the data’s mean. Even though he knows that the mean
may carry important information, he realizes that it may be skewed upward or
downward by extremely large or small observations. Burst is not sure how to
rectify this problem.
Which of the following, if used, will least likely address Burst’s concern?
A. Trimmed mean.
B. Winsorized mean.
C. Standardized mean.

31. Eric Bates is performing a trend analysis of the market prices of U.S. commodity
stocks. Bates is a strong proponent of the normal distribution, and believes that
most data can be described by it. He is thus using the distribution to help him with
his analysis.
Bates approach to perform the trend analysis is most likely:
A. appropriate.
B. inappropriate, because the lognormal distribution is more suitable.
C. inappropriate, because a distribution skewed to the left is more suitable.
32. Student’s t-distribution is most likely used when the population variance is:
A. known for small and large sample sizes.

B. not known for small and large sample sizes.
C. known for large sample sizes but not known for small sample sizes.

33. A dealer provides the following quotes:
Spot Rate Expected Spot Rate in one year

USD/EUR 1.3455 1.3987
Based on the data, over the next year against the U.S. dollar, the euro is expected
to:
A. appreciate by 1.04%.
B. depreciate by 3.80%.
C. appreciate by 3.95%.
34. The breakeven sales quantity that would allow an investor to earn a return
commensurate with the risk of the firm’s equity capital is the quantity:
A. corresponding to the point of intersection of the marginal cost curve and

the ATC curve.
B. that is a little greater than the quantity corresponding to the starting point
of the firm’s long-run supply curve.
C. that equals the sum of the normal profit and the quantity corresponding to
the point of intersection of the MC and ATC curve.
35. Which of the following factors will least likely cause a shift in an economy’s
aggregate demand?
A. A change in price.
B. A change in household wealth.
C. A change in business expectations.
36. Assuming perfect competition, if price increases, a firm’s demand curve will most
likely shift:
A. upward, and the total revenue curve would shift leftward from the origin.
B. leftward, and the total revenue curve would shift leftward from the origin.
C. downward, and the total revenue curve would shift rightward from the
origin.

37. Rocket Communications (ROCOM) is a newly established firm in the U.S.

electronics and communications industry. At the current price level for its
product, the firm makes only normal profit. The CEO of ROCOM believes that by
realizing economies of scale the firm can generate economic profit by moving
towards the minimum cost point in the long-run.
Assuming that the U.S. communications and electronics industry is characterized

by perfect competition, in the short-run the firm can:
A. not generate economic profit and neither can it in the long-run.

B. generate economic profit if price is greater than average total cost, but in
the long-run no economic profit is possible since price equals average total
cost.
C. not generate economic profit because price equals average total cost, but
in the long-run the firm can generate economic profit in the amount of
‘price less average total cost’ by moving to the lowest cost point.
38. Profit maximization for a firm most likely occurs when:
A. TR equals TC.
B. MR equals MC.
C. TR is greater than TC.
39. If an economy has experienced a decline in its aggregate supply, which of the
following investments would be most appropriate for an investor?
A. Equity.
B. Fixed-income.
C. Commodities.

40. A company operating in an industry defined by imperfect competition increases

the quantity of its product sold by 50,000 units. The company still operates at only
30% of full capacity.
Which of the following best describes the changes in the company’s revenues?
A. Total revenue will increase, marginal revenue will increase but average
revenue will decrease.
B. Total revenue will increase, marginal revenue will decrease but average
revenue will increase.
C. The rate of increase in total revenue will decrease, and marginal revenue
and average revenue both will decrease.
41. Cross elasticity of demand is negative for goods that are:
A. substitutes.
B. complements.
C. normal goods.
42. A firm’s long-run supply curve equals the firm’s marginal:
A. cost curve that lies above the minimum point on the average total cost
curve.
B. cost curve that lies above the minimum point on the average variable cost
curve.
C. revenue curve that lies above the minimum point on the average total cost
curve.

43. Isabel Riley has just started her own business of providing career counseling to
young and aspiring students of finance and accounting. Riley provides this service
in her own home so that she doesn’t have to pay any rent or additional utility bills.
No other apparent fixed costs apply. The opportunity cost of providing services in
terms of forgone hours at her current job varies with the amount of students Riley
gets per week.
Given the above information, if TR is greater than TVC, Riley should most likely:
A. continue running the business as it is profitable.

B. shut down in the short run and exit market in the long run.
C. continue running the business in the short run but only continue in the
long-run if TR is greater than TC.
44. If the expansion of an economy is largely supply driven, which of the following
best represents the level of interest rates and inflation in the economy?
A. Low inflation and low interest rates.

B. Low inflation but high interest rates.
C. High inflation and high interest rates.

45. An analyst has been assigned the task of analyzing the following comparative
data.
Industry
Firm A Firm B Firm C
Average
Inventory
7.0 6.5 7.5 7.0
turnover
Growth rate 6.0% 12.0% 8.5% 9.0%
Inventory
$30,000 $7,000 $2,000 -
write-downs
Which of the above firms most likely has the most effective inventory
management system in place?
A. Firm A.
B. Firm B.
C. Firm C.
46. Matt Lyman is a research analyst reviewing the financial performance of Fresh
Beverages (FREBE), a medium-sized firm famous for its pulpy juices. Lyman has
accumulated the following data about FREBE for the fiscal year ended 31 May,
2010:
• Income from continuing operations is $14.5 million.

• Depreciation equals $6 million and amortization is $3 million.
• The increase in accounts receivable from last year is $2.5 million.
• During the year inventories did not change whereas accounts payable
increased by $3.0 million.
• Over the last year, accrued liabilities have decreased by $4.5 million.
Given the information above, FREBE’s cash flow from operations for the year
ended 31 May, 2010 is closest to:
A. $19.5 million.
B. $27.5 million.
C. $28.5 million.

47. Olson White is an equity analyst keenly following the pharmaceutical industry.
White suspects that Medi-Care Pharmaceutical’s financial position has
deteriorated over the last few years. The firm’s quick ratio decreased from 6.7 to
4.3 in the current year. Current liabilities and daily cash expenditures in the
current year equaled $107,000 and $40,000 respectively. White is concerned
about the firm’s liquidity position.
Medi-Care Pharmaceuticals’ defensive interval ratio for the current year is closest
to:
A. 6.42.
B. 11.50.
C. 17.92.
48. Sturdy Auto Parts Manufacturer is testing a prototype electronic auto part that
would help improve the navigation systems in cars. The part is feasible to produce
and would keep the firm competitive with technological advance in the market.
The following exhibit displays information about the expenses of the research
division with regards to the project.
Exhibit:
Expenses related to Auto Part Project (‘000 of US$)
Material and services 950
Direct Labor 550
Start-up costs 400
Administrative personnel 250
Direct overhead 375
Indirect overhead 100
Under IFRS, the amount of costs of the project that would be capitalized will be
closest to:
A. $1,975,000.
B. $2,225,000.
C. $2,625,000.

49. Holding everything else constant, if a firm switches from the LIFO method of
accounting to FIFO, in a period of rising prices, the firm’s current ratio will most
likely:
A. increase.
B. decrease.
50. The chief executive officer of a manufacturing concern just had a meeting with
the firm’s financial department. After the meeting, the members of the financial
committee decided to increase the estimated useful life of a piece of equipment
from 5 years to 7 years. In addition, given future market conditions, the
committee also revised the salvage value estimate downward by 20%.
Holding everything else constant, with regards to the changes made only, net
income in the future will most likely:
A. increase.
B. decrease.
C. may increase or decrease.
51. If the value of the net identifiable assets of a target company is greater than the
cost to purchase that company, the excess will most likely:
A. not be depreciated but checked annually for impairment.

B. be expensed immediately in the profit and loss statement.
C. be amortized and reported in the profit and loss statement over a specified
time period.
A. required to expense costs associated with internally created intangible

assets.
B. required to capitalize costs associated with internally created intangible
assets.
C. allowed to capitalize or expense costs associated with internally created
intangible assets.

53. Which of the following will most likely increase net income relative to operating
cash flow?
A. Depreciation.
B. Gain on sale of an asset.
C. Amortization of a bond premium.
54. Pinnacle Products Incorporated (PIPR) wrote down the value of its inventory in
2010 and reversed the write-down in 2011.
Under IFRS, compared to the ratios that would have been calculated if no write-
down had occurred, which of the following PIPR’s reported 2011 values would be
the same?
A. Current ratio.
B. Operating profit margin.
C. Cash/Cost of sales ratio.
55. A company just purchased machinery worth $55,000 in order to reduce labor
costs and increase efficiency. The machinery has a useful life of 5 years and a
salvage value of zero. The company plans to depreciate the machinery’s value
using the accelerated depreciation method.
Holding everything else constant, if the company had used the straight-line
depreciation method, the firm’s net income would have been:
A. lower in the early years.

B. higher in the early years.
C. either higher or lower in the early years.
56. A firm invested $10 million in a 7% semiannual pay coupon bond a year ago.
Since then, interest rates have declined such that the value of the investment has
Ignoring all other effects, at the end of year 1, the lowest value for reported assets
would be if the bond is reported as a:
A. held-for-trading asset.
B. held-to-maturity asset.
C. available-for-sale asset.

57. White Rock Enterprises (WREN) reported income tax expense of $6.5 million
over the past year. During the same year, taxes payable and deferred tax assets
increased by $2 million and $0.85 million respectively. WREN reports no
deferred tax liabilities.
Over the recent year, the cash paid by WREN for income taxes is closest to:
A. $4.5 million.
B. $5.35 million.
C. $7.65 million.
58. Chucky Cheese (CHCH) is a restaurant chain in Ohio that prepares its financial
statements in accordance with U.S. GAAP. Just recently, the firm borrowed
$2,000,000 to construct a facility with a useful life of 35-years. The loan has an
interest rate of 15% payable annually and has a maturity of 3 years. CHCH
invested the loan proceeds to earn $50,000 during the three year loan period.
If CHCH had prepared its financial statement in accordance with IFRS, the
firm’s:
A. future depreciation expense would be lower.

B. cash flow from operating activities would be higher.
C. property, plant and equipment would be $50,000 higher.
59. If the days of sales outstanding of a firm decreases and the proceeds from the
collections are used to purchase inventory, which of the following ratios will
decline?
A. Quick ratio.
B. Current ratio.
C. Receivables turnover.

60. An equipment costs $17,000 with a useful life of five years and estimated residual
value of $2,000. The equipment is to be depreciated using the double declining
balance method.
The net book value of the equipment at the beginning of the third year would be
closest to:
A. $3,672.
B. $6,120.
C. $8,704.
61. Silver Rock Cafe (SRC) is a famous coffee shop and dessert specialist operating
in New York, USA. Just recently, SRC reported a gain on the sale of cooking
equipment of $10 million, depreciation expense of $6.5 million and capital
expenditures of $18 million. The exhibit displays additional information about the
firm’s balance sheet accounts.
December 31 December 31
2010 2011
Equipment $80 million $91 million
Accumulated
depreciation – $25 million $30 million
equipment
Using the information above, the cash that SRC received from the sale of the
cooking equipment is closest to:
A. $12.0 million.
B. $15.5 million.
C. $17.0 million.

62. Which of the following least accurately describes the effects on a firm’s return on
assets for an increase in market value of fixed income security?
If the investment is classified as:
A. held-for-trading, return on assets would be higher than if it classified as

available for sale.
B. available for sale, return on assets will be higher than if it is classified as
held to maturity.
C. held for trading, return on assets would be higher than if it is classified as
held to maturity.
63. Which of the following assets should least likely be amortized?
A. A tangible asset with an indefinite life.

B. An intangible asset with an indefinite life.
C. An unidentifiable asset with a definite life.
64. Brick Enterprises reported cost of goods sold of $85,000 and net income of
$35,000 in the most recent year. During that year, inventory increased by $12,000
and accounts payable decreased by $10,000.
Over the recent year, cash paid to suppliers was closest to:
A. $83,000.
B. $87,000.
C. $107,000.

65. An analyst is evaluating the liquidity of three large utility firms and has gathered
the following comparative data to assist him with his analysis.

Days of inventory
8 10 25
on hand
Days of sales
55 65 77
outstanding
Payables turnover 9 3 5
*All figures are annual using a 365-day year.
With respect to the cash conversion cycle, which of the following firms has the
greatest liquidity?
A. Firm A.
B. Firm B.
C. Firm C.
66. An equity analyst, is estimating the EPS of a firm. The firm has an average of
700,000 shares of common stock outstanding and 30,000 shares of convertible
preferred. Each preferred share is convertible into two shares of the company’s
common stock. Just recently, it has increased preferred dividends from $15/share
to $35/share.
If net income equals $1,600,000, the values of firm’s diluted EPS before and after
the increase in dividends, are closest to:

67. Considering each in isolation, a decrease in which of the following would least
likely result in a higher return on equity?
A. Tax burden.
B. Average total assets.
C. EBIT relative to EBT.

68. A portfolio manager is analyzing the information provided in the exhibit below.
Exhibit
Key Financial Information (in thousands of US dollars)
Year ended June 1, 2011
Bank loan 150
Long-term bank debt 750
Other financial liabilities 200
Trade payables 650
Deferred tax assets 475
Total equity 9,500
Using the above information, the debt to equity ratio is closest to:
A. 11.58%.
B. 16.58%.
C. 21.95%.

69. Which of the following industry least likely has higher operating leverage?
A. A large retail store

B. A pharmaceutical firm
C. A software development firm
70. An analyst presented the following criteria for accepting or rejecting a capital
budgeting project using the profitability index.
Criterion 1: “If the value of the index is greater than 1, then accept the project.”
Criterion 2: “If the cumulative discounted cash flow is greater than the initial
investment, then accept the project.”
Analyst is most accurate with respect to:
A. Criterion 1.
B. Criterion 2.
C. Criteria 1 and 2.
71. A corporate analyst is assessing an investment project with an initial investment

of $900,000 that is depreciable straight line over a period of three years to a zero
salvage value. Exhibit 1 displays cash flow information for the project.
Exhibit:
Cash Flow Information
Year 1 Year 2 Year 3
Sales $900,000 $950,000 $1,050,000
Cash expenses $250,000 $300,000 $185,000
*Tax rate equals 35%
The average accounting rate of return for the project is closest to:
A. 33.01%.
B. 46.11%.
C. 60.91%.

72. If a company engages in share repurchases, leverage will increase:
A. only if the repurchase is financed with debt.

B. only if the repurchase is financed with excess cash.
C. whether the repurchase is financed with debt or with excess cash.
73. “The payback period has a number of drawbacks and is hence, not economically
sound to use for capital budgeting. The discounted payback period, however,
addresses some of its limitations. It is, therefore, closest to the NPV criterion
despite its limitations.”
The statement is most likely:
A. Correct.
B. Incorrect, because it is not closest to the NPV criterion.
C. Incorrect, because it has similar limitations to the payback period.
74. Alex Paul is considering the NPV profile of two projects of differing scales. The
required return corresponds to the crossover point of the profile. The IRR of
Project A is 7 percentage points lower than the IRR of project B.
Which of the following best represents the appropriate investment decision?
A. Invest in Project A.
B. Invest in Project B.
C. Invest either in Project A or Project B.
75. Zephyr Products Incorporated (ZPI) plans to invest in large warehouse facility to
increase storage capacity. ZPI has 150 million shares outstanding with a current
market price of $85.00/share. As soon as ZPI announces its plan to invest in the
project, the share price rises to $86.70/share. No other expectations about the
company’s future performance changed.
The NPV of the project is closest to:
A. $170 million.
B. $255 million.
C. $260 million.

76. An analyst is assessing the capital structure of an automobile company. Exhibit 1

displays key information about the company’s vitals.
Exhibit
Five year average preferred dividend $4.50/share
Current preferred dividend $5.50/share
Current stock price $60/share
Stock beta 1.45
Risk-free rate 4.0%
Tax rate 40%
Debt/equity 0%
% of preferred stock in the capital structure 25%
The company’s WACC is closest to:
A. 11.99%.
B. 12.49%.
C. 12.90%.

77. An industry tends to be more competitive when the industry:
A. is not fragmented.
B. has high fixed costs.
C. sells differentiated products.
78. Walter Dan bought 1,000 shares of Red Corporation (RECO) last year when the
purchase price was $150/share. Dan’s equity financed only 40% of the purchase
price. Just recently, Dan found out that RECO’s stock’s price had fallen to
$120/share. The stock paid not dividends during the year.
Ignoring all other cash flows, if Dan had financed 0% of the purchase price, his
loss on the investment would have been:
A. 13.33% lower.
B. 30.00% lower.
C. 45.62% lower.
79. Lyon works for a firm that trades in several derivative contracts including swaps,
futures and forwards. Lyon’s research indicates that the rate on credit default
swaps covering the bonds issued by Bright Enterprises (BEN) is significantly
lower than warranted. He therefore plans to buy a CDS covering BEN’s bonds.
With respect to his trading motive, Lyon is most likely a(an):
A. hedger.
B. investor.
C. information-motivated trader.
80. If the central bank wants to decrease the money supply to curb inflationary
pressures it would most likely:
A. sell bills, notes and bonds to primary dealers.

B. buy notes, bills and bonds from dealers and brokers.
C. sell bills, notes and bonds to primary dealers and brokers.

81. Which of the following statements best describes the weighing methods used in
price-weighted and equal-weighted indices?
In price-weighted indices, the weights are:
A. determined by market prices whereas in equal-weighted indices the

weights always remain fixed.
B. arbitrarily determined whereas in equal-weighted indices the weights are
assigned by the index provider.
C. determined by market prices whereas in equal-weighted indices the
weights reflect the relative value of each security.
82. Many markets allow brokers to lend their clients more money if the brokers use
risk models to measure and control the overall risk of their clients’ portfolios.
This system is called:
A. risk management.
B. portfolio margining.
C. leverage control and risk management.
83. The primary disadvantage of price-weighted index is:
A. its complexity.
B. that it results in arbitrary weights for each security.
C. that constituent securities whose prices have risen the most, have a greater
weight in the index.
84. An investment manager just bought a stock on margin posting 30 percent of the
initial stock price of $75/share as equity. The maintenance margin requirement for
the position is 35%.
The price below, which a margin call will occur, is closest to:
A. $80.77.
B. $79.05.
C. $78.37.

85. The following Exhibit provides information about the limit orders standing in a
continuous trading market.
Exhibit:
Limit Order Book
Offer
Buyer Bid Size Limit Price ($) Seller
Size
A 35 50.00
B 40 50.50
C 55 50.70
D 20 51.00
51.50 100 E
If a seller F submits a day order to sell 125 contracts, limit $50.50, his/her average
selling price will be closest to:
A. $50.68.
B. $50.73.
C. $50.78.
86. For the same index, as time passes, the value of the total return index will exceed
the value of the price return index by a(an):
A. consistent amount.
B. increasing amount.
C. decreasing amount.
87. Which of the following weighting methods would produce an effect closest to a
momentum investment strategy?
A. Price weighting.
B. Market-capitalization weighting.
C. Both price weighting and market-capitalization weighting.

88. While describing the various types of market structures to a group of internees, a
portfolio manager made the following comment:
“The order matching rules that characterize order-driven markets help increase
market liquidity. The complete precedence hierarchy is given by price priority,
time precedence and display precedence.”
The above comment is most accurate with respect to:
A. market liquidity only.

B. the precedence hierarchy only.
C. market liquidity and the precedence hierarchy.

89. Which of the following is essentially a call option?
B. Credit spread option.
C. Credit default swap (CDS).
90. Some futures contracts contain a provision limiting price changes. Price limits are
important because they help:
A. manage credit risk.

B. ensure smoothly operating markets.
C. matching of long and short parties.
91. Which of the following swaps will best make a bet on the credit risk premium of
London banks?
A. Basis swap.
B. Plain vanilla swap.
C. Overnight indexed swaps.
92. Which of the following best represents the payoff value and the profit for an at-
the-money call option?
A. Positive and zero respectively.

B. Zero and negative respectively.
C. Positive and negative respectively.
93. An institutional investor enters a FRA contract to protect against rising interest
rates on a bank loan. The FRA is based on LIBOR as the underlying and is quoted
at a rate of 6.5%. while at expiration the LIBOR is 7.35%.
The investor will most likely take the:
A. long position in the FRA contract and will gain at the end of the contract.
B. short position in the FRA contract and will lose at the end of the contract.
C. short position in the FRA contract and will gain at the end of the contract.

94. Going long a bond is equivalent to:
A. selling the underlying as well as investing in the call and put options.
B. purchasing the underlying, investing in a put option and selling the call
option.
C. selling the underlying, selling the put option and purchasing the call
option.

95. A bond is currently priced at 89.187 per 100 par value. If yields increase by 10bp,
the value of bond falls to 88.215. However, if yields decrease by the same amount
the value of the bond rises to 90.237.
The approximate modified duration for the bond is closest to:
A. 10.51.
B. 11.33.
C. 12.67.
96. The presence of an embedded call option will decrease the effective duration of a
bond:
A. only when interest rates are rising.

B. only when interest rates are falling.
C. for both rising and falling interest rates.
97. A financial consultant made the following comment while addressing a team of
newly hired portfolio managers:
“The accuracy of duration measures is improved by choosing a smaller yield-to-

maturity change.”
The statement is most accurate with respect to:
A. modified duration only.

B. effective duration only.
C. modified duration and effective duration.
98. The use of which of the following will least likely aid underwritten bond offerings
in price discovery?
A. Anchors.
B. Auctions.
C. Grey market.

99. For the same time to maturity and yield to maturity, the Macaulay duration will be
lowest for a:
A. zero-coupon bond.
B. low-coupon bond trading at a discount.
C. high-coupon bond trading at a premium.
100. An U.S. based analyst invests 20% of her portfolio in fixed-income securities.
Part of her focus, while investing, is on credit risk and foreign-exchange rate risk.
She thus invests in sovereign bonds issued by the Russian government. The bonds
are denominated in U.S. dollars.
By investing in the bonds, the analyst has most likely addressed:
A. her concerns.
B. none of her concerns.
C. only one of her concerns.
101. An investor just purchased a bond with a stated coupon rate of 6.5% paid
semiannually. Since the bond was purchased between coupon dates, the investor
had to pay the seller the amount of accrued interest also.
Holding everything else constant, if the investor paid the amount of reported
accrued interest to the seller, the paid amount would be:
A. correct.
B. slightly higher because the accrued interest does not account for time
value of money.
C. slightly lower because the reported accrued interest amounts are
conservative measures.
102. If a longer time to maturity leads to a lower modified duration for a bond, the
bond is most likely priced at a:
A. discount, and is zero coupon.

B. discount, and has a low coupon.
C. premium, and has a high coupon.

103. Which of the following investments are mostly based on a floating interest rate?
A. Sovereign bonds.
B. Supranational bonds.
C. Syndicated or bilateral loans.
104. A three-year German floating-rate note pays the three-month Euribor plus 1.55%.
The floater is priced at 97.65. The Euribor is currently at 3.5% and is assumed to
remain constant over the life of the floater.
If a 30/360 day count convention is used, the discount margin will be closest to:
A. 148 bps.
B. 155 bps.
C. 241 bps.
105. For a discount rate greater than zero, if the money market discount rate is used as
a proxy for an investor’s rate of return, the rate of return will most likely be:
A. overstated.
B. understated.
C. correctly stated.
106. Catherine Dingman, a portfolio manager, is analyzing the following investment

options for inclusion in a client’s portfolio.
Security 1: A T-bill with a maturity of 6-months.

Security 2: U.S. dollar commercial paper with a maturity of 160 days.
Security 3: A U.S. based municipal bond that matures in six months.
The yield will be highest for security:
A. 1.
B. 2.
C. 3.

107. V-Tex Monetary Fund is one of the best performing hedge funds in the U.S. The
fund has $350 million of assets under management and a ‘2 and 30’ fee structure.
Last year, the fund earned a return of 20% and the ending capital position was
established as a high water mark. This year, the fund value stood at $320 million
before the payment of any fees. Management fees and incentive fees are
calculated independently using end-of-period values.
The ending capital position at the end of this year will be closest to:
A. $287.4 million.
B. $302.1 million.
C. $313.6 million.
108. A hedge fund manager uses event driven strategies to generate positive return for
his fund. This strategy most likely involves:
A. top down analysis.

B. bottom up analysis.
C. fundamental analysis.
109. A commodity futures market is characterized by high storage costs and little
convenience yield. The prices in such a market are most likely:
A. in contango.
B. in backwardation.
C. unbiased predictors of future spot prices.
110. The three components of return for each commodity futures contract are: the roll
yield, the collateral yield and the change in spot prices of the underlying
commodity. The primary determinant of which of the following components is
the relationship between current supply and demand?
A. Roll yield.
B. Spot prices.
C. Collateral yield.

111. Which of the following alternative investments is most suitable for those investors
who seek liquidity
A. Private equity funds

B. Real Estate ownership
C. Exchange traded funds
112. Unique features of real estate property least likely include:
A. indivisibility.
B. homogeneity.
C. fixed location.

113. Investors are generally compensated for holding assets or portfolios based:
A. on that investment’s total risk.

B. only on that investment’s systematic risk.
C. only on that investment’s diversifiable risk.
114. A share with standard deviation of 46% is trading in a market where the expected
return on the market portfolio is 16% and its standard deviation is 28%. If the risk
free rate is 4.5% and the share is uncorrelated with the market, the expected return
of the share is closest to:
A. 4.50%
B. 11.50%
C. 13.64%
115. An investor desires to invest in a pooled investment product that would offer him
maximum flexibility with regards to portfolio construction.
Which of the following products would be most suitable for the investor?
A. A hybrid fund as it allows investment in both stocks and bonds.

B. An ETF, but its price may or may not equal the underlying net asset value.
C. A separately managed account, but it would require a high minimum
investment amount.
116. Which of the following about the efficient frontier and the global minimum-
variance portfolio is least accurate?
A. As risk increases, the efficient frontier offers increases in returns at a

decreasing rate.
B. An investor cannot hold a portfolio of assets that has less risk than the
global minimum-variance portfolio.
C. A portfolio towards the left of the efficient frontier would offer greater
return for the same or lesser risk but will be unattainable.

117. Anthony Mecca is an appraisal consultant that has been hired by an investment
management firm to assess the performance of three asset managers within the
firm.
Which of the following returns should Mecca focus on to compare the investment
skill of the asset managers?
A. Gross returns.
B. Net, after-tax returns.
C. After-tax, real returns.
118. Elaine Lopez has $70,000 that she plans to invest in a mutual fund. Lopez has
shortlisted two mutual funds and is currently evaluating their return prospects.
Exhibit 1 displays the data that Lopez gathered for this purpose. Lopez expects a
3% inflation rate for the coming future.
Exhibit
Gross Indirect Assets under
Tax Rate
Return Expenses management
Fund A 17% $600,000 $45,000,0000 25%
Fund B 22% $750,000 $30,000,000 20%
Lopez should choose:
A. fund A.
B. fund B.
C. either Fund A or Fund B.
119. If the return distribution of a stock index is negatively skewed, standard deviation
will most likely be:
A. overestimated, with the distribution concentrated to the left.

B. underestimated, with the distribution concentrated to the left.
C. overestimated, with the distribution concentrated to the right.

120. A portfolio manager is attempting to develop a risk-return tradeoff curve for one
of its largest private wealth clients. While developing the client’s investment
policy statement, the manager determines that he has above-average risk
tolerance. The client’s optimal asset allocation is thus, heavily skewed towards
equity investments.
The client’s risk-return tradeoff curve will most likely have a:
A. zero slope.
B. less than zero slope.
C. greater than zero slope.

FinQuiz.com
June, 2016
Revision 1



33-44 Economics 18
Total 180


1. Jackie Mills has just joined an equity management firm as a financial analyst. To
complete her first assignment, Mills utilizes comprehensive data sorting software
developed by an ex-employee of the firm. By the help of the software, Mills is
able to establish a relationship between stock market returns and the GDP growth
rate. Mills writes a report stating her conclusions without attributing the analyst
who developed the software.
With regards to writing the report, has Mills violated any CFA Institute Standards
A. No.
B. Yes, specifically Standard I(C)-‘Misrepresentation’.
C. Yes, Standard I(C)-‘Misrepresentation’ and Standard III(A)-‘Loyalty,
Prudence and Care’.
Correct Answer: A
Reference:
Mills has not violated any Standards. Models developed while employed by a
firm are the property of the firm. The firm may issue future reports without
providing attribution to the prior analysts.
2. Limelight Associates (LLA) is a well-established investment management firm in

San Jose, California. The firm manages both discretionary and non-discretionary
accounts as well as fee-paying and non-fee paying accounts. For buy
recommendations, stock purchases are first made for discretionary accounts and
then for non-discretionary accounts. The same holds for ‘sell’ recommendations.
According to Standard III(B)-Fair Dealing, LLA’s trade allocation procedures are

most likely:
A. ethical, as long as LLA discloses its trade allocation policies to its clients.
B. ethical, as long as LLA discloses its trade allocation policies to its clients
and prospects.
C. unethical, even if LLA discloses its trade allocation policies to its clients
and prospects.


Correct Answer: C
Reference:
LLA’s trade allocation policies are unfair so disclosure of the firm’s policies
would not change this fact and the policies would still be unethical.
3. Chris Harvey is planning to leave his current employer to work for a newly
established investment advisory firm. Harvey plans to take with him the computer
models he developed for stock selection, and has disclosed this fact to his
employer. The employer permits Harvey to keep the models after employment
ends.
If Harvey takes with him the computer models he developed, his actions would be
in:
A. compliance with the Standards.

B. violation of Standard IV(A)-‘Loyalty’.
C. violation of Standard IV-(A)’Loyalty’ and Standard I-(D)-‘Misconduct’.
Correct Answer: A
Reference:
Harvey can take the models with him since his employer has given him
permission to keep those models after employment ends.
4. While advising his client to move at least 10% of his portfolio from corporate
bonds to bank-sponsored certificates of deposit, a portfolio manager makes the
following comment:
“I guarantee that your principal value will not fall on these investments.”
The portfolio manager has most likely:

B. violated the Standards by misleading investors.
C. violated the Standards by misrepresenting information and guaranteeing
preservation of investment capital.


Correct Answer: A
Reference:
Certificates of deposit are insured by the government. Therefore, using the term
‘guaranteed’ in this context is not inappropriate as long as the amount is within
government-insured limit.
5. Ryan English, a portfolio manager, offers only a few of his clients review
meetings every month in addition to the regular annual review meetings. For the
rest of his clients, Ryan has review meetings annually unless circumstances state
otherwise.
Is English most likely in compliance with the CFA Institute Standards of

A. Yes.
B. No, because he does not treat his clients fairly.
C. No, because his meetings should be much more frequent.
Correct Answer: A
Reference:
English is providing additional services to a few clients. The clients have

probably paid higher fees to receive this service. As such, it does not appear that
English has violated any Standards.


6. ‘Standard III(E)-‘Preservation of Confidentiality’ states that if applicable law

requires members or candidates to maintain confidentiality, even if the
candidates should not disclose such information.’
The above statement is most likely:
A. Correct.
B. Incorrect, since the more strict law applies and members are obligated to
disclose illegal activities on part of clients.
C. Incorrect, since members should consult their compliance department and
disclose the information only if the compliance personnel say so.
Correct Answer: A
Reference:
Members and candidates must comply with applicable law. If applicable law
requires members and candidates to maintain confidentiality, even if the
candidates should not disclose such information.
7. With regards to proprietary trading procedures, the CFA Institute Standards of

Professional Conduct impose a trading prohibition that is:
A. more strict for market-making than risk-arbitrage trading.

B. more strict for risk-arbitrage trading than for market making.
C. equally stringent for market-making and risk-arbitrage trading.
Correct Answer: B
Reference:
The potential for illegal profits is greater in risk-arbitrage trading than in market
making. Hence, trading prohibitions are more stringent for risk-arbitrage trading.


8. If a designated officer discovers that violation of the Code and Standards occurred
by a member or candidate:
A. the designated officer can propose a disciplinary sanction that must be

accepted by the member or candidate.
B. the designated officer can propose a disciplinary sanction that may be
accepted or rejected by the member or candidate.
C. the matter must be referred to the hearing panel composed of disciplinary
review committee (DRC) members and CFA Institute member volunteers.
Correct Answer: B
Reference:
If a designated officer discovers that violation of the Code and Standards occurred
by a member or candidate, the designated officer proposes a disciplinary sanction,
which may be accepted or rejected by the member or candidate.
If the member or candidate does not accept the proposed sanction, the matter is
referred to a hearing panel composed of DRC members and CFA Institute
member volunteers affiliated with the DRC.
9. If a member or candidate has reason to believe that a colleague is engaging in

illegal activities, the best course of action as stipulated by the CFA Institute
Standards of Professional Conduct will be to:
A. leave the firm after disclosing to legal authorities about the illegal activity.
B. report the activity to legal authorities and discontinue any association with
the colleague.
C. inform the firm’s compliance department or appropriate legal counsel to
determine whether applicable laws require reporting the illegal activity.
Correct Answer: C
Reference:


The member or candidate should first inform the firm’s compliance department or
legal counsel to determine whether applicable laws require reporting the illegal
activity. Only in extreme cases, where the compliance personnel fail to take action
to resolve the issue, should the member report it to legal authorities or leave the
firm.
10. Ella Asset Managers (ELLAM) has just launched the ‘High-Yield Market Fund’ a
fund that targets high dividend paying domestic and international stocks. To
promote the fund and boost visibility amongst investors, ELLAM offers three of
its most prominent clients to commit at least $10,000 in the fund in exchange for
lower advisory fees. ELLAM previously determines that the fund is suitable for
each of the three clients.
Has ELLAM most likely violated Standard II-‘Integrity of Capital Markets’ of the
CFA Institute Standards of Professional Conduct?
A. No, as long as it fully discloses its agreement with the clients to boost
visibility.
B. Yes, since ELLAM is engaging in an illegal act and should be held
accountable for it.
C. Yes, since ELLAM is intentionally misleading investors and is thus
compromising the integrity of capital markets.
Correct Answer: A
Reference:
As long as ELLAM fully discloses its agreement with clients to boost visibility,
the firm will not be in violation of the Standards.
11. While preparing advertising material at a new firm, an analyst utilizes his past
investment record at a prior firm; to be in accordance he should most likely
disclose:
A. where the performance took place.

B. where the performance took place and his specific role in achieving that
performance.
C. the source of the historical performance, along with details of the prior
firm and the funds managed.


Correct Answer: B
Reference:
The Standards do not prohibit showing past performance of funds managed at a

prior firm as part of a performance track record as long as that record is
accompanied by appropriate disclosures about where the performance took place
and the person’s specific role in achieving that performance.
12. Vivid Optics (VIOP) is a U.S. firm that specializes in the productions of eye-sight
glasses and eye-care equipment. Even though the firm has been successful in the
past, it’s stock has not gained much popularity amongst investors. To increase
visibility in financial markets, VIOP hires Al Bailey, a research analyst, to write a
report analyzing their company. In return, VIOP promises to pay Bailey a fee that
is 10% greater than the fee paid for similar research work. Bailey conducts a
thorough, independent analysis and issues a ‘buy’ recommendation for the firm.
In preparing the report, to be in compliance with Standard I(B)-‘Independence

and Objectivity’ of the CFA Institute Standards of Professional Conduct, Bailey
should most likely:
A. refuse writing the report and accepting a higher fee since it contradicts
with best conduct.
B. write the report, but disclose the nature of compensation and potential
conflicts of interests to investors.
C. write the report, but not accept the higher fee and ask for a fee that is
comparable to similar research work.
Correct Answer: B
Reference:
The firm promises to pay a flat fee (which is greater than offered in the market),
and not a fee based on the conclusions of the report. Hence, as long as Bailey
fully discloses the nature of his compensation and all potential conflicts of interest
to investors, he is in accordance with the Standards.


13. Zenith Futures Exchange has launched a new futures contract and is trying to
promote it amongst traders and arbitrageurs. In order to boost liquidity of the
contract, the exchange enters into agreements with members to commit to a
substantial trading volume on the contract. While marketing the contract to
investors, the exchange fully discloses the liquidity enhancing strategy it used.
With respect to Standard II-B ‘Market Manipulation’ of the CFA Institute

Standards of Professional Conduct, Zenith Futures Exchange is most likely in:
A. compliance.
B. violation, because engaging in a pump-priming strategy is illegal.
C. violation, because disclosure does not absolve the exchange from its
unethical intent.
Correct Answer: A
Reference:
The exchange can engage in a liquidity-pumping strategy, but the strategy must be
disclosed.
14. One-Stop Products (OSP) is a large toy manufacturer with a number of retail
shops throughout USA. OSP has hired Cathy John as a portfolio manager for part
of its newly offered pension plan. The OSP pension fund is also partly invested in
an equity mutual fund.
Which of the following fund managers are bound by the duty of loyalty to OSP?
A. Cathy John only.

B. Both Cathy John and the mutual fund manager.
C. Neither Cathy John nor the mutual fund manager.
Correct Answer: A
Reference:


Cathy John provides advisory services to OSP so it is bound by the duty of loyalty
to OSP. The mutual fund manager, however, is not. He or she is obligated to
manage the fund in accordance with the fund’s objectives, and is not liable to
determine the suitability of the fund for each investing client.
15. Laura Culpitt is the compliance officer at her investment firm. Culpitt just found
out that a portfolio manager at the firm was engaging in inequitable trading
practices, giving preference to his personal portfolio over client accounts.
Immediately after identifying the malpractice, Culpitt talks to the manager who
assures her that the wrongdoing would not recur.
To fulfill her duty as a supervisor, according to best practice, Culpitt:
A. has performed her duty as a supervisor.

B. should report the misconduct up the chain of command and warn the
employee to cease the unfair practice.
C. should place limits on the employee’s activities and/or increase
monitoring of the employee’s activities.
Correct Answer: C
Reference:
The supervisor should take steps to ensure that the violation will not be repeated.
Placing limits on the employee’s activities or increasing the monitoring of the
employee’s activities would represent such steps.
16. An investment firm is taking steps to comply with the GIPS standards to be at par
with global competition. The firm, however, operates in a country that has
existing laws and industry standards that impose requirements related to the
calculation and presentation of investment performance.
The firm should most likely comply with:
A. GIPS Standards only.

B. local laws and standards only.
C. GIPS Standards in addition to applicable regulatory requirements.
Correct Answer: C


Reference:
Where existing laws and industry standards already impose requirements related to
the calculations and presentation of investment performance, firms are strongly
encourages to comply with the GIPS standards in addition to applicable regulatory
requirements.
17. Kelly Jesper is the portfolio manager for a large endowment fund. Since the fund
is invested in international stocks and bonds, Jesper plans to hire a currency
manager as a sub-advisor. To select the appropriate sub-advisor, Jesper went
through the fee structure of a number of eligible firms and selected the firm with
the lowest fees for the job.
Jesper’s selection process has most likely:
A. violated the Standards.

B. not violated the Standards because Jesper is in a position to deem what is
the appropriate eligibility criteria.
C. not violated the Standards because Jesper’s selection will have the least
impact on the firm’s cost structure.
Correct Answer: A
Reference:
When selecting a subadviser, Jesper needs to ensure that the new manager’s
services are appropriate for her clients. In basing the decision on the fee structure
alone, Jesper has violated Standard III(C)-‘Suitability’.


18. Walter & Associates (W&A) is a GIPS compliant firm that makes compliant
presentations to all prospective clients. On January 1, 2012, the firm provided a
compliant presentation to all prospects. Six months later, it provided another
compliant presentation to only few selected clients.
W&A’s actions have most likely:
A. ensured compliance with the GIPS standards.

B. not met the requirements of the GIPS standards.
C. violated the standards as a consequence of being selective in their
disclosure policy.
Correct Answer: A
Reference:
As long as a prospective client has received a compliant presentation within the

previous 12 months, the firm has met the requirement set forth by the GIPS
standards.


19. Betty Williams is constructing an appropriate asset allocation for a client with a
$500,000 portfolio. The client has stipulated the need to withdraw $50,000 from
the portfolio in six months’ time to meet medical expenses. The overall time
horizon for the portfolio is more than 20 years. The client does not want her
capital to depreciate in any way. The table below shows the allocations that
Williams is considering. The risk-free rate is 7.5%.
Allocation A B C
Expected annual return 27 17 14
Standard deviation 30 19 8
The allocation that would be most appropriate for William’s client is:
A. Allocation A.
B. Allocation B.
C. Allocation C.
Correct Answer: A
Reference:
The allocation that has the highest SFR would be most appropriate (since the client
wants to meet a cash flow need). The threshold return equals 50,000/500,000 =
0.10
A: 27-10/30 =0.567
B: 17-10/19 = 0.3684
C: 14-10/8 = 0.500
Hence, allocation A is most appropriate.


20. John Hedges has invested a part of his portfolio in a well-diversified mutual fund
consisting of U.S. stocks only. Even though the fund’s return was 3.5% for the
most recent month, the mean monthly return equaled 1.5% with a standard
deviation of 4.5% for a total of 260 observations. Hedges is utilizing this
information to understand the investment’s risk characteristics.
Using the Chebyshev’s inequality, the return interval in which at least 195
observations will lie is closest to:
A. -3.0% to 6.0%.
B. -7.5% to 10.5%.
C. -12.0% to 15.0%.
Correct Answer: B
Reference:
With a total of 260 observations, 195 observations equal 75% of the total. 75% of
the observations lie within two standard deviations of the mean. The interval in
which 75% of the observations lie will equal:
1.5-2(4.5) to 1.5+2(4.5)
-7.5% to 10.5%
21. Which of the following sampling biases would most likely result in an
underestimated standard deviation of returns?
A. Look-ahead bias.
B. Data mining bias.
C. Survivorship bias.
Correct Answer: C
Reference:
Since only the best performing funds are included in survivorship bias (the poorly
performing ones are dropped out), returns will be overstated and risk would be
understated.


22. Flags and pennants are least likely considered to be:
A. minor continuation patterns.

B. similar to each other and have same uses.
C. bullish indicators and are formed in an uptrend.
Correct Answer: C
Reference:
Both options A and B correctly represent the characteristics of flags and pennants.
They are considered minor continuation patterns because they are formed over
short periods of time i.e. on a daily price chart, typically over a week. They are
similar to each other and have same uses. However option C do not represent the
properties of flags and pennants.
23. Red-Dot Enterprises (RDE) is choosing between the two projects that have cash
flows displayed in the following exhibit.
Project CFO($) CF1($) CF2($) CF3($)

A -50,000 65,000 0 0
B -50,000 0 0 78,000
The IRR of Project A is 45% whereas the IRR of Project B is 23%. However,
using the NPV criterion, Project B ranks higher than Project A using a discount
rate.
Compared to crossover rate, the discount rate used for NPV analysis is:
A. lower.
B. equal.
C. higher.
Correct Answer: A
Reference:


Since the NPV of the project with the higher more distant cash inflow is larger
than the NPV of the other project, the discount rate used is likely to be low. At
lower rates, the NPV of Project B is likely to be higher than Project A.
24. Irene Elinor, a research analyst, is using the safety-first ratio to assess several
asset allocations for her personal portfolio. Given her threshold return of 6%,
Elinor has selected a portfolio with an expected annual return of 15% and
standard deviation of 19%. Elinor assumed a normal distribution of returns for her
portfolio. She used the following table to assist her selection process.
x or z 0.05 0.06 0.07

0.3 0.6368 0.6406 0.6443
0.4 0.6736 0.6772 0.6808
0.5 0.7088 0.7123 0.7157
The probability that Elinor’s selected portfolio will return less than the shortfall
level is closest to:
A. 31.92%.
B. 47.37%.
C. 68.08%.
Correct Answer: A
Reference:
SFR: 15-6/19= 0.4737

Using the standard normal cdf, N(0.47) = 0.6808, 1-0.6808 = 0.3192 or 31.92%
25. An analyst is interested in three independent events R,V and T with probabilities
of 0.21, 0.34 and 0.45 respectively. The probability that all three will occur is
closest to:
A. 0.03.
B. 0.32.
C. 1.00.
Correct Answer: A


Reference:
When three events are independent, the joint probability of three events equals the
product of the individual probabilities i.e.
P(RVT) = P(R) x P(V) x P(T) = 0.21 x 0.34 x 0.45 = 0.0321
26. A T-bill has a face value of $1 million and 180 days until maturity. The security is
selling for $970,000. The yield on a bank discount basis is closest to:
A. 1.94%.
B. 6.00%.
C. 6.18%.
Correct Answer: B
Reference:
r = 30,000/1,000,000 (360/180) = 6.0%
27. Which of the following statements is least accurate regarding measures of central
tendency and measures of location?
A. Measures of location include not only measures of central tendency but

also illustrate the distribution of the data.
B. Measures of location illustrate the distribution and location of the data but
fail to specify where the data are centered.
C. Measures of central tendency specify where the data are centered but
illustrate nothing about the distribution of the data.
Correct Answer: B
Reference:


• Measures of central tendency specify where the data are centered.

• Measures of location include not only measures of central tendency but
also illustrate the distribution and location of the data.
28. If a return distribution has small but frequent gains and only a few extreme losses,
which of the following measures for the distribution will most likely be the
highest?
A. Mean.
B. Mode.
C. Median
Correct Answer: B
Reference:
The question describes a negatively skewed distribution. For such a distribution,

the mode is the highest.
29. “Continuously compounded returns need to be normally distributed for asset

prices to be log-normally distributed.”
Which of the following would most likely refute the above condition?
A. Law of probabilities.
B. Central limit theorem.
C. Lognormal distribution theorem.
Correct Answer: B
Reference:
The central limit theorem states that continuously compounded returns need not be
normally distributed for asset prices to be reasonably well described by a
lognormal distribution.


30. Harold Burst, a portfolio manager, is evaluating international investments for

diversification purposes. Burst has compiled 15-years data regarding the returns
to a broad-based Russian equity index. To analyze the data gathered, Burst
proceeds with estimating the data’s mean. Even though he knows that the mean
may carry important information, he realizes that it may be skewed upward or
downward by extremely large or small observations. Burst is not sure how to
rectify this problem.
Which of the following, if used, will least likely address Burst’s concern?
A. Trimmed mean.
B. Winsorized mean.
C. Standardized mean.
Correct Answer: C
Reference:
Both the trimmed mean and the Winsorized mean are approaches to handle
extreme values. Standardized mean does not address Burst’s concern.
31. Eric Bates is performing a trend analysis of the market prices of U.S. commodity
stocks. Bates is a strong proponent of the normal distribution, and believes that
most data can be described by it. He is thus using the distribution to help him with
his analysis.
Bates approach to perform the trend analysis is most likely:
A. appropriate.
B. inappropriate, because the lognormal distribution is more suitable.
C. inappropriate, because a distribution skewed to the left is more suitable.
Correct Answer: B
Reference:
Asset prices can never be negative, so a lognormal distribution, that is bound by

zero on the left, will be more suitable.


32. Student’s t-distribution is most likely used when the population variance is:
A. known for small and large sample sizes.

B. not known for small and large sample sizes.
C. known for large sample sizes but not known for small sample sizes.
Correct Answer: B
Reference:
Student’s t-distribution is used when the population variance is not known for both
small and large sample sizes.


33. A dealer provides the following quotes:
Spot Rate Expected Spot Rate in one year

USD/EUR 1.3455 1.3987
Based on the data, over the next year against the U.S. dollar, the euro is expected
to:
A. appreciate by 1.04%.
B. depreciate by 3.80%.
C. appreciate by 3.95%.
Correct Answer: C
Reference:
Euro is the base currency in the above quote provided by the dealer (USD/EUR)
and an increase in the expected spot rate indicates that euro is appreciating.
Mathematically:
𝑈𝑆𝐷 1.3987
= − 1 = 3.95%
𝐸𝑈𝑅 1.3455
34. The breakeven sales quantity that would allow an investor to earn a return
commensurate with the risk of the firm’s equity capital is the quantity:
A. corresponding to the point of intersection of the marginal cost curve and

the ATC curve.
B. that is a little greater than the quantity corresponding to the starting point
of the firm’s long-run supply curve.
C. that equals the sum of the normal profit and the quantity corresponding to
the point of intersection of the MC and ATC curve.
Correct Answer: A
Reference:


The quantity corresponding to the point of intersection of the MC and ATC curve
includes the normal profit (profit required by investors on their equity capital
regardless of the level of output).
35. Which of the following factors will least likely cause a shift in an economy’s
aggregate demand?
A. A change in price.
B. A change in household wealth.
C. A change in business expectations.
Correct Answer: A
Reference:
A change in price will cause movement along the demand curve.
36. Assuming perfect competition, if price increases, a firm’s demand curve will most
likely shift:
A. upward, and the total revenue curve would shift leftward from the origin.
B. leftward, and the total revenue curve would shift leftward from the origin.
C. downward, and the total revenue curve would shift rightward from the
origin.
Correct Answer: A
Reference:
Demand will increase, so the demand curve will shift upward (parallel to the
previous curve) and the TR curve will move leftward.


37. Rocket Communications (ROCOM) is a newly established firm in the U.S.

electronics and communications industry. At the current price level for its
product, the firm makes only normal profit. The CEO of ROCOM believes that by
realizing economies of scale the firm can generate economic profit by moving
towards the minimum cost point in the long-run.
Assuming that the U.S. communications and electronics industry is characterized

by perfect competition, in the short-run the firm can:
A. not generate economic profit and neither can it in the long-run.

B. generate economic profit if price is greater than average total cost, but in
the long-run no economic profit is possible since price equals average total
cost.
C. not generate economic profit because price equals average total cost, but
in the long-run the firm can generate economic profit in the amount of
‘price less average total cost’ by moving to the lowest cost point.
Correct Answer: B
Reference:
In the short-run, by moving towards the lowest cost point, the firm can generate
economic profit. However, economic profit with no barriers to entry under perfect
competition leads to more competitors, a greater market supply, and, subsequently,
a lower price in the long-run. As price declines to the long-run equilibrium level,
economic profits disappear (it is zero under perfect competition).
38. Profit maximization for a firm most likely occurs when:
A. TR equals TC.
B. MR equals MC.
C. TR is greater than TC.
Correct Answer: B
Reference:


Profit maximization occurs when marginal revenue equals marginal cost and when
the difference between TR and TC is the greatest.
39. If an economy has experienced a decline in its aggregate supply, which of the
following investments would be most appropriate for an investor?
A. Equity.
B. Fixed-income.
C. Commodities.
Correct Answer: C
Reference:
If AS declines, interest rates rise and output declines, so fixed income and equity
investments would not be attractive. Commodity based investments are appropriate
because their profits and prices are likely to rise.
40. A company operating in an industry defined by imperfect competition increases

the quantity of its product sold by 50,000 units. The company still operates at only
30% of full capacity.
Which of the following best describes the changes in the company’s revenues?
A. Total revenue will increase, marginal revenue will increase but average
revenue will decrease.
B. Total revenue will increase, marginal revenue will decrease but average
revenue will increase.
C. The rate of increase in total revenue will decrease, and marginal revenue
and average revenue both will decrease.
Correct Answer: C
Reference:
The rate of increase in total revenue decreases as quantity increases. Average

revenue and marginal revenue decrease when output increases.


41. Cross elasticity of demand is negative for goods that are:
A. substitutes.
B. complements.
C. normal goods.
Correct Answer: B
Reference:
Cross elasticity of demand is positive for goods that are substitutes and is negative
for goods that are compliments.
42. A firm’s long-run supply curve equals the firm’s marginal:
A. cost curve that lies above the minimum point on the average total cost
curve.
B. cost curve that lies above the minimum point on the average variable cost
curve.
C. revenue curve that lies above the minimum point on the average total cost
curve.
Correct Answer: A
Reference:
In the long run, the firm needs to cover both fixed and variable costs. Hence, the
long-run supply curve lies above the minimum point on the average total cost
curve.


43. Isabel Riley has just started her own business of providing career counseling to
young and aspiring students of finance and accounting. Riley provides this service
in her own home so that she doesn’t have to pay any rent or additional utility bills.
No other apparent fixed costs apply. The opportunity cost of providing services in
terms of forgone hours at her current job varies with the amount of students Riley
gets per week.
Given the above information, if TR is greater than TVC, Riley should most likely:
A. continue running the business as it is profitable.

B. shut down in the short run and exit market in the long run.
C. continue running the business in the short run but only continue in the
long-run if TR is greater than TC.
Correct Answer: A
Reference:
Since fixed costs are negligible, the only costs that Riley faces are variable (i.e.
the opportunity cost). Hence, if total revenue is greater than total variable costs,
the business is profitable, both in the long-run and the short-run, and Riley should
continue running the business.
44. If the expansion of an economy is largely supply driven, which of the following
best represents the level of interest rates and inflation in the economy?
A. Low inflation and low interest rates.

B. Low inflation but high interest rates.
C. High inflation and high interest rates.
Correct Answer: A
Reference:
Supply driven expansions are associated with lower inflation and low interest
rates.


45. An analyst has been assigned the task of analyzing the following comparative
data.
Industry
Average
Inventory
7.0 6.5 7.5 7.0
turnover
Growth rate 6.0% 12.0% 8.5% 9.0%
Inventory
$30,000 $7,000 $2,000 -
write-downs
Which of the above firms most likely has the most effective inventory
management system in place?
A. Firm A.
B. Firm B.
C. Firm C.
Correct Answer: B
Reference:
A high inventory turnover with slower growth could indicate inadequate

inventory levels. Firm B has a closer to average inventory turnover ratio but a
much higher growth rate. Hence, the turnover probably reflects greater efficiency
in managing inventory.


46. Matt Lyman is a research analyst reviewing the financial performance of Fresh
Beverages (FREBE), a medium-sized firm famous for its pulpy juices. Lyman has
accumulated the following data about FREBE for the fiscal year ended 31 May,
2010:
• Income from continuing operations is $14.5 million.

• Depreciation equals $6 million and amortization is $3 million.
• The increase in accounts receivable from last year is $2.5 million.
• During the year inventories did not change whereas accounts payable
• Over the last year, accrued liabilities have decreased by $4.5 million.
Given the information above, FREBE’s cash flow from operations for the year
ended 31 May, 2010 is closest to:
A. $19.5 million.
B. $27.5 million.
C. $28.5 million.
Correct Answer: A
Reference:
CFO = $14.5+6+3-2.5+3.0-4.5 = $19.5 million.
47. Olson White is an equity analyst keenly following the pharmaceutical industry.
White suspects that Medi-Care Pharmaceutical’s financial position has
deteriorated over the last few years. The firm’s quick ratio decreased from 6.7 to
4.3 in the current year. Current liabilities and daily cash expenditures in the
current year equaled $107,000 and $40,000 respectively. White is concerned
about the firm’s liquidity position.
Medi-Care Pharmaceuticals’ defensive interval ratio for the current year is closest
to:
A. 6.42.
B. 11.50.
C. 17.92.


Correct Answer: B
Reference:
4.3 = Cash + Short-term Marketable Investments + Receivables/107,000

Therefore, Cash + ST investment+ Receivables = $460,100
Hence, defensive interval ratio: 460,100/40,000 = 11.50
48. Sturdy Auto Parts Manufacturer is testing a prototype electronic auto part that
would help improve the navigation systems in cars. The part is feasible to produce
and would keep the firm competitive with technological advance in the market.
The following exhibit displays information about the expenses of the research
division with regards to the project.
Exhibit:
Expenses related to Auto Part Project (‘000 of US$)
Material and services 950
Direct Labor 550
Start-up costs 400
Administrative personnel 250
Direct overhead 375
Indirect overhead 100
Under IFRS, the amount of costs of the project that would be capitalized will be
closest to:
A. $1,975,000.
B. $2,225,000.
C. $2,625,000.
Correct Answer: A
Reference:


950+550+375+100 = $1,975,000
Start-up costs and admin costs are expensed.
49. Holding everything else constant, if a firm switches from the LIFO method of
accounting to FIFO, in a period of rising prices, the firm’s current ratio will most
likely:
A. increase.
B. decrease.
Correct Answer: A
Reference:
If a firm switches from LIFO to FIFO, in a period of rising prices, inventory will
increase (inventory will have more expensive recently purchased items). Hence,
the current ratio (CA/CL) will rise.
50. The chief executive officer of a manufacturing concern just had a meeting with
the firm’s financial department. After the meeting, the members of the financial
committee decided to increase the estimated useful life of a piece of equipment
from 5 years to 7 years. In addition, given future market conditions, the
committee also revised the salvage value estimate downward by 20%.
Holding everything else constant, with regards to the changes made only, net
income in the future will most likely:
A. increase.
B. decrease.
C. may increase or decrease.
Correct Answer: C
Reference:


An increase in the estimated useful life will decrease depreciation expense.

However, a decrease in the salvage value will increase depreciation expense.
Hence, net income may rise or fall (depreciation expense is subtracted from net
income).
51. If the value of the net identifiable assets of a target company is greater than the
cost to purchase that company, the excess will most likely:
A. not be depreciated but checked annually for impairment.

B. be expensed immediately in the profit and loss statement.
C. be amortized and reported in the profit and loss statement over a specified
time period.
Correct Answer: B
Reference:
This defines a bargain purchase; the gain will be expensed immediately in the
profit and loss statement (in the period in which it arises).
A. required to expense costs associated with internally created intangible

assets.
B. required to capitalize costs associated with internally created intangible
assets.
C. allowed to capitalize or expense costs associated with internally created
intangible assets.
Correct Answer: A
Reference:
Under U.S. GAAP companies are not allowed to capitalize costs associated with
internally created intangible assets. All such costs must be expensed in the income
statement.


53. Which of the following will most likely increase net income relative to operating
cash flow?
A. Depreciation.
B. Gain on sale of an asset.
C. Amortization of a bond premium.
Correct Answer: B
Reference:
Gain on sale increases net income but has no effect on cash flow. Depreciation
would decrease net income and increase CFO. Amortization of a bond premium is
added back to CFO, hence it increases cash flow.
54. Pinnacle Products Incorporated (PIPR) wrote down the value of its inventory in
2010 and reversed the write-down in 2011.
Under IFRS, compared to the ratios that would have been calculated if no write-
down had occurred, which of the following PIPR’s reported 2011 values would be
the same?
A. Current ratio.
B. Operating profit margin.
C. Cash/Cost of sales ratio.
Correct Answer: A
Reference:
Since the write-down was reversed, there would be no affect on current assets (the
effect will cancel out). Hence, the current ratio will be the same.


55. A company just purchased machinery worth $55,000 in order to reduce labor
costs and increase efficiency. The machinery has a useful life of 5 years and a
salvage value of zero. The company plans to depreciate the machinery’s value
using the accelerated depreciation method.
Holding everything else constant, if the company had used the straight-line
depreciation method, the firm’s net income would have been:
A. lower in the early years.

B. higher in the early years.
C. either higher or lower in the early years.
Correct Answer: B
Reference:
If the firm had used the straight-line method, depreciation expense would be
lower in early years. This means that net income would be higher.
56. A firm invested $10 million in a 7% semiannual pay coupon bond a year ago.
Since then, interest rates have declined such that the value of the investment has
Ignoring all other effects, at the end of year 1, the lowest value for reported assets
would be if the bond is reported as a:
A. held-for-trading asset.
B. held-to-maturity asset.
C. available-for-sale asset.
Correct Answer: B
Reference:
If a security is reported as held-to-maturity, the increase in the value of the

investment will not be reported until the security is sold. Hence, reported assets
would be lower in such a case.


57. White Rock Enterprises (WREN) reported income tax expense of $6.5 million
over the past year. During the same year, taxes payable and deferred tax assets
increased by $2 million and $0.85 million respectively. WREN reports no
deferred tax liabilities.
Over the recent year, the cash paid by WREN for income taxes is closest to:
A. $4.5 million.
B. $5.35 million.
C. $7.65 million.
Correct Answer: B
Reference:
Cash paid for income taxes: 6.5+0.85-2 = $5.35 million.
58. Chucky Cheese (CHCH) is a restaurant chain in Ohio that prepares its financial
statements in accordance with U.S. GAAP. Just recently, the firm borrowed
$2,000,000 to construct a facility with a useful life of 35-years. The loan has an
interest rate of 15% payable annually and has a maturity of 3 years. CHCH
invested the loan proceeds to earn $50,000 during the three year loan period.
If CHCH had prepared its financial statement in accordance with IFRS, the
firm’s:
A. future depreciation expense would be lower.

B. cash flow from operating activities would be higher.
C. property, plant and equipment would be $50,000 higher.
Correct Answer: A
Reference:
Under IFRS, the capitalized amount can be lowered by the amount of interest
earned on temporarily investing the borrowed monies. Hence, PP&E would be
lower (cap. amount would be lower) under IFRS. Consequently, depreciation
expense would also be lower, so option B is correct.


59. If the days of sales outstanding of a firm decreases and the proceeds from the
collections are used to purchase inventory, which of the following ratios will
decline?
A. Quick ratio.
B. Current ratio.
C. Receivables turnover.
Correct Answer: A
Reference:
The current ratio will remain unchanged, but the quick ratio will decline.
60. An equipment costs $17,000 with a useful life of five years and estimated residual
value of $2,000. The equipment is to be depreciated using the double declining
balance method.
The net book value of the equipment at the beginning of the third year would be
closest to:
A. $3,672.
B. $6,120.
C. $8,704.
Correct Answer: B
Reference:
Under the straight-line method: 17,000-2,000/5 = $3,000 or 20%

Under the double declining balance method: 2 (20%) = 40%
End of year 1: NBV: 17,000 – 40%(17,000) = $10,200
End of year 2: NBV: 17,000 – (4,080+6,800) = $6,120---(10,200*40% = 4,080)
Hence, at the beg of the third year, NBV = $6,120.


61. Silver Rock Cafe (SRC) is a famous coffee shop and dessert specialist operating
in New York, USA. Just recently, SRC reported a gain on the sale of cooking
equipment of $10 million, depreciation expense of $6.5 million and capital
expenditures of $18 million. The exhibit displays additional information about the
firm’s balance sheet accounts.
December 31
December 31 2011
2010
Equipment $80 million $91 million
Accumulated
$25 million $30 million
depreciation –equipment
Using the information above, the cash that SRC received from the sale of the
cooking equipment is closest to:
A. $12.0 million.
B. $15.5 million.
C. $17.0 million.
Correct Answer: B
Reference:
Historical cost of equipment sold: 80+18-91 = $7 million

Accumulated dep. on equipment sold: 25+6.5-30 = $1.5 million
Hence, book value: 7-1.5 = $5.5 million.
Because gain on sale is $10 million cash received must be $15.5 million.
62. Which of the following least accurately describes the effects on a firm’s return on
assets for an increase in market value of fixed income security?
If the investment is classified as:
A. held-for-trading, return on assets would be higher than if it classified as

available for sale.
B. available for sale, return on assets will be higher than if it is classified as
held to maturity.
C. held for trading, return on assets would be higher than if it is classified as
held to maturity.


Correct Answer: B
Reference:
The effects on a firm’s return on assets for an increase in market value of fixed
income security will be:
• higher if the security is classified as held for trading than if it is classified
as held to maturity.
• higher if the security is classified as held to maturity than if it is classified
as available for sale.
63. Which of the following assets should least likely be amortized?
A. A tangible asset with an indefinite life.

B. An intangible asset with an indefinite life.
C. An unidentifiable asset with a definite life.
Correct Answer: B
Reference:
An intangible asset with an indefinite life is not amortized. Instead, it is test for
impairment at least annually.
64. Brick Enterprises reported cost of goods sold of $85,000 and net income of
$35,000 in the most recent year. During that year, inventory increased by $12,000
and accounts payable decreased by $10,000.
Over the recent year, cash paid to suppliers was closest to:
A. $83,000.
B. $87,000.
C. $107,000.
Correct Answer: A


Reference:
Cash paid to suppliers: 85,000+12,000+10,000 = $107,000
65. An analyst is evaluating the liquidity of three large utility firms and has gathered
the following comparative data to assist him with his analysis.

Days of
inventory on 8 10 25
hand
Days of sales
55 65 77
outstanding
Payables
9 3 5
turnover
*All figures are annual using a 365-day year.
With respect to the cash conversion cycle, which of the following firms has the
greatest liquidity?
A. Firm A.
B. Firm B.
C. Firm C.
Correct Answer: B
Reference:
Number of days of payables:

Firm A: 365/9 = 40.55
Firm B: 365/3 =121.67
Firm C: 365/5 = 73
Cash conversion cycle:

Firm A: 8+55-40.55 = 54
Firm B: 10+65-121.67 = -46.67
Firm C: 25+77 – 73 = 29
With its negative cash conversion cycle, Firm B is most liquid.


66. An equity analyst, is estimating the EPS of a firm. The firm has an average of
700,000 shares of common stock outstanding and 30,000 shares of convertible
preferred. Each preferred share is convertible into two shares of the company’s
common stock. Just recently, it has increased preferred dividends from $15/share
to $35/share.
If net income equals $1,600,000, the values of firm’s diluted EPS before and after
the increase in dividends, are closest to:

Correct Answer: A
Reference:
Before increase: 1,600,000/(700,000+60,000) = $2.105 which is greater than the

!,!"",!!!!!"#,!!!
basic EPS of $1.64 (Basic EPS = !"",!!!
) so reported diluted EPS will be
#1.64.
!,!"",!!!!!,!"!,!!!
Similarly for after increase: Basic EPS : $0.785 = !"",!!!
.
67. Considering each in isolation, a decrease in which of the following would least
likely result in a higher return on equity?
A. Tax burden.
B. Average total assets.
C. EBIT relative to EBT.
Correct Answer: A
Reference:
An increase in the tax burden ratio (implying lower taxes) will result in an
increase in ROE.


68. A portfolio manager is analyzing the information provided in the exhibit below.
Exhibit:
Key Financial Information (in thousands of US dollars)
Year ended June 1, 2011
Bank loan 150
Long-term bank debt 750
Other financial liabilities 200
Trade payables 650
Deferred tax assets 475
Total equity 9,500
Using the above information, the debt to equity ratio is closest to:
A. 11.58%.
B. 16.58%.
C. 21.95%.
Correct Answer: A
Reference:
Debt/Equity: 150+750+200/9,500 = 11.58%


69. Which of the following industry least likely has higher operating leverage?
A. A large retail store

B. A pharmaceutical firm
C. A software development firm
Correct Answer: A
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 37.
Industries that invest upfront to produce a product but spend little on making and
distributing it tend to have high operating leverage e.g. software developers and
pharmaceutical companies. In contrast retailers have low operating leverage.
70. An analyst presented the following criteria for accepting or rejecting a capital
budgeting project using the profitability index.
Criterion 1: “If the value of the index is greater than 1, then accept the project.”
Criterion 2: “If the cumulative discounted cash flow is greater than the initial
investment, then accept the project.”
A. Criterion 1.
B. Criterion 2.
C. Criteria 1 and 2.
Correct Answer: C
Reference:
If PI is greater than 1, the project is profitable. Also, if the PV of future cash flows
(cumulative discounted cash flow) is greater than the initial investment, PI will be
greater than 1, and the project will be profitable.


71. A corporate analyst is assessing an investment project with an initial investment

of $900,000 that is depreciable straight line over a period of three years to a zero
salvage value. Exhibit 1 displays cash flow information for the project.
Exhibit:
Cash Flow Information
Year 1 Year 2 Year 3
Sales $900,000 $950,000 $1,050,000
Cash expenses $250,000 $300,000 $185,000
*Tax rate equals 35%
The average accounting rate of return for the project is closest to:
A. 33.01%.
B. 46.11%.
C. 60.91%.
Correct Answer: C
Reference:
Depreciation: 900,000-0/3 = 300,000

Year 1 net income: (900,000-250,000-300,000)(1-0.35) = $227,500
Year 2 net income: (950,000-300,000-300,000)(1-0.35) = $227,500
Year 3 net income: (1,050,000-185,000-300,000)(1-0.35) = $367,250
Average net income: $274,083
Average book value: 900,000/2 = $450,000
AAR: 274,083/450,000 = 60.91%.
72. If a company engages in share repurchases, leverage will increase:
A. only if the repurchase is financed with debt.

B. only if the repurchase is financed with excess cash.
C. whether the repurchase is financed with debt or with excess cash.
Correct Answer: C
Reference:


Both assets and shareholders’ equity decline if the repurchase is financed with
cash. As a result, leverage increases. Leverage will increase even more if the
repurchase is financed with debt.
73. “The payback period has a number of drawbacks and is hence, not economically
sound to use for capital budgeting. The discounted payback period, however,
addresses some of its limitations. It is, therefore, closest to the NPV criterion
despite its limitations.”
The statement is most likely:
A. Correct.
B. Incorrect, because it is not closest to the NPV criterion.
C. Incorrect, because it has similar limitations to the payback period.
Correct Answer: B
Reference:
The statement is incorrect because the Profitability index is closest to the NPV
criterion. The discounted payback period does not consider all of the project’s
cash flows and is hence, not suitable for capital budgeting decisions (in isolation).
74. Alex Paul is considering the NPV profile of two projects of differing scales. The
required return corresponds to the crossover point of the profile. The IRR of
Project A is 7 percentage points lower than the IRR of project B.
Which of the following best represents the appropriate investment decision?
A. Invest in Project A.
B. Invest in Project B.
C. Invest either in Project A or Project B.
Correct Answer: C
Reference:


Since the required return corresponds to the crossover point of the NPV profile—
the point where both projects would have equal NPVs—investing in either project
is appropriate since their NPVs are equal at the required rate of return.
75. Zephyr Products Incorporated (ZPI) plans to invest in large warehouse facility to
increase storage capacity. ZPI has 150 million shares outstanding with a current
market price of $85.00/share. As soon as ZPI announces its plan to invest in the
project, the share price rises to $86.70/share. No other expectations about the
company’s future performance changed.
The NPV of the project is closest to:
A. $170 million.
B. $255 million.
C. $260 million.
Correct Answer: B
Reference:
The rise in price is most likely due to the announcement of the project. Hence, the
NPV of the project:
Value Before announcement: 85(150 million) = $12,750 million

Value After announcement: 86.70(150) = $13,005 million
So NPV: 13,005-12,750 = $255 million.


76. An analyst is assessing the capital structure of an automobile company. Exhibit 1

displays key information about the company’s vitals.
Exhibit:
Five year average preferred dividend $4.50/share
Current preferred dividend $5.50/share
Current stock price $60/share
Stock beta 1.45
Risk-free rate 4.0%
Tax rate 40%
Debt/equity 0%
% of preferred stock in the capital structure 25%
The company’s WACC is closest to:
A. 11.99%.
B. 12.49%.
C. 12.90%.
Correct Answer: C
Reference:
75% is common equity and 25% is preferred equity (no debt)

Return on common equity: 4.0+1.45(7) = 14.15%
Cost of preferred equity: 5.50/60 = 9.167% (current preferred dividend will be
used to reflect current costs; no tax adjustment will be made).
WACC: 0.25(9.167) + 0.75(14.15) = 12.904%


Questions 77 through 88 relate to Equity Investment
77. An industry tends to be more competitive when the industry:
A. is not fragmented.
B. has high fixed costs.
C. sells differentiated products.
Correct Answer: B
Reference:
An industry tends to be more competitive when the industry:
• is fragmented.
• has high fixed costs.
• sells undifferentiated products.
• has high exit barriers.
78. Walter Dan bought 1,000 shares of Red Corporation (RECO) last year when the
purchase price was $150/share. Dan’s equity financed only 40% of the purchase
price. Just recently, Dan found out that RECO’s stock’s price had fallen to
$120/share. The stock paid not dividends during the year.
Ignoring all other cash flows, if Dan had financed 0% of the purchase price, his
loss on the investment would have been:
A. 13.33% lower.
B. 30.00% lower.
C. 45.62% lower.
Correct Answer: B
Reference:
Price Change is 120-150/150 = -20%

Ignoring all other cash flows, with leverage the realized loss is : 2.5 (20) = 50%
(with 40% equity, leverage ratio equals 2.5). So the loss is 30% greater.


79. Lyon works for a firm that trades in several derivative contracts including swaps,
futures and forwards. Lyon’s research indicates that the rate on credit default
swaps covering the bonds issued by Bright Enterprises (BEN) is significantly
lower than warranted. He therefore plans to buy a CDS covering BEN’s bonds.
With respect to his trading motive, Lyon is most likely a(an):
A. hedger.
B. investor.
C. information-motivated trader.
Correct Answer: C
Reference:
Lyons is an informed trader who believes that the credit default swaps written on
BEN’s bonds have swap prices that are low. If he is correct, he would profit
because the payoff to the swap would be more than the cost of buying and
maintaining the swap position.
80. If the central bank wants to decrease the money supply to curb inflationary
pressures it would most likely:
A. sell bills, notes and bonds to primary dealers.

B. buy notes, bills and bonds from dealers and brokers.
C. sell bills, notes and bonds to primary dealers and brokers.
Correct Answer: A
Reference:
Primary dealers are dealers with whom central banks trade when conducting
monetary policy. The central bank will sell bills, notes and bonds to primary
dealers if it wants to curb inflation.


81. Which of the following statements best describes the weighing methods used in
price-weighted and equal-weighted indices?
In price-weighted indices, the weights are:
A. determined by market prices whereas in equal-weighted indices the

weights always remain fixed.
B. arbitrarily determined whereas in equal-weighted indices the weights are
assigned by the index provider.
C. determined by market prices whereas in equal-weighted indices the
weights reflect the relative value of each security.
Correct Answer: B
Reference:
Unlike a price-weighted index, where the weights are arbitrarily determined by

market prices, the weights in an equal-weighted index are assigned by the index
provider.
82. Many markets allow brokers to lend their clients more money if the brokers use
This system is called:
A. risk management.
B. portfolio margining.
C. leverage control and risk management.
Correct Answer: B
Reference:
Many markets allow brokers to lend their clients more money if the brokers use
This system is called portfolio margining.


83. The primary disadvantage of price-weighted index is:
A. its complexity.
B. that it results in arbitrary weights for each security.
C. that constituent securities whose prices have risen the most, have a greater
weight in the index.
Correct Answer: B
Reference:
• The primary advantage of price-weighted index is its simplicity.

• The primary disadvantage of price-weighted index is that it results in
arbitrary weights for each security.
• The primary disadvantage of market capitalization weight (including float-

adjusted) is that constituent securities whose prices have risen (or fallen)
the most have a greater (or lower weight) in the index.
84. An investment manager just bought a stock on margin posting 30 percent of the
initial stock price of $75/share as equity. The maintenance margin requirement for
the position is 35%.
The price below, which a margin call will occur, is closest to:
A. $80.77.
B. $79.05.
C. $78.37.
Correct Answer: A
Reference:
22.5+P-75/P = 35%
P = $80.769


85. The following Exhibit provides information about the limit orders standing in a
continuous trading market.
Exhibit:
Limit Order Book
Limit
Buyer Bid Size Offer Size Seller
Price ($)
A 35 50.00
B 40 50.50
C 55 50.70
D 20 51.00
51.50 100 E
If a seller F submits a day order to sell 125 contracts, limit $50.50, his/her average
selling price will be closest to:
A. $50.68.
B. $50.73.
C. $50.78.
Correct Answer: A
Reference:
Seller F’s sell order first fills in with the most aggressively priced buy order (and
then so on).
Average selling price: 20(51.00)+55(50.70)+40(50.50)/20+55+40 = $50.6826
86. For the same index, as time passes, the value of the total return index will exceed
the value of the price return index by a(an):
A. consistent amount.
B. increasing amount.
C. decreasing amount.
Correct Answer: B
Reference:


As time passes, the value of the total return index will exceed the value of the
price return index by an increasing amount.
87. Which of the following weighting methods would produce an effect closest to a
momentum investment strategy?
A. Price weighting.
B. Market-capitalization weighting.
C. Both price weighting and market-capitalization weighting.
Correct Answer: B
Reference:
The effect of market capitalization weighting is similar to a momentum

investment strategy in that over time, the securities that have risen in price the
most will have the largest weights in the index.
88. While describing the various types of market structures to a group of internees, a
portfolio manager made the following comment:
“The order matching rules that characterize order-driven markets help increase
market liquidity. The complete precedence hierarchy is given by price priority,
time precedence and display precedence.”
The above comment is most accurate with respect to:
A. market liquidity only.

B. the precedence hierarchy only.
C. market liquidity and the precedence hierarchy.
Correct Answer: A
Reference:
The precedence hierarchy is given by price priority, display precedence, and then
finally, time precedence.


89. Which of the following is essentially a call option?
B. Credit spread option.
C. Credit default swap (CDS).
Correct Answer: B
Reference:
A credit spread option is essentially a call option in which the underlying is the
credit spread.
The investor will go long to protect against rising interest rates.

Payment to the long: (0.0735-0.065)(180/360)/[1+0.0735 (180/360)] =
0.004099($15 million) = $61,490.
90. Some futures contracts contain a provision limiting price changes. Price limits are
important because they help:
A. manage credit risk.

B. ensure smoothly operating markets.
C. matching of long and short parties.
Correct Answer: A
Reference:
Price limits help the clearinghouse manage its credit exposure. Sharply moving
prices make it more difficult for the clearinghouse to collect from the parties
losing money.


91. Which of the following swaps will best make a bet on the credit risk premium of
London banks?
A. Basis swap.
B. Plain vanilla swap.
C. Overnight indexed swaps.
Correct Answer: A
Reference:
In a basis swap, one party pays the LIBOR and the other pays the T-bill rate. The
spread between the two is a measure of credit risk premium of London banks.
92. Which of the following best represents the payoff value and the profit for an at-
the-money call option?
A. Positive and zero respectively.

B. Zero and negative respectively.
C. Positive and negative respectively.
Correct Answer: B
Reference:
For an at-the-money call option, value will equal zero because the market price
will equal the exercise price. Also, profit will be negative because the premium
has yet to be recovered.
93. An institutional investor enters a FRA contract to protect against rising interest
rates on a bank loan. The FRA is based on LIBOR as the underlying and is quoted
at a rate of 6.5%. while at expiration the LIBOR is 7.35%.
The investor will most likely take the:
A. long position in the FRA contract and will gain at the end of the contract.
B. short position in the FRA contract and will lose at the end of the contract.
C. short position in the FRA contract and will gain at the end of the contract.


Correct Answer: A
Reference:
The investor will go long the FRA contract to protect against rising interest rates.
As the rates have increased therefore the investor will gain at the end of the
contract.
94. Going long a bond is equivalent to:
A. selling the underlying as well as investing in the call and put options.
B. purchasing the underlying, investing in a put option and selling the call
option.
C. selling the underlying, selling the put option and purchasing the call
option.
Correct Answer: B
Reference:
A long bond is equivalent to going long a put, long the underlying, and short the
call.


95. A bond is currently priced at 89.187 per 100 par value. If yields increase by 10bp,
the value of bond falls to 88.215. However, if yields decrease by the same amount
the value of the bond rises to 90.237.
The approximate modified duration for the bond is closest to:
A. 10.51.
B. 11.33.
C. 12.67.
Correct Answer: B
Reference:
Modified duration: 90.237-88.215/2(0.001)(89.187) = 11.3357
96. The presence of an embedded call option will decrease the effective duration of a
bond:
A. only when interest rates are rising.

B. only when interest rates are falling.
C. for both rising and falling interest rates.
Correct Answer: B
Reference:
When interest rates are falling, the effective duration of a callable bond will be
lower than that of an otherwise comparable non-callable bond. At high interest
rates, the effective durations of the callable and non-callable bonds are very
similar.


97. A financial consultant made the following comment while addressing a team of
newly hired portfolio managers:
“The accuracy of duration measures is improved by choosing a smaller yield-to-

maturity change.”
The statement is most accurate with respect to:
A. modified duration only.

B. effective duration only.
C. modified duration and effective duration.
Correct Answer: A
Reference:
Estimates of interest rate risk using effective duration are not necessarily
improved by choosing a smaller change in benchmark rates. The statement is true
for modified duration.
98. The use of which of the following will least likely aid underwritten bond offerings
in price discovery?
A. Anchors.
B. Auctions.
C. Grey market.
Correct Answer: B
Reference:
Trading in the grey market helps underwriters determine what the final offering
price should be. The underwriter can also approach large institutional investors to
discuss with them the kind of bond issues they are willing to buy. These buyers
are known as the ‘anchor’. Auctions are not used by underwriters for price
discovery.


99. For the same time to maturity and yield to maturity, the Macaulay duration will be
lowest for a:
A. zero-coupon bond.
B. low-coupon bond trading at a discount.
C. high-coupon bond trading at a premium.
Correct Answer: C
Reference:
Macaulay duration will be lowest for a high-coupon bond trading at a premium

and highest for a zero-coupon bond.
100. An U.S. based analyst invests 20% of her portfolio in fixed-income securities.
Part of her focus, while investing, is on credit risk and foreign-exchange rate risk.
She thus invests in sovereign bonds issued by the Russian government. The bonds
are denominated in U.S. dollars.
By investing in the bonds, the analyst has most likely addressed:
A. her concerns.
B. none of her concerns.
C. only one of her concerns.
Correct Answer: C
Reference:
Since the bonds are denominated in U.S. dollars, there is no foreign exchange rate
risk. However, even sovereign bonds of emerging economies have credit risk,
especially if they are issued in a different currency. Hence, the analyst has
addressed only one of her concerns.


101. An investor just purchased a bond with a stated coupon rate of 6.5% paid
semiannually. Since the bond was purchased between coupon dates, the investor
had to pay the seller the amount of accrued interest also.
Holding everything else constant, if the investor paid the amount of reported
accrued interest to the seller, the paid amount would be:
A. correct.
B. slightly higher because the accrued interest does not account for time
value of money.
C. slightly lower because the reported accrued interest amounts are
conservative measures.
Correct Answer: A
Reference:
Accrued interest neglects the time value of money and hence is a little too high.
The flat price is a little too low. The full price, however, is correct because it is
the sum of the present values of all future cash flows. Since the investor paid the
full price, the amount paid is correct.
102. If a longer time to maturity leads to a lower modified duration for a bond, the
bond is most likely priced at a:
A. discount, and is zero coupon.

B. discount, and has a low coupon.
C. premium, and has a high coupon.
Correct Answer: B
Reference:
Sometimes for a discount bond, a longer time to maturity might lead to a lower
duration. This situation only occurs if the coupon rate is low relative to the yield.


103. Which of the following investments are mostly based on a floating interest rate?
A. Sovereign bonds.
B. Supranational bonds.
C. Syndicated or bilateral loans.
Correct Answer: C
Reference:
Syndicated or bilateral bonds are mostly based on floating interest rates.

Sovereign and supranational bonds are mostly fixed-rate bonds.
104. A three-year German floating-rate note pays the three-month Euribor plus 1.55%.
The floater is priced at 97.65. The Euribor is currently at 3.5% and is assumed to
remain constant over the life of the floater.
If a 30/360 day count convention is used, the discount margin will be closest to:
A. 148 bps.
B. 155 bps.
C. 241 bps.
Correct Answer: C
Reference:
PV = 97.65
coupon rate: 3.5%+1.55% = 5.05%/4 = 1.2625%
n = 12
FV = 100
r = ? 1.4776%
0.014776 = 0.035 +DM/4
DM = 0.024106


105. For a discount rate greater than zero, if the money market discount rate is used as
a proxy for an investor’s rate of return, the rate of return will most likely be:
A. overstated.
B. understated.
C. correctly stated.
Correct Answer: B
Reference:
As long as discount rate is greater than zero, a money market discount rate
understates the rate of return to an investor.
106. Catherine Dingman, a portfolio manager, is analyzing the following investment

options for inclusion in a client’s portfolio.
Security 1: A T-bill with a maturity of 6-months.

Security 2: U.S. dollar commercial paper with a maturity of 160 days.
Security 3: A U.S. based municipal bond that matures in six months.
The yield will be highest for security:
A. 1.
B. 2.
C. 3.
Correct Answer: B
Reference:
The yield on commercial paper is higher than on short-term municipal bonds

(especially in the U.S.), because of tax reasons. Hence, security 2 will have the
highest return (even though its maturity is slightly less).


107. V-Tex Monetary Fund is one of the best performing hedge funds in the U.S. The
fund has $350 million of assets under management and a ‘2 and 30’ fee structure.
Last year, the fund earned a return of 20% and the ending capital position was
established as a high water mark. This year, the fund value stood at $320 million
before the payment of any fees. Management fees and incentive fees are
calculated independently using end-of-period values.
The ending capital position at the end of this year will be closest to:
A. $287.4 million.
B. $302.1 million.
C. $313.6 million.
Correct Answer: C
Reference:
350*0.20 = $70 million profit

420*0.02 = $8.4 million management fee
(420-350)*30% = $21 million incentive fee
Ending value 350-(8.4+21) = 320.6 million
Since this year’s value of $320 is less than the HWM $320.6 million, no incentive
fees would be paid.
$320*0.02 = $6.4
Ending cap position: 320-6.4 = $313.6
108. A hedge fund manager uses event driven strategies to generate positive return for
his fund. This strategy most likely involves:
A. top down analysis.

B. bottom up analysis.
C. fundamental analysis.
Correct Answer: B


Reference:
Event driven strategies generate positive return by exploiting opportunities

created by short-term corporate events and usually involves bottom up analysis.
109. A commodity futures market is characterized by high storage costs and little
convenience yield. The prices in such a market are most likely:
A. in contango.
B. in backwardation.
C. unbiased predictors of future spot prices.
Correct Answer: A
Reference:
With low convenience yields and high storage costs, future prices will be higher
than spot prices and the prices would be in contango.
110. The three components of return for each commodity futures contract are: the roll
yield, the collateral yield and the change in spot prices of the underlying
commodity. The primary determinant of which of the following components is
the relationship between current supply and demand?
A. Roll yield.
B. Spot prices.
C. Collateral yield.
Correct Answer: B
Reference:
The primary determinant of spot (or current) prices is the relationship between
current supply and demand.


111. Which of the following alternative investments is most suitable for those investors
who seek liquidity
A. Private equity funds

B. Real Estate ownership
Correct Answer: C
Reference:
For those investors who seek liquidity, publicly traded securities, such as shares
of REITs, exchange traded funds (ETFs) and publicly traded private equity firms
may serve as the means for investing in alternatives.
112. Unique features of real estate property least likely include:
A. indivisibility.
B. homogeneity.
C. fixed location.
Correct Answer: B
Reference:
Some unique features of real estate property are indivisibility, heterogeneity and
fixed location.


113. Investors are generally compensated for holding assets or portfolios based:
A. on that investment’s total risk.

B. only on that investment’s systematic risk.
C. only on that investment’s diversifiable risk.
Correct Answer: A
Reference:
Investors are compensated for holding assets or portfolios based only on that
investment’s systematic risk.
114. A share with standard deviation of 46% is trading in a market where the expected
return on the market portfolio is 16% and its standard deviation is 28%. If the risk
free rate is 4.5% and the share is uncorrelated with the market, the expected return
of the share is closest to:
A. 4.50%
B. 11.50%
C. 13.64%
Correct Answer: A
Reference:
The share is uncorrelated with the market therefore its beta is 0 and its expected is
equal to the risk free rate.
E(Ri) = Rf + βi [E(Rm) - Rf = 0.045 + 0 (0.16 + 0.045) = 0.045 = 4.5%


115. An investor desires to invest in a pooled investment product that would offer him
maximum flexibility with regards to portfolio construction.
Which of the following products would be most suitable for the investor?
A. A hybrid fund as it allows investment in both stocks and bonds.

B. An ETF, but its price may or may not equal the underlying net asset value.
C. A separately managed account, but it would require a high minimum
investment amount.
Correct Answer: C
Reference:
A separately managed account would offer maximum flexibility because the

investor has control over which assets are bought and sold and the timing of the
transactions. However, the required minimum investment is usually much higher
than is the case with a mutual fund.
116. Which of the following about the efficient frontier and the global minimum-
variance portfolio is least accurate?
A. As risk increases, the efficient frontier offers increases in returns at a

decreasing rate.
B. An investor cannot hold a portfolio of assets that has less risk than the
global minimum-variance portfolio.
C. A portfolio towards the left of the efficient frontier would offer greater
return for the same or lesser risk but will be unattainable.
Correct Answer: B
Reference:


An investor cannot hold a portfolio consisting of risky assets that has less risk
than that of the global minimum-variance portfolio (an investor can combine his
portfolio with a risk-free asset to get attain lower risk). Options A and C are
correct.
117. Anthony Mecca is an appraisal consultant that has been hired by an investment
management firm to assess the performance of three asset managers within the
firm.
Which of the following returns should Mecca focus on to compare the investment
skill of the asset managers?
A. Gross returns.
B. Net, after-tax returns.
C. After-tax, real returns.
Correct Answer: A
Reference:
Gross return is an appropriate measure for evaluating and comparing the

investment skill of asset managers because it does not include any fees related to
the management and administration of an investment.


118. Elaine Lopez has $70,000 that she plans to invest in a mutual fund. Lopez has
shortlisted two mutual funds and is currently evaluating their return prospects.
Exhibit 1 displays the data that Lopez gathered for this purpose. Lopez expects a
3% inflation rate for the coming future.
Exhibit
Gross Indirect Assets under
Tax Rate
Return Expenses management
Fund A 17% $600,000 $45,000,0000 25%
Fund B 22% $750,000 $30,000,000 20%
Lopez should choose:
A. fund A.
B. fund B.
C. either Fund A or Fund B.
Correct Answer: B
Reference:
Net return after taxes:

Fund A:[ 0.17-(600,000/45,000,000)](1-0.25) = 11.75%
Fund B: [0.22-(750,000/30,000,000)](1-0.20) = 15.6%
Fund B has a higher net after tax return so Lopez should choose Fund B.
119. If the return distribution of a stock index is negatively skewed, standard deviation
will most likely be:
A. underestimated, with the distribution concentrated to the left.

B. overestimated, with the distribution concentrated to the right.
C. overestimated, with the distribution concentrated to the left.
Correct Answer: B
Reference:


The standard deviation is based on a normal distribution. Stock returns are usually
negatively skewed because there is a higher frequency of negative deviations
from the mean, which also has the effect of overestimating standard deviation. For
a negatively skewed distribution, most of the values are concentrated to the right.
120. A portfolio manager is attempting to develop a risk-return tradeoff curve for one
of its largest private wealth clients. While developing the client’s investment
policy statement, the manager determines that he has above-average risk
tolerance. The client’s optimal asset allocation is thus, heavily skewed towards
equity investments.
The client’s risk-return tradeoff curve will most likely have a:
A. zero slope.
B. less than zero slope.
C. greater than zero slope.
Correct Answer: B
Reference:
For risk-lovers, the risk-return tradeoff curve (indifference curve) will exhibit a
negative slope, implying that the risk-lover is happy to substitute risk for return.

FinQuiz.com
June, 2016
Revision 1



33-44 Economics 18
Total 180


1. Jason Storm is a research analyst at Pickler Associates. Storm is preparing an

economic research report on the performance of IT companies in his country.
Following successive years of strong profitability, Storm now predicts that the
industry will experience a slump in performance thereby negating the
performance of the companies being followed. His forecast is based on
discussions with company executives, analysis of historical financial statements
and comparisons with the international IT industry trends. Based on this forecast
he strongly recommends avoiding IT stocks. Storm’s supervisor states that his
forecast and recommendation is contrary to historical industry performance and
his own forecast developed for the local industry. His supervisor also claims that
the local industry is far behind its international counterpart in terms of
development making any comparison a waste of an effort.
By issuing the research report with his own forecast, Storm will most likely:
A. comply with the CFA Institute Standards of Professional Conduct.

B. violate the standard relating to diligence and reasonable basis by failing to
conduct thorough investigation.
C. violate the standard relating to employer loyalty by issuing a
recommendation contrary to his employer’s forecasts.
2. The management of Gum Drop Inc., a manufacturing concern, is comparing

merger offers received from two of its competitors. Daisy Howard, Gum Drop
Inc.’s senior executive officer is pushing for the acceptance of the offer. The
decision of the acceptance rests on three officers including Howard. Believing
that the manufacturer will more than likely go through, she advises her brother to
purchase the stock for his clients’ portfolios. To avoid the appearance of conflict,
Howard’s brother deliberately avoids purchasing the stock for his sister’s
investment portfolio, who is also a regular fee-paying client of his investment
firm.
Which of the following CFA Institute Standards of Professional Conduct is least

A. Fair dealing
B. Disclosure of conflicts
C. Material non-public information


3. ThornGate Associates is an asset management firm with its own research

department. ThornGate manages the investment portfolio of Liwood, an insurance
company. One of ThornGate’s research analysts has come to know that Liwood is
currently under financial distress. After a conversation with his supervisor, the
research analyst learns that the firm is unwilling to release any information that
has the potential to damage its relationship with clients.
In order to comply with the CFA Institute Standards of Professional Conduct, the
research analyst’s best course of action would be to:
A. leave the employer.

B. request for a change in assignment.
C. encourage ThornGate Associates to put Liwood on a restricted list.
4. Kathleen Jones issues a recommendation to buy the Green Corp stock to her
clients following a thorough analysis of its expected forecasted performance.
Jones has held the Green Corp stock for several years in her investment portfolio.
Immediately after issuing the recommendation, she sells the stock from her
portfolio to meet a down payment for a boat purchase. Her transaction has not
violated any laws and regulations.
Is Jones’ personal transaction in violation of the CFA Institute Standards of

A. No.
B. Yes, she will benefit personally from the trade.
C. Yes, she is not allowed to undertake transactions in a stock, which she has
recommended for her clients.
5. Transactions made on behalf of family member accounts for which members or

candidates do not have beneficial ownership:
A. are prohibited.
B. are subject to preclearance requirements.
C. should not supersede those undertaken for non-family member client
accounts.


6. Wade Thomas is the senior portfolio manager at West Horizons, a firm providing
brokerage and asset advisory services. Over the past two years, West’s client
portfolios have not been generating the returns promised by Thomas. After
receiving complaints from several clients Thomas decides to allocate a portion of
client accounts to an emerging market equity fund being managed by his brother-
in-law, Steve Harris. Following the allocation, portfolio risk increases beyond
client risk tolerance levels. Thomas strongly believes high expected returns will
compensate for this increased risk in the months to come. He decides to delay
notifying clients about the change until the perceived returns are generated.
Thomas is in violation of the CFA Institute Standards of Professional Conduct

because he:
A. has failed to consider the suitability of the allocation to client accounts.

B. has not disclosed the fact that the equity fund is being managed by Harris.
C. is not permitted to reallocate client funds without receiving prior
permission.
7. Gregory Spark manages the accounts of several high net-worth individuals. His
clients have a moderate risk tolerance and the allocation of risky investments is
specifically prohibited as stated in their investment policy statement. Spark
decides to allocate a portion of each client’s account to an equity index fund. Two
of the securities comprising the fund are highly risky with high expected returns.
However, due to the effects of diversification, the overall risk level of the index
fund is moderate when added to client portfolios. One of Spark’s clients
complains that the risk profile of the risky securities does not match his own.
Is Spark in violation of the CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, he is in violation of the standard relating to suitability.
C. Yes, he is in violation of the standard relating to loyalty, prudence and
care.


8. Leslie Hower is attending an investment conference in Geneva, Switzerland on

behalf of her employer. At the conference the guest speaker makes two comments
with respect to the implementation of the CFA Institute Standards of Professional
Conduct in an investment management firm.
Statement 1: While members and candidates are permitted to rely on secondary or

third-party research, the duty to verify the soundness of research
rests solely on the individual alone.
Statement 2: A member or candidate who knows or should have known that

information, which could have influenced the investment decision is
being omitted, is in violation of the standard relating to
misrepresentation.
The speaker is most likely correct with respect to:
C. both of the statements.
9. Janice Mahkoub is an investment manager at Page Associates. She has received

an offer to serve on the board of a charitable institute. Her duties include
managing $2 billion in charitable donations. Given that her line of work does not
relate to providing investment advice, she accepts the offer without informing her
employer.
Are Mahkoub’s actions in compliance with the CFA Institute Standards of

A. Yes.
B. No, she should have not accepted the offer.
C. No, she should have notified her employer prior to accepting the offer.


10. According to the CFA Institute Standards of Professional Conduct, a firewall is

required to:
A. prohibit employees from front running their client trades.

B. prohibit personnel from sharing confidential client information on clients
outside their department.
C. control communications between the investment banking and corporate
finance areas of a brokerage firm.
11. Boyle Thomas is the asset advisor at Marshall Associates who is allocating client
funds to an EFT. A common trait shared by his clients is their distaste for the
stock of corporations with poor environmental practices. Out of the three stocks
allocated, one of them belongs to a corporation that has recently disposed its
industrial waste in a nearby river. The other two stocks belong to corporations
with environmental-friendly practices.
Are Thomas’s actions consistent with the CFA Institute Standards of Professional
Conduct concerning suitability?
A. No.
B. Yes; since inclusion of the two stocks is consistent with client
requirements, the allocation as a whole passes the suitability test.
C. Yes; Thomas is not responsible for verifying the suitability of each
individual investment when allocating stocks from ETFs to client
accounts.
12. To prepare her research report, Sonia Graham is using a stock return forecasting
model prepared by Victor Patel, a former employee at the firm she serves, ARB
Capital. She concludes her report by identifying ARB Capital as its designer and
stating a model forecast accuracy of 60%. Is Graham in violation of the CFA
Institute standard relating to misrepresentation?
A. No.
B. Yes, she is guaranteeing investment results.
C. Yes, she has not given credit to the Patel in her report.


13. Thorntop Associates is a research firm which publishes its reports in print and on
its official website. Graham Barnes is Thorntop Associates’ chief research
analyst. With the permission of his employer, Barnes uploads reports prepared by
him on his personal website in addition to the firm’s. On his website, Barnes signs
off his reports using his name.
Barnes has most likely:
A. failed to disclose any conflicts of interest in preparing reports.

B. misrepresented his relationship with Thorntop Associates on his website.
C. not violated any standards since he has obtained permission to upload
reports on his website.
14. Actions that construe violations of the CFA Institute Standards of Professional
Conduct concerning misconduct most likely include:
A. personal bankruptcy resulting from gambling in a casino.

B. workplace negligence which causes the firm to lose millions of dollars.
C. serving time in a juvenile as a teenager after being found guilty of drug
possession.
15. With respect to voting proxies, an investment manager will most likely be in
violation if he:
A. votes all proxies.

B. fails to cast a vote.
C. fails to disclose proxy voting policies.


16. Theodore Simpson is the chief portfolio manager at L.T. Associates. He also
serves on the board of a charity hospital, which is in the knowledge of his
employer. Simpson routinely trades his accounts through West Brokers that
provides average execution for a fee, which is lower relative to others.
Dissatisfied with West Brokers’ performance over the past two years, Simpson
moves his client accounts to Abe & Smith, which is well-reputed for its ability to
deliver above-average portfolio returns. However, the broker charges a high fee
for its services. Following the shift, Simpson prepares a written memo with news
of the change in broker. He intends to send this memo to his clients around the
time quarterly client account statements are dispatched.
Are Simpson’s actions in violation of the CFA Institute Standards of Professional

Conduct?
A. No.
B. Yes, he has failed to notify clients of the change in broker on a timely
basis.
C. Yes, by using Abe & Smith as a broker Simpson is not acting in his
clients’ best interests.
17. An investment firm retains its records for a maximum period of five years after
which they are disposed off. Local regulations require firms to retain records for
at least four years.
In order to comply with the CFA Institute Standards of Professional Conduct, the
investment firm should dispose its records after:
A. four years.
B. five years.
C. seven years.


18. Two months ago Leslie Hower sat for the CFA Level III exam that she passed on
the second attempt. Hower has been working as a full-time employee at a bank for
five years and continued working even during her study years.
In a discussion with her colleague and study partner Hower states, “After passing
all three levels of the CFA exam program, my past work experience will make me
eligible for receiving the CFA charter upon application.”
Hower’s statement is most likely:
A. not in violation of the CFA Institute Standards of Professional Conduct.

B. is in violation of the standards as she is making guarantees tied to the CFA
designation.
C. is in violation of the standards as she implies that she has passed all three
levels on the first attempt.


19 Kathy Peterson is a fixed income analyst who has made probability estimates with
respect to the recovery of the principal amount of a $300,000 loan.
Probability Amount Probability of

Scenario of Scenario Recovered Recovery Amount
1 45 $270,000 25
$150,000 75
2 55 $200,000 60
$130,000 40
The expected recovery amount is closest to:
A. $175,600.
B. $180,000.
C. $352,000.
20. The risk that assets in a defined benefit plan will fall below plan liabilities is most
likely known as:
A. variance.
B. value at risk.
C. shortfall risk.
21. In contrast to simple sampling, samples in stratified sampling:
A. are not drawn randomly.

B. produce less precise estimates of parameters.
C. fully represent each population subdivision of interest.


22. Sam Miguel has arranged returns in an ascending order and has accordingly
constructed return intervals.
Return intervals (%) Returns observed (%)

- 35 to -31 - 34
- 31 to – 27 - 32
- 27 to – 23 - 24
- 23 to – 19 - 20
- 19 to – 15 - 18
- 15 to – 11 - 17
- 11 to – 7 -4
- 7 to – 3 -2
The cumulative relative frequency for the return interval – 15% to – 11% is
closest to:
A. 0.0%.
B. 75.0%
C. 77.8%.
23. Over the past 12 years, Algeria’s stock market index generated positive returns in
only 8 years. Maria Alfonso has collected the returns over these eight years in the
exhibit below:
Year Annual Return (%)

1 8.9
2 12.5
3 14.1
4 22.7
5 27.8
6 31.9
7 38.6
8 45.7
The third quintile lies in the distance between:
A. 27.8% and 31.9%.

B. 31.9% and 38.6%.
C. 38.6% and 45.7%.


24. A company has concluded job interviews by short listing ten candidates each of
which has an equal probability of being selected. The probability that the number
of candidates selected less than or equal to seven but more than four is closest to:
A. 3/10.
B. 4/10.
C. 7/10.
25. A fixed income analyst estimates that ten bonds in an investor’s international
fixed income portfolio have a high likelihood of default. The estimated annual
default rate for bonds in the same category as the foreign bonds is 6.5%.
The standard deviation of the number of defaults over the coming year using the
Bernoulli and Binomial random variables is respectively closest to:
A. 6.1% and 60.8%.

B. 6.5% and 65.0%.
C. 24.7% and 78.0%.
26. In contrast to Monte Carlo Simulation, historical simulation:
A. uses actual data.

B. executes ‘what if analysis’ with relative ease.
C. represents a more efficient method to value options.
27. The power of a test represents:
A. a Type I error.
B. the confidence level.
C. 1 – probability of a Type II error.


28. Walsh Emerson is contemplating the inclusion of a South American commodity

stock to his investment portfolio. Emerson will opt for the investment if the stock
achieves a mean monthly return of at least 4.5%. Over the past twelve months, the
stock achieved a mean monthly return of 3.8% with a sample standard deviation
of monthly returns of 7.4%. A portion of the distribution table is displayed below:
Significance level
df 0.10 0.05
10 1.372 1.812
11 1.363 1.796
12 1.356 1.782
Assuming the returns are normally distributed and using a 10% confidence
interval, should Emerson make the investment?
A. Yes.
B. No, because the hypothesized mean value falls within the confidence
interval.
C. No, because the hypothesized mean value falls outside the confidence
interval.
29. On a given trading day, a stock peaked at $41.23 before falling to $38.50. Two
days later, the same stock’s price rose to $41.21 after which it again started to
decline. A stock market analyst identified the price pattern as a double-top.
Based on the identified pattern, the price target is closest to:
A. $35.79.
B. $41.21.
C. $41.23.
30. Forty years ago James Paul deposited a sum of funds in an investment fund with
an expected annual return of 8%. If its current value is worth $44.5 million, Paul’s
original investment in the fund was closest to:
A. $1.0 million.
B. $2.0 million.
C. $41.2 million.


31. The management at South AM Enterprises has approved an exploration project

which has met the IRR decision rule.
Based on the decision taken, which of the following conclusions is most likely
valid?
A. The discount rate of the project is less than the IRR.

B. The project will have no effect on shareholder’s wealth.
C. The IRR of the project is at least equal to its hurdle rate.
32. Graham Walsh, a fund manager, has complied performance results for a fund he
is managing. He has summarized the results in the exhibit below:
January 1, 2012 $650,000

June 30, 2012 (Fund value) $770,000
July 1, 2012 (Dividends received before additional $55,000
investment)
July 1, 2012 (Fund value)* $855,000
December, 2012 (Dividends received) $26,550
December 31, 2012 (Fund value)** $920,000
*This includes a $30,000 capital investment in the fund.
**This does not include the dividends received on December 31, 2012.
Based on the complied information, the time-weighted rate of return is closest to:
A. 40.51%.
B. 41.54%.
C. 45.62%.


33. Aerot is an aeronautical engineering firm operating in Ecadoria, a developing

country. Aeronautical engineering is a fairly new arena in the country with the
firm being the sole operator in its market. As a result, Aerot’s management has
free reign over the fees the firm charges for its services. It has been estimated that
the amount of resources required in establishing an engineering firm such as
Aerot is substantial. In addition, Aerot is heavily regulated due to the nature of
services it offers.
Which of the following statements is most likely correct regarding demand

analysis in the aeronautical industry?
A. Demand for Aerot’s services is elastic.

B. Average revenue is twice as large as the market demand schedule.
C. The impact of a price decrease on marginal revenue is three times as large
as that on marginal demand.
34. An industry comprises of thirty participants. Ten percent of the participants have
a market share of ten percent each while twenty percent of the participants have a
market share of five percent each. The Herfindahl-Hirshchman (HHI) index for
the top five firms is closest to:
A. 0.030.
B. 0.035.
C. 0.050.


35. Martha Lockwood is an analyst who has collected economic data with respect to a
country in the exhibit below:
$000
Net imports 35
Indirect business taxes less subsidies 95
Government spending on goods and services 150
Consumer spending on goods and services 42
Rental income 85
Interest income 25
Corporate and government enterprise profits before taxes 44
Transfer payments 21
The country’s GDP and national income are closest to:
A. $157,000 and $78,000, respectively.

B. $165,000 and $249,000, respectively.
C. $235,000 and $228,000, respectively.
36. Littleton Enterprises operates in a monopoly market. The average cost is constant
at $50, while marginal revenue and average revenue are equal to $65 and $70,
respectively. Recent market analysis indicates that the price elasticity of demand
is 1.8.
The price at which output will be maximized is closest to:
A. $112.50.
B. $146.25.
C. $157.50.
37. In 2011 the real GDP for a country was $128.5 million while the GDP deflator
was 125. In 2012 the real GDP was recorded at $98.5 million. The GDP deflator
required to maintain the same amount of nominal GDP as in 2011 is closest to:
A. 104.37.
B. 130.46.
C. 163.07.


38. According to the aggregate demand curve, when holding nominal money supply
constant, increasing the price level will most likely cause a decline in:
A. real interest rates.

B. real money supply.
C. aggregate expenditures.
39. A higher real money supply will cause the IS and LM curves to intersect at a:
A. lower price level.

B. higher real interest rate.
C. higher level of real income.
40. The exhibit below illustrates a segment of the consumption basket as well as
prices between the months, January and February. The base value of the index is
100 and the base month is January 2013.
Exhibit:
Consumption Baskets and Prices, January-February 2013.
Date January 2013 February 2013
Goods Quantity Price Quantity Price
Wheat 150 kg $0.25/kg 175 kg $0.30/kg
Rice 45 kg $1.50/kg 45 kg $1.40/kg
The value of the Fisher index in February 2013 is closest to:
A. 102.86.
B. 103.34.
C. 106.37.
41. According to the concept of money neutrality, an increase in money supply will:
A. decrease aggregate price level in the long run only.

B. increase the real value of natural resources in the short run.
C. have no impact on the availability of capital and labor in the long run.


42. Martin Greene is a market analyst observing trading activities between Brazil and
South Africa. South Africa exports industrial equipment to Brazil and imports
coffee. With respect to industrial equipment, the output per worker per day in
South Africa and Brazil is 6 and 2 units respectively. On average, a Brazilian
worker processes 100 grams of coffee per day while the autarkic price of coffee in
terms of a unit of industrial equipment in South Africa is 0.15.
Which of the following statements is most likely correct?
A. The cost of processing coffee is lower in South Africa.

B. A Brazilian worker processes ten more grams of coffee relative to a South
African worker.
C. The opportunity cost of a unit of industrial equipment is 6.7 grams of
coffee in South Africa.
43. The welfare loss under a quota is similar to a tariff if:
A. quota rent is captured by a foreign exporter.

B. the exporter shifts sales from the domestic to the export market.
C. the government of the country capturing quota rent auctions import
licenses for a fee.
44. India manufactures 5.0 million television sets in a year while the domestic
demand for sets is 5.8 million. As a result, the country will import 400,000 sets
from abroad at world free trade prices. The global price of television set is $130.
In response to the heightened demand for imported televisions, Indian authorities
impose a tariff on the imports thereby raising the domestic price of a set to $150.
Following the imposition of tariffs, domestic production increases to 5.2 million
while quantity demanded declines to 5.3 million.
The gain in government revenue arising from the imposition of the tariff is closest
to:
A. $2.0 million.
B. $7.0 million.
C. $102.0 million.


45. Tara Scott is a finance officer at Westdale. Scott has collected selective financial
information for the company (Exhibit).
Exhibit: Selective Financial Information for

Westdale
$ millions
Net book value 140
Contributed capital 38
Beginning retained earnings 102
Revenue 85
Expenses 69
The amount of dividends paid by Westdale is closest to (in millions):
A. 16.
B. 22.
C. 118.
46. Which of the following scenarios most likely explains an increase in receivables
turnover?
A. A large number of customer accounts have defaulted and are written off.
B. A company has modified the terms of its credit policy from “3/10” to
“3/15”.
C. A company’s sales have been adversely affected by new industry wide
product regulations.


47. Two years ago Terrance Limited had undertaken a four-year construction project
for a total sales price of $30 million. The project’s total estimated building costs
were $18 million. The company has already spent $4 million and $5 million in the
first and second year, respectively. Terrance uses the percentage of completion
method to recognize contract revenues.
Assuming no changes in estimated total costs, the amount of revenues recognized

by Terrance Limited in each of the first two years is, respectively, closest to (in
millions):
First year: Second year:

A. $4.00 $5.00.
B. $6.67 $8.33.
C. $6.67 $15.00.
48. An effective financial reporting system is transparent if it requires:
A. fair presentation.
B. similar transactions to be measured and presented in a similar manner.
C. the full spectrum of transactions that have financial consequences to be
reported.
49. The exhibit below highlights selective financial information for ABC Limited for
the years 2012 and 2013.
Exhibit
$ millions 2013 2012
Total current assets 90 80
Total current liabilities 55 50
Total debt 115 127
Total equity 200 180
Based on the information presented, ABC Limited’s financial risk has most likely:
A. increased.
B. decreased.


50. Which of the following items is most likely included in a company’s other
comprehensive income?
A. Changes in net assets

B. Foreign currency translation adjustments
C. Unrealized gains and losses on held for trading securities
51. The exhibit below illustrates financial information summarized from a company’s
income statement and balance sheet for the financial years 2012 and 2013.
Exhibit
Working capital (beginning) 40 35
Working capital (ending) 50 42
Revenue 120 100
The company (’s):
A. is utilizing its assets more efficiently.

B. ability to cover short-term obligations has improved.
C. ability to generate profits from its resources has improved.
52. A company that issues stock dividends will most likely record the transaction:
A. as a financing activity in the cash flow statement.

B. as an operating activity in the cash flow statement.
C. in a supplementary note to the cash flow statement.
53. For the year ended 31 December 2013 Aerox Limited reported net income of €2
million and paid common and preferred dividends of €30,000 and €42,000,
respectively. Preferred dividends relate to 150,000 convertible preferred shares
issued at the beginning of the year each convertible into two shares of the
company’s common stock. The company has an average of 300,000 shares of
common stock outstanding.
Aerox’s diluted EPS is closest to:
A. 3.21.
B. 3.33.
C. 6.53.


54. Alliance is in the book publishing and printing industry. The company has
incurred the following costs during the current financial year:
• The company paid $500,000 to acquire rights to distribute published work

of three authors.
• Storage costs relating to unsold books totaled $100,000.
• Storage costs relating to paper and ink (for printing books) totaled
$30,000.
• The company paid $40,000 to distribute published books to bookstores
and libraries.
If Alliance complies with U.S. GAAP, the amount recognized as part of inventory
is closest to:
A. $30,000.
B. $530,000.
C. $540,000.
55. Which of the following financial consequences most accurately highlights a

company’s decision to reclassify property from the investment to owner occupied
category based on the fair value model (assuming fair value is higher than
depreciated cost)? The company will experience an increase in the:
A. net profit margin.

B. asset turnover ratio.
C. financial leverage ratio.
56. Jade Associates operates in a country where the same depreciation method is used
for both tax and financial reporting. The company has recently purchased an item
of machinery with a useful life of ten years. Jade’s management has projected
annual quantity produced to be the same over the machine’s useful life. The
company would like to select a depreciation method that will minimize the
amount it pays in taxes in the first few years of the useful life. Jade will most
likely opt for the:
A. straight line method.

B. units-of-production method.
C. double declining balance method.


57. RZX Limited purchased an automated paint mixer on January 1, 2010 for
€300,000 with an estimated useful life of eight years and a salvage value of
€20,000. The asset is depreciated on straight-line basis. On December 31, 2013,
the mixer’s fair value is determined as €250,000; the change in value is
determined to be other than temporary. The present value of cash flows expected
from the asset’s continued use is €260,000. The costs to sell the asset in its current
condition are €15,000.
Under IFRS, RZX would report:
A. a gain of €55,000 in equity.

B. an impairment loss of €62,500 in its income statement.
C. an impairment loss of €50,000 in other comprehensive income.
58. Which of the following statements most accurately explains why a lessee will
prefer a finance lease over an operating lease?
A. Profitability ratios are stronger.

B. Debt-to-equity ratios are lower.
C. Asset ownership is transferred at the end of the lease term.


59. Licardo Inc. resides in a country where the tax laws require a higher depreciation
charge to be recorded as part of taxable income. Annual depreciation charges and
asset values for accounting and tax purposes related to an item of machinery are
summarized in the exhibit below. The statutory tax rate is 30%.
Exhibit:
Depreciation Charges & Equipment Values (2011-2013)
2013 2012 2011
Equipment value for accounting
purposes (carrying amount)(depreciation $13,000 $16,500 $20,000
charge of $3,500 per year)
Equipment value for tax purposes (tax
base)(depreciation charge of $4,200 per $10,900 $15,100 $19,300
year)
Difference $2,100 $1,400 $700
If the income tax rate is revised to 20% for 2013, which of the following
A. Deferred tax liabilities will need to be increased by $210.

B. The benefit of the accelerated depreciation tax shield will be reduced to
$420.
C. The reduction in income tax expense attributable to the change in tax rate
is $140.
60. In the financial year 2012, Frax Crop recognized deferred tax assets of $120,000
in its balance sheet. At the start of 2013, finance manager George Knight
reassesses the recoverability of the amount and determines that the 2012 estimate
was too high and needs to be reduced by $10,000. Six months following Knight’s
adjustment, the original estimate proves to stand correct and the reduction is
reversed.
The reversal of the $10,000 amount is most likely accounted for by:
A. reducing deferred tax assets.

B. increasing operating income.
C. recognizing a valuation allowance.


61. On January 1, 2010, Yellow Inc. purchased a newspaper printing machine for
$500,000. On January 1, 2013 the accumulated depreciation related to the
machine is $187,500. At the beginning of 2013, the machine was revalued
upwards by $25,000 while annual depreciation expense (post revaluation)
increased to $70,000. Tax authorities do not permit revaluation gains to be
recognized. Annual depreciation recognized for tax purposes is $50,000. The
applicable tax rate is 30%.
On December 31, 2013, Yellow’s management will most likely increase:
A. retained earnings by $7,500.

B. deferred tax assets by $25,000.
C. revaluation surplus by $25,000.
62. In a period of rising inventory costs and stable inventory quantities, which
inventory accounting method will produce the highest:
net profit margin? current ratio?

A. LIFO LIFO
B. LIFO FIFO
C. FIFO FIFO
63. Bridge Corp reported interest expense of $4,500 for the year ended December 31,
2013. Cash interest paid during the year was $6,100 and the ending balance of the
interest payable account was $12,500. Bridge Corp complies with U.S. GAAP.
The beginning balance of the interest payable account is closest to:
A. $10,900.
B. $14,100.
C. $23,100.


64. On January 1, 2013 Trax Limited issues $3 million 10-year face value of bonds
when the market interest rate is 5%. The bond pays interest of $210,000 annually
on December 31.
Using the effective interest method, on December 31, 2013, Trax Limited will
report:
A. $36,835 as interest income.

B. $210,000 as interest expense.
C. $3,426,469 as a long-term liability.
65. Which of the following statements most accurately reflects a limitation of using
ratio analysis?
A. Ratios cannot be used for time-series analysis.

B. Ratios enhance size differences between companies.
C. The use of different accounting policies may distort comparability.
66. The exhibit below illustrates selective financial information for Delight for the
financial years 2011-2013. The average number of days in a financial year is 365.
Exhibit
$ millions 2013 2012 2011
Cost of goods sold 345 280 200
Accounts payable 120 165 138
The change in Delight’s days of sales payable (DSP) most likely indicates:
A. sustainable growth.
B. an unsustainable boost to operating cash flows.
C. the company taking advantage of early payment discounts.


67. On January 1, 2012 HR Enterprises sold industrial equipment and reported a

profit of $35,000. Six years ago, the equipment was purchased for $200,000 with
a $10,000 salvage value. The original useful life was eight years and the
equipment is depreciated using the straight line method.
The cash received upon the sale of equipment is closest to:
A. $22,500.
B. $57,500.
C. $92,500.
68. Which of the following statements most accurately highlights the financial
accounting of long-lived assets that are to be abandoned?
A. They are not tested for impairment.

B. They are depreciated until the final disposal date.
C. Carrying values are replaced by fair values on the balance sheet.


69. A privately traded enterprise has an asset beta of 1.45. Increasing the degree of
financial leverage will most likely produce an equity beta which is closest to:
A. 1.00.
B. 1.45.
C. 1.89.
70. Which of the following statements most accurately demonstrates the correct
treatment of floatation costs? Flotation costs:
A. associated with debt issuance are included in the cost of capital.

B. associated with equity issuance are included in the cost of capital.
C. are reflected by adjusting the net present value of the project it is intended
to finance.
71. The capital budgeting process least likely includes:
A. post-auditing of recent investment results.

B. ensuring compliance with laws and regulations.
C. identifying projects which are attractive in isolation but undesirable
strategically.
72. By selling 5% more units, Blue Top Limited has been able to enhance its net
revenues without modifying the selling price per unit. In the previous year, Blue
Top sold 200,000 units and generated revenue of $500,000. As a result of the
change in revenue, operating income has increased by 8% in the current year. The
variable cost per unit has remained unchanged from its $1.50 level from the
previous year.
Blue Top’s total fixed operating costs in the current year are closest to:
A. $78,750.
B. $183,750.
C. $300,000.


73. The share repurchase method that does not obligate a company to complete the
repurchase program is most likely known as:
A. Dutch auction.
B. buying in the open market.
C. repurchase by direct negotiation.
74. The management at Lockwood Associates has decided to undertake an external

borrowing of $250,000 to finance the repurchase of company shares at the
prevailing market price of $20. Lockwood has 2,000,000 shares outstanding
before the repurchase and its after-tax cost of borrowing is 5.50%. The company’s
earnings yield is 6.00%.
The company’s earnings per share (EPS) after the buyback is closest to:
A. $1.190.
B. $1.201.
C. $1.207.
75. A key aspect of the corporate governance definition is that it provides a

framework which:
A. is legally binding.
B. is used as a performance benchmark.
C. delineates rights and responsibilities of various groups.


76. Yarrow Inc. is a real estate development firm that will be undertaking short-term
borrowings of $800,000 to finance a one-month project. Yarrow’s management is
evaluating two alternative financing sources, a line of credit and commercial
paper. Details concerning both financing plans are as follows:
Line of credit: A line of credit can be drawn down at 7.40% with a 1/4 percent
commitment fee on the full amount. 1/12th of the cost of the commitment fee is
allocated to the first month.
Commercial paper: The interest cost is 7.50% with a dealer’s commission of 1/12
percent and a backup line of credit of 1/5 percent both of which will be assessed
when the commercial paper is issued.
Yarrow Inc. will most likely:
A. opt for a line of credit.

B. opt for commercial paper.
C. be indifferent between the two options.


77. Vanessa Huge is a trader at a firm that manages a hedge fund. The fund invests in
commodities such as natural gas. To hedge the risk associated with the investment
the firm establishes a position whereby the instrument’s risk exposure to its
investment is negative.
Which of the following positions has the firm most likely established to reduce
exposure to the underlying risk?
A. Short position in commodity puts.

B. Long position in commodity futures.
C. Short position in commodity futures.
78. Ali Mehmood has purchased 30 equity stocks with an average price per share of
$25 by depositing 30% as initial margin for his investment portfolio. The
maintenance margin is 25%. Ignoring commissions, at what price will Mehmood
first receive a margin call?
A. $17.50.
B. $23.33.
C. $25.00.


79. A Brazilian small-cap equity index comprises of five securities; A, B, C, D and E.

In the base year the value of the index was 100. All the constituent securities have
undergone a 3-for-2 split. The exhibit below illustrates constituent security prices
and weights before the split.
Security Price before split Weight before

split (%)
A 30.00 14.35
B 21.00 10.05
C 85.00 40.67
D 40.00 19.14
E 33.00 15.79
Total 209.00 100.00
Divisor 5.00
Index value 41.80
Based on the stock split, the divisor will be adjusted to:
A. 3.33.
B. 6.67.
C. 7.50.
80. Blue-Top Associates’ return on equity decreased by 12.0% from the 25.0%
reported at the beginning of 2013. The company’s book value of equity at the
beginning and end of 2013 was $15.0 million and $26.3 million respectively. Net
income reported for 2012 and 2013 was equal to $1.1 million and $1.8 million
respectively.
Blue-Top Associate’s reported return-on-equity for the year 2012 was closest to:
A. 7.67%.
B. 8.72%.
C. 9.76%.
81. A limitation of using business cycle sensitivities to classify entities is that:
A. placement in categories is somewhat arbitrary.

B. business cycle sensitivity is not adequately captured in weak economies.
C. investment opportunities cannot be determined by comparing two
otherwise identical businesses operating in different demand
environments.


82. Martin Walsh has purchased 30,000 shares of a manufacturing concern at price
per share of $15 by depositing 40% margin. One month later, the price rises to
$18 and Walsh is required to pay an interest rate of 5% on the borrowed funds.
The dividend per share is $0.05 and commission is paid at the rate of $0.04 per
share at the time of purchase and sale.
The total return on the investment is closest to:
A. 29.54%.
B. 41.72%.
C. 42.00%.
83. Markets that are semi-strong form efficient:
A. are not necessarily weak-form efficient.

B. render fundamental analysis unnecessary.
C. are likely to perform better when passive portfolio management is
employed.
84. North Atlantic reported the following figures during the financial year 2013:
Current dividend per share $0.85

Forecasted earnings per share 1.20
Earnings growth rate (%) 4.5%
Required rate of return 9.3%
Based on the data presented, the justified forward price-to-earnings ratio is closest
to:
A. 14.76.
B. 15.42.
C. 17.73.
85. In contrast to commercial classification systems, current systems:
A. are reviewed more frequently.

B. distinguish between different business categories.
C. may not employ peer group as the narrowest classification unit.


86. The EPS and DPS measures reported by ZRT Enterprises over the most recent
three years have been summarized by the company’s financial analyst, Raul
Gibbons. Also included in the exhibit are his forecasts for the two measures over
the next three years.
Year DPS ($) EPS ($)

6 6.9* 7.2*
5 5.6* 8.9*
4 5.1* 7.8*
3 4.5 6.1
2 4.2 5.4
1 3.9 5.0
*Forecasted EPS and DPS measures
In estimating ZRT’s intrinsic value at the end of third year, Gibbons employs the
company’s required rate of return of 17.50%. He estimates the company’s growth
rate as 15.31% and derives an intrinsic value of $313.64.
Gibbons’ calculations are most likely:
A. correct.
B. incorrect with respect to the intrinsic value only.
C. incorrect with respect to the growth rate and intrinsic value.
87. The asset-based approach to valuation can be applied to companies:
A. which are to be liquidated.

B. with a sizeable amount of intangibles.
C. operating in a hyperinflationary economic environment.


88. The exhibit below illustrates the price-to-sales (P/S) ratios for Levine, Tractor Inc.
and Repo relative to industry averages; all three companies operate in different
industries.
P/S ratio Levine Tractor Inc Repo

Company 34.6 45.1 78.9
Industry Average 25.8 34.5 62.9
Based on the method of comparables, which company appears to be most

overvalued?
A. Repo
B. Levine
C. Tractor Inc.


89. The maximum profit from the protective put strategy is:
A. infinite
B. original underlying price plus the option premium.
C. exercise price minus the original underlying price plus option premium.
90. A call option is selling for $8 in which the exercise price is $100. If the price of
the underlying at expiration is 110, the value of the call option for the seller is
closest to:
A. $8
B. -$2
C. -$10
91. In contrast to forward commitments, contingent claims:
A. are not legal in nature.

B. provide the right but not the obligation to buy or sell the underlying.
C. provide the obligation but not the right to buy or sell the underlying.
92. Arbitrage opportunities least likely exist when:
A. markets are efficient.

B. there are no short selling restrictions.
C. the same asset is not selling at the same price in different markets.
93. A party terminating a forward contract by engaging in an offsetting forward

contract prior to expiration will be exposed to credit risk if the counterparty to the
two contracts is:
A. different.
B. the same.
C. either same or different.


94. Which of the following is least likely an example of contingent claims?
A. Options
B. Convertible bonds
C. Forward-rate agreement


95. Vortex Inc. has issued three bonds in the current year; a fixed rate corporate bond,
floating rate note, and a zero-coupon bond. The LIBOR at the time of issue was
3.25% and the LIBOR over the first, second and third quarter is forecasted at
4.20%, 5.00% and 5.90% respectively. Details concerning the coupon structures
of the three bonds are summarized in the exhibit below:
Exhibit:
Coupon Structures of the Three Issues
Bond Issue Coupon Rate Coupon Payment Purchase
Frequency Price
Fixed-rate bond LIBOR + 0.25% Quarterly $980
Floating rate note LIBOR + 0.10% Quarterly $1,000
Zero-coupon bond N/A N/A $930
Assuming forecasts materialize, which issue has the highest interest payment in
the second quarter?
A. Fixed-rate bond
B. Floating-rate note
C. Zero-coupon bond
96. Credit migration risk is best described as the risk that a bond (‘s):
A. yield spread may increase.

B. creditworthiness may decline.
C. issuer is unable to make interest and principal payments on a timely basis.


97. The exhibit below illustrates data concerning two, one-year, floating rate notes (A
and B) which pay the three-month LIBOR plus 0.25%. The current 3-month
LIBOR is 1.50%.
Exhibit:
Details Concerning A and B
A B
Required yield spread (basis points) 30 40
Discount rate per period 0.4500% 0.1375%
Which of the following statements is most likely correct concerning A and B

(using an n/12 day convention where applicable and assuming N evenly spaced
periods to maturity)?
A. A is selling at discount.
B. B is selling at discount.
C. Both notes are selling at a premium.
98. A covered bond is one that:
A. carries a higher yield relative to similar securitized bonds.

B. carries lower credit risk relative to similar securitized bonds.
C. offers bondholders additional protection by permitting recourse against the
financial institution and SPV in the event the former defaults.
99. Aola Inc issued a 5-year convertible bond with a par value of $1,000 trading at a
premium of 105 per 100 of its par value. The issue is convertible into common
shares at a price of $37. The market price of an Aola Inc common share is
currently is $33.
Does the parity condition hold?
A. Yes.
B. No, the condition is above parity.
C. No, the condition is below parity.


100. Secondary bond markets:
A. facilitate direct trading between investors.

B. have a significant presence of retail investors.
C. are structured as organized exchanges but never as over-the-counter.
101. A 5-year corporate bond issued by Stanley Corp with a 6.25% coupon trades at a
yield of 5.80%. Due to a recent heavy supply of new bond issues, the yield
offered on the bonds instantaneously increases to 6.40%. The bond has a modified
duration of 3.8 and its convexity is 41.5.
Taking into account convexity, the return impact arising from the change in yield
is closest to:
A. (2.21%).
B. (0.57%).
C. + 2.35%.
102. Effective duration is essential to measuring interest rate risk of a bond with an
embedded call option because:
A. it has a well-defined yield-to-maturity.

B. it is measured as sensitivity to changes in the yield-to-worst.
C. future cash flows are contingent on the path of future interest rates.
103. Rodale Tech purchases a 4-year, 6% annual coupon payment corporate bond issue
at a price of 93.3757 per 100 of par value. The issue is trading a yield-to-maturity
of 8% at the time of issuance and this rate is expected to remain unchanged. All
coupon payments are reinvested at the yield-to-maturity.
If Rodale Tech sells the bond after three years, the resulting capital gain (loss)
will be closest to:
A. ($1.85).
B. $4.77.
C. $24.25.


104. A company that has two issues outstanding has declared bankruptcy. Both issues
are equivalent in seniority ranking with Issue A being due in 15 years and Issue B
in 30 years.
Which of the following statements is most likely correct regarding recovery of the
two issues?
A. Issue A will be the first to be repaid.

B. Issue B will be the first to be repaid.
C. Both issues will be ranked pari passu in right of payment.
105. Mark Ronald is a fixed-income investor evaluating two corporate bond issues, A
and B. She would like to determine which issue offers the highest yield-to-
maturity based on quarterly compounding. She has summarized details with
respect to the two issues in the exhibit below:
Exhibit:
Details Concerning Bond Issues A and B
A B
Term (years) 3 5
Annualize yield-to-maturity(%) 6 6
Coupon payment frequency Monthly Semi-annually
Based on quarterly compounding, Ronald will conclude that:
A. issue A offers a higher yield.

B. issue B offers a higher yield.
C. both issues offer the same yield.


106. Kayak Inc. has three outstanding bond issues; A, B and C.
• Issue A is priced at a premium to par and has a longer time-to-maturity

relative to issues B and C but a lower coupon rate relative to issue C.
• Issue B is priced at a discount to par and has a longer time-to-maturity and
higher coupon rate relative to issue C. B’s coupon rate is lower relative to its
yield.
• Issue C is priced at par.
The duration measure will be the lowest for issue:
A. A.
B. B.
C. C.


107. The Gray Fund is a venture capital fund, which is financing Ray Tech’s
production plant expansion. Ray Tech has one operational plant and commercially
sold its first product six months ago. The company’s chief executive has shared
his intent of undertaking an IPO with a year’s time with Gray’s chief investment
officer. Ray Tech is most likely receiving:
A. later-stage financing.
B. early stage financing.
C. mezzanine-stage financing.
108. Tickworth Associates is an asset management firm that manages the hedge fund,
VAC. The fund has implemented a quantitative directional strategy for managing
its equity investments. Which of the following statements is least likely correct
concerning the implemented strategy? VAC (‘s):
A. maintains a market risk neutral position.

B. long/short positions vary depending on the anticipated direction of the
market.
C. employs a combination of technical and fundamental analysis to identify
overvalued securities.
109. Investors selecting fund of funds over single hedge funds should expect:
A. shorter lockup periods.

B. attractive fee structures.
C. no need to conduct due diligence.
110. Capital Inc. maintains a hedge fund that is invested in infrequently traded
convertible bonds. Based on the information provided, Capital Inc. will value its
assets using:
A. average quotes.
B. estimated model values with haircuts.
C. bid prices for longs and ask prices for shorts.


111. A hedge fund with $80 million of initial investment has 2 and 20 fee structure
where the 2% management fees is charged at year-end and. What is an investor’s
effective return if the value of the capital at year end is $108 million, assuming
both fees are calculated independently?
A. 25.30%
B. 25.84%
C. 26.45%
112. Commodity swaps contracts:
A. are obligations to buy or sell a specific amount of a given commodity at a

fixed price, location, and date in the future.
B. are agreements to exchange streams of cash flows between two parties
based on future commodity or commodity index prices.
C. are rights to buy or sell a specific amount of a given commodity at a
specified price and delivery location on or before a specified date in the
future.


113. The investment policy statement sections that are most closely linked to the
client’s needs and are important from planning perspective are those dealing with:
A. investment objectives and investment guidelines.

B. investment guidelines and investment constraints.
C. investment objectives and investment constraints.
114. Which of the following statements correctly explains the required return of an
asset if its beta is negative?
The required return of the asset will be:
A. less than the risk free rate and the asset will reduce the risk of the overall
portfolio.
B. equal to the risk free rate and the asset will reduce the risk of the overall
portfolio.
C. less than the market return but will be greater than the risk free rate and
the asset will increase the overall return of the portfolio and will provide
diversification benefits.
115. Vaughn Reid is an independent investor with portfolio details shown in exhibit
below. He withdraws a fixed $40,000 each year from his investment portfolio.
Inflation rate is 4% and is maintained at its historical level. The applicable tax rate
is 30%.
Exhibit:
Data Concerning Reid’s Investment Portfolio
Year Asset Base Net return
1 $425,000 14%
2 $530,200 3%
3 $615,650 18%
The after-tax real return earned by Reid in the third year is closest to:
A. 8.27%.
B. 9.42%.
C. 12.60%.


116. Which of the following statements concerning the capital market line (CML) is
most likely correct?
A. The slope intersects the y-axis at the point of origin.

B. Points above the CML represent desirable portfolios.
C. As the amount of investment devoted to the market portfolio increases,
expected return and risk will increase.
117. Which of the following statements is most likely correct regarding risk
governance?
A. It is a top-down process and guidance that directs risk management

activities to align with and support the overall enterprise.
B. It is the main quantitative core of risk management but also includes
qualitative assessment and evaluation of all potential sources of risk and
the organization’s risk exposures.
C. It is an overarching governance approach applied throughout the entity
and consistent with its strategy, guiding the risk management framework
to focus risk activities on the objectives, health and value of the entire
organization.
118. The exhibit below summarizes details concerning securities A, B and C which are
trading in the same market:
Exhibit:
Annualized Standard Correlation with
Deviation the Market
Security A 7.5% 1.5
Security B 8.6% 0.6
Security C 9.1% 0.9
Market 5.2% 1.0
The security with the lowest market risk is most likely:
A. A.
B. B.
C. C.


119. The exhibit below shows returns for a small-cap stock over a 5-year period.
Year Return (%)

1 14.5
2 15.2
3 23.1
4 - 6.5
5 13.0
The geometric annual mean return for the stock is closest to:
A. 11.4%.
B. 11.9%.
C. 14.3%.
120. Investors would like to create leveraged positions by borrowing to invest more in
the market portfolio. As a consequence, the capital market line will:
A. become curved even if funds are borrowed at the risk-free rate.

B. remain a straight line regardless of the rate at which funds are borrowed.
C. become curved if investors borrow at a rate higher than the risk-free rate.

FinQuiz.com
June, 2016
Revision 1


33-44 Economics 18
Total 180

Questions 1 through 18 relate to Ethics
1. Mosaic theory is defined as an analyst combining information that is:
A. public and material public.

B. public and material nonpublic.
C. non-public and immaterial nonpublic.
2. Jewel Knowles is a research analyst at Trimont Limited. During the course of her
research, Knowles comes across an unpublished research report in the firm’s
electronic database which is not password protected. The report concerns ADP, a
biotechnology firm, which is developing an item of lab equipment using in-house
developed technology. In his report, he recommends a strong buy based on his
personal observation of how the model operates, ADP’s financial projections
concerning the equipment, discussion with company executives, and analysis of
industry data. He intends to release his report when the firm launches a prototype
of the equipment in the market. After reading the report, Knowles would like to
purchase ADP shares for her investment portfolio.
Can Knowles purchase the stock for her investment portfolio?
A. No, she is not permitted to act on material nonpublic information.

B. Yes, she can act on a recommendation prepared using the mosaic theory.
C. Yes, but she will have to seek her supervisor’s consent prior to the
purchase.
3. The employees of LockHurst Traders, a dealer firm, established an equity fund

that invests in highly speculative ‘hot’ issues for their personal investment
portfolios. The fund was set up after receiving employer consent and all securities
purchased are pre- cleared by a company officer. The latest security purchased by
the fund is issued by a manufacturer, which has previously undertaken an IPO of
its stock. The employees have made an agreement with the manufacturer whereby
they will purchase a large quantity of the stock to induce an increase in price. The
stock will later be sold to clients when its price has at least doubled.
Which of the following standards is least likely being violated?
A. Fair dealing
B. Misrepresentation
C. Responsibility of supervisors

4. When establishing trade allocation procedures for client portfolios, members and
candidates should consider giving all client accounts participating in block trades
the
A. same execution price and charging the same commission.

B. execution price and commission on first in first out basis.
C. same execution commission and the execution price based on first in first
out basis.
5. Mark Michler is a financial analyst who is developing performance projections

for Tike Limited, for the financial years 2015 to 2030. He uses a forecasting
model developed by his supervisor to extrapolate historical performance
information (from the years 1990 to 2014) into the future, makes further
adjustments, and publishes the forecasts in his research report. He includes a
small disclosure at the end of the report, which reads, ‘All forecasts represent
simulations of past performance.’
Is Michler in violation of any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, he is not permitted to use simulated performance information.
C. Yes, his disclosure does not provide full details on the simulated
performance.
6. Walter Stewart is the chief investment manager at Carl & Mathews, which is
renowned for its asset management services. During an official visit to an
investment conference, Stewart engages in a discussion with Marie Lance, a
philanthropist who is seeking to establish an investment fund for a charitable
foundation. Stewart casually mentions that he once managed the account of ‘a
(former) client’ who was seeking to donate a significant sum of money to a cause
like Lance’s. Stewart also offers to ask the client to get in touch with Lance.
Is Stewart in violation of the CFA Institute Standards of Professional Conduct

concerning client confidentiality?
A. Yes.
B. No, because he has not revealed the identity of the client.
C. No, because information concerning former clients is no longer
confidential.

7. Donna Simpson had an exceptional performance year and is offered a two-way

ticket and fully paid trip to the Greece by her client as reward. Simpson’s best
course of action is to:

B. receive consent from her employer before accepting the offer.
C. accept the offer as long as she notifies her employer accordingly.
8. With respect to the acceptance of gifts, the CFA Institute:
A. discourages customary business-related entertainment.

B. encourages setting a strict value limit for acceptable gifts.
C. encourage accepting gifts from parties other than clients.
9. Which of the following is least likely the code of ethics?
A. Promote the integrity of and uphold the rules governing capital markets.
B. Maintain and improve professional competence and strive to maintain and
improve the competence of other investment professionals
C. Deal fairly and objectively with all clients when providing investment
analysis, making investment recommendations or taking investment
actions.
10. With the permission of her former employer, Taylor Reed shares information
concerning her achievements at the firm with her new employer. She writes a
short summary, which includes the results she has achieved over the past ten years
and the names of several important client accounts for which she executed trades.
Taylor forgets to mention her association with her former employer in her
summary but takes caution not to share additional client information with her new
employer.
Taylor is in violation of the CFA Institute Standards of Professional Conduct

relating to:
A. record retention.
B. misrepresentation.
C. loyalty to employer.

11. Following the conclusion of research on a steel equipment manufacturer, a

research firm releases a one word ‘sell’ recommendation to all its clients and
prospects and discloses that ‘additional information concerning the
recommendation is available from the producer of the report’.
Based on the communication used by the firm, it is most likely:
A. in violation because the firm must include the factors that were used to
arrive at the recommendation.
B. in violation because the firm must disclose the identified ‘additional
information’ as part of the recommendation.
C. not in violation of the Code and Standards as communication is defined as
‘highly diverse’ by the CFA Institute Standards of Professional Conduct.
12. Jason Gilbert, CFA, is an exam grader for the CFA Program. He also works as an
independent research analyst. When asked about his experience as a grader and
the CFA Program’s scope in the financial market, Gilbert makes the following
comments:
Comment 1: “Although results for the CFA exam are yet to be released,
pass rates will be the lowest across all levels.”
Comment 2: “The CFA Program equips candidates to be qualified enough

to deal with a broad range of real-life topics including, but not limited to,
financial analysis, portfolio management, quantitative techniques and
corporate finance.”
Which comment most likely represents a violation of the CFA Institute Standards
A. Comment 1 only.
B. Comment 2 only.
C. Both of the comments.

13. Upon receiving a written complaint, the CFA Institute Designated Officer
conducts an investigation and discovers that a violation of the Code and Standards
has occurred. If the designated officer issues a disciplinary sanction, the member
or candidate:
A. can reject it.

B. must accept it.
C. will receive a cautionary letter.
14. The Code and Standards require members and candidates to make a reasonable
inquiry into a client’s risk and return objectives and financial constraints prior to
making investment recommendations and taking investment action for:
A. clients with a stated mandate, strategy or style only.

B. members or candidates in an investment advisory relationship only.
C. clients with a stated mandate, strategy or style and members or candidates
in an investment advisory relationship.
15. Which of the following statements concerning claiming compliance with the
GIPS standards is most likely correct?
A. Compliance must be achieved on a firm-wide basis.

B. Compliance with the GIPS standards is enforced by legal and regulatory
authorities.
C. Software vendors supplying performance calculation software programs to
investment management firms can claim compliance with the GIPS
standards.
16. Which of the following is least likely tested by the verification process? Whether
the investment management firm (‘s):
A. meets the definition of a firm as laid out by the GIPS standards.

B. policies and procedures for calculating performance are in compliance
with the GIPS standards.
C. has complied with the composite construction requirements of the GIPS
standards on a firm-wide basis.

17. For periods beginning on or after January 1, 2011, the GIPS standards require
portfolios to be valued on the basis of:
A. fair value.
B. original cost.
C. present value.
18. Base Corp. resides in a country that enacted laws and regulations for calculating
and presenting investment performance fifteen years ago. By complying with
local laws and regulations, Base Corp:
A. cannot claim compliance with the GIPS standards.

B. has automatically complied with the GIPS standards.
C. can also comply with the GIPS standards but must give priority to the
former in the event of conflict between the two.

19. If there is no variability in the data set, the geometric mean will equal to the:
A. arithmetic and harmonic mean.

B. harmonic mean but will be lower than the arithmetic mean.
C. arithmetic mean but will be higher than the harmonic mean.
20. A recruitment agency is short listing candidates for a position. The candidates
being evaluated are from numerous educational backgrounds. The probability that
the selected candidate is an MBA is 0.65 and the probability that the chosen
candidate is the most appropriate for the role is 0.30. The agency has worked out
that the probability a chosen candidate is appropriate given that he is of a non-
MBA is 0.25.
Using the total probability rule, what is the probability that the chosen candidate
is the most appropriate for the HR role given that he is an MBA?
A. 0.327.
B. 0.300.
C. 0.750.
21. The most probable definition of an exhaustive event is that it:
A. covers all possible outcomes.

B. has a specified set of outcomes.
C. is the chance that a specified event will occur.
22. Dwight Enterprises holds equity stock of Max Limited. The current price per
share is $30. The probability that the investment will increase in value over the
coming year is denoted as p̂ . Over the past year, the stock had increased in value
in seven out of the twelve months. If the stock increases in value, it is expected to
earn an annualized rate of return of 2%.
Viewing the monthly change in stock prices as individual Bernoulli trials, the
probability that the stock will increase in value over the coming year is closest to:
A. 0.0117
B. 0.0200.
C. 0.5833.

23. Defining properties of a probability least likely include the following:
A. probabilities are based on logical analysis.

B. the probability of any event is between 0 and 1.
C. the sum of probabilities of any set of mutually exclusive and exhaustive
events equals 1.
24. Which of the following statements is least likely correct regarding a limitation of
technical analysis?
A. Technicians restrict their analysis to studying market movements.

B. Technicians are slow to recognize changes in trends and/or patterns.
C. The analysis cannot be applied to asset classes that do not have an income
stream.
25. Which of the following features is most likely correct regarding binomial random
variable?
A. The individual trials are positively correlated.

B. The probability of success is constant for all trials.
C. The probability of success can only take on a value of 0 or 1.
26. The exhibit provides information concerning quarterly returns on two otherwise
identically managed equity funds, A and B, as well as statistical estimates
concerning their mean return differences over the past fifty quarters.
Measure Fund A Return Fund B Return Differences

(%) (%) (Fund A – Fund B)
Mean 2.780 3.756 - 0.976
Standard 4.672 5.468 - 0.796
Deviation
Using a critical value of 1.671, which of the following conclusions is most likely
valid concerning differences between the mean returns on Fund A and B?
A. The difference is significant.

B. The difference is insignificant as the null hypothesis is rejected.
C. The difference is insignificant as the null hypothesis is not rejected.

27. The real risk-free interest rate most likely reflects:
A. compensation for expected inflation.

B. the relationship between different dated cash flows.
C. time preferences of individuals for current versus future real consumption.
28. A cricket club’s manager is evaluating the performance of its players over the past
year and will use this as a basis for forecasting future performance. The
probability that a player performing well in the past season will continue to do so
is 0.65. The probability a chosen venue will provide favorable playing conditions
for a player is 0.20. The probability that either of the two events materialize is
0.40.
The probability that past performance and favorable playing conditions contribute
positively to player performance in the future is closest to:
A. 0.13.
B. 0.40.
C. 0.45.
29. A telecommunication company’s procurement analyst has forecasted that the

average cost for one of its key inputs will equal $25.00 per unit. The analyst
would like to measure the dispersion around his cost forecast using the probability
distribution of purchase costs in the current fiscal year.
Probability Purchase Cost

($)
0.10 28.00
0.25 27.80
0.35 26.40
0.30 19.10
1.00
The standard deviation of unit purchase costs in the current fiscal year is closest
to:
A. $0.28.
B. $3.69.
C. $4.97.

30. Marcus Babbage holds a $500,000 investment portfolio. In the current year
Babbage will need to withdraw $40,000 to finance a business venture. However,
he does not want the withdrawal to invade his portfolio’s principal. His portfolio
manager has identified three alternative asset allocations for Babbage:
A B C
Expected annual 13 22 15
return
Standard 17 28 19
deviation of return
Which of the three allocations is the most optimal for Babbage’s investment
portfolio?
A. A
B. B
C. C
31. A nonparametric test is preferred to a parametric test when:
A. stronger measurement scales are required.

B. the randomness of a sample is being questioned.
C. the population from which the sample is drawn is assumed to be normally
distributed.

32. A portfolio manager is comparing the performance of a client’s portfolio before

and after the inclusion of real estate. He has complied relevant data in a table. He
aims to analyze whether quarterly returns have changed significantly between the
two periods.
He collects returns data five years prior to and five years after the inclusion.
Mean Variance
N Quarterly of Returns
Returns (%)
Before inclusion 20 2.584 225
After inclusion 20 1.821 151
Using a 2.1555 rejection point, the manager will most likely conclude that the
inclusion of real estate:
A. significantly alters portfolio performance.

B. does not significantly alter portfolio performance
C. has an indeterminate effect on portfolio performance.

33. Laura Martin, CFA, is a British investor currently holding Singaporean equities.
She is exploring arbitrage opportunities in the forward foreign currency market.
The current GBP/SGD spot exchange rate is 2.1050. She has devised the
following strategy:
Invest SGD for twelve months in risk-free zero coupon bonds at a rate of 4.5%.
At the end of the term convert the SGD to the GBP at an agreed upon forward rate
of GBP/SGD 2.0303.
The return on the strategy in domestic currency terms is closest to:
A. 0.35%.
B. 0.45%.
C. 0.79%.
34. In context of the gains from global trading, a country:
A. decreases its welfare by solely focusing on producing the good in which it

has a comparative advantage.
B. which does not have an absolute advantage cannot gain from trading
goods in which it has a comparative advantage.
C. can earn higher trading gains if the difference between the world price of a
good or service and autarkic price is increased.

35. The exhibit below illustrates the transactions in a country’s balance of payment
account for the fiscal year 2013:
Amount
($ millions)
Foreign remittances by non- 14.5
resident citizens
Dividend income on foreign 8.6
equity investments
Acquisition of natural gas 2.5
extraction rights
Total gift taxes 3.4
Exports of goods and 22.7
services
Foreign owned assets in the 44.9
country
Based on the information provided, the current account balance is closest to:
A. $16.8 million.
B. $45.8 million.
C. $49.2 million.
36. The government of a developing country intends to increase domestic savings by

reducing the budget deficit. The impact of the government’s proposed plans on
the current account balance is most likely:
A. neutral.
B. a decrease.
C. an increase.
37. A key function of the International Monetary Fund (IMF) is to:
A. ensure the stability of international payments.

B. regulate cross-border transactions on a global scale.
C. develop robust financial systems which support lending arrangements.

38. A firm can increase aggregate supply in the:
A. short run by increasing physical capital stock.

B. very short run without adjusting output prices.
C. long run by increasing wages in line with the aggregate price level
changes.
39. Ecrot is a manufacturer of computers. The exhibit below highlights the aggregate
sum of production for the firm as well as the quantity of labor employed in the
process.
Exhibit:
Labor and Aggregate Production Data
Labour Aggregate Sum
(L) of Production
0 -
1 150
2 260
3 390
4 450
5 505
6 535
Ecrot’s marginal return is maximized when the maximum number of workers

employed is no more than:
A. 3.
B. 4.
C. 6.
40. Janice Lee is a British investor seeking to purchase U.S. small-cap equities in a
year’s time. The current GBP/USD nominal spot exchange rate is 0.9055 and is
forecasted to rise by 8% while Lee expects her real purchasing power to increase
by 15% by year end. If the price of U.S. goods is expected to increase by 3%, the
British price level is forecasted to:
A. decline by 3.27%.
B. decline by 15.00%.
C. increase by 30.87%.

41. An exchange rate dealer based in France has quoted the following exchange rates:
Exchange Rate
Quotation
EUR/USD 1.3718
EUR/GBP 0.8178
EUR/BRL 3.0214
Another dealer has quoted a USD/BRL cross rate of 2.8963. A French investor
can exploit the arbitrage opportunity and earn a profit of:
A. USD 69,380 per BRL 100,000 traded.

B. BRL 69,380 per USD 100,000 traded.
C. BRL 124,846 per USD 100,000 traded.
42. With respect to the impact of fiscal policy on aggregate demand:
A. Monetarists forecast the effects as powerful.

B. Keynesians believe that the effect is only temporary.
C. Keynesians forecast a powerful effect subject to the spare capacity in an
economy.
43. An economist has forecasted that a country’s economy can grow credibly over the
long-term at a sustainable rate of 1.8% per year. The country’s inflation target is
2.0% and the central bank has announced its intention to implement an
expansionary monetary policy.
To implement the stated policy, the policy rate should most likely:
A. exceed 3.8%.
B. not exceed 2.0%.
C. not exceed 3.8%.

44. Debora Eaton is analyzing money supply and demand in the nation of Nigeria.
Based on her preliminary findings, Eaton has determined that the interest rate
where there will be no excess money balances is 6.5%.
Holding all else constant, if bonds offer an interest rate of 6.2%:
A. prices will increase.

B. supply will increase.
C. individuals will decrease their money holdings.

45. A deferred tax asset will result when the solution to the expression ‘Income tax
payable (for income tax purposes) – Income tax expense (on the income
statement)’ is:
A. positive and the difference is due to temporary timing differences.

B. positive and the difference is due to permanent timing differences.
C. negative than income tax expense and the difference is due to temporary
timing differences.
46. Starred Limited redeems a portion of its bond issue prior to the stated maturity
date. Which of the following statements most accurately highlights the effect of
the redemption given the company complies with IFRS? Starred will:
A. reduce bonds payable by the face value of the bonds redeemed.

B. report the cash used for redemption as a cash outflow from financing
activities.
C. report the unamortized debt issuance costs as part of gain or loss on debt
extinguishment.
47. In 2013 Maritime Inc.’s ROE ratio has increased by 30.7% from its 10.7% level
in 2012. The exhibit below illustrates selective financial information concerning
the company over the two years.
Exhibit:
Selective Financial Information for Maritime Inc.
2013 2012
Average total assets $12.1 million $11.5 million
Average shareholders’ equity $11.1 million $11.1 million
Tax rate 35% 30%
The increase in the company’s ROE can most likely be attributed to an increase in:
A. the tax rate.

B. financial leverage of 5.2%.
C. net profit margin of 34.4%.

48. If a firm decides to use the straight-line method of depreciation instead of the
accelerated method for a new piece of equipment, which of the following would
most likely increase during the year of purchase?
A. Asset turnover.
B. Return on assets.
C. Operating profit margin.
49. Dract Limited borrows $1.5 million to finance the construction of a processing
facility that will have a useful life of 25 years at an interest rate of 6%. The
construction will be completed in three years. Dract prepares and presents its
financial statements in accordance with IFRS.
Which of the following transactions will most likely be recorded in relation to the
loan?
A. Interest costs of $90,000 will be capitalized.

B. Dract will classify $270,000 as an investing cash outflow.
C. At the end of the first year, depreciation expense will equal $60,000.
50. With respect to the initial recognition of goodwill related to a business

combination, a deferred tax liability is:
A. recognized only to the extent of subsequent impairment charges.

B. recognized only to the extent of the difference between the carrying
amount and tax base.
C. not recognized for either the difference between the carrying and tax base
or for subsequent impairment charges.

51. The exhibit below illustrates the inventory purchase record for ABC Limited for
the financial year 2012. The company uses the LIFO method of inventory
accounting.
Exhibit:
Inventory Purchase Record for ABC Limited, Year 2012
Per Unit
Date Units Amount (€)
Beginning 150 20
inventory
28 Jan Purchases 20 24
15 Feb Purchases 30 25
22 March Sales 80 30
17 June Purchases 30 28
20 September Sales 100 30
9 November Purchases 40 35
The cost of sales reported for the year is closest to:
A. €2,700.
B. €3,830.
C. €4,670.
52. A financial analyst has tabulated the following data for a large-cap firm:
Beginning shareholder’s equity $245 million

Ending shareholder’s equity $475 million
Net Income $67 million
Repurchase of common stock $0
The firm’s other comprehensive income is closest to:
A. $0.
B. $186 million.
C. $297 million.

53. Kayle Limited purchased an automated box stamping machine for $4,000. The
original useful life and salvage value of the machine is 10 years and $800,
respectively. Rob Marshall would like to evaluate the impact of the depreciation
methods on the company’s operating profit margin. During the first year of
purchase, Kayle Limited reported revenues of $25,000 while earnings before
interest, tax, depreciation and amortization (EBITDA) was $12,000.
The operating profit margin (EBIT/revenues) reported under the straight-line

method and double declining method of depreciation, respectively, in the first
year of the machine’s operations is closest to:
Straight-line Double-declining
method: method:
A. 46.72% 44.80%.
B. 46.72% 46.40%.
C. 48.00% 45.44%.
54. Which of the following statements accurately address the differences between
income tax accounting under IFRS and U.S. GAAP?
A. Deferred income taxes related to the revaluation of property, plant and

equipment are recognized in equity under IFRS only.
B. Deferred tax assets related to a step-up in the value of an acquired asset to
fair value in a business combination are recognized under IFRS only.
C. Unlike IFRS, which require a full provision to be recognized for deferred
income taxes, U.S. GAAP require a provision to be recognized to the
extent of recoverability of deferred taxes.
55. In the financial year 2010, a company reported accounting profit and taxable
income of $150,000 and $147,400, respectively. In addition, the company
received $8,500 in tax refunds during the year while its deferred tax liabilities
account increased by $2,500. The company paid $42,000 in taxes. The applicable
tax rate is 25%.
Income tax expense for the year 2010 is closest to:
A. $36,850.
B. $39,350.
C. $42,000.

56. Which of the following is most likely an example of a positive covenant?
A. The company must maintain a minimum interest coverage ratio of 2.0

times.
B. Lender consent must be sought prior to undertaking any factory expansion
projects.
C. Dividends can only be paid if the company generates a minimum net profit
margin of 25%.
57. An upward revaluation of a long-lived asset is treated in the same way as:
A. a downward revaluation
B. the reversal of a revaluation decrease.
C. the amount in excess of the revaluation reversal amount.
58. Which of the following features is most likely a general requirement highlighted
by the Conceptual Framework with respect to the preparation of financial
statements according to IFRS?
A. Fair value
B. Timeliness
C. Consistency
59. In 2010, Horizon Inc. sold real estate property worth $150,000 to Homestead
receiving a down payment of $15,000. The remainder of the sales price is to be
paid over an eight year period. Horizon Inc. purchased the property in the year
2000 when the original cost was $130,000.
Under the cost recovery method, the profit to be recognized by Horizon Inc. in the
year 2010 is closest to:
A. $0.
B. $15,000.
C. $20,000.

60. Defensive interval ratios measure:
A. solvency.
B. a company’s creditworthiness.
C. how long a company can rely on cash reserves to pay daily cash
expenditures.
61. In the year 2013, Time Corp. reports net income of €2.50 million and has 300,000
weighted average number of shares outstanding. At the beginning of the year the
company had 30,000 options with an exercise price of €20. The company’s
market price averaged €30 per share over the fiscal year.
Time Corp’s diluted EPS based on the treasury stock method is closest to:
A. 8.06.
B. 8.62.
C. 8.33.
62. Which of the following statements most accurately explains the treatment of costs
associated with internally developing intangible assets? These costs are:
A. generally capitalized.
B. treated as investing cash outflows.
C. expensed under U.S. GAAP if they relate to research and development.

63. The exhibit below highlights selective balance sheet information for Rictor Corp.
for the financial year 2013.
Exhibit:
$ millions
Accounts payables 100
Current portion of long-term debt 65
Other current liabilities 90
Long-term debt 160
Common stock 650
Retained earnings 95
The debt to equity ratio is closest to:
A. 0.30.
B. 0.35.
C. 0.56.
64. The exhibit below illustrates selective financial information for Mono Capital
between the financial years 2012 and 2013. Monroe reported net income of
$280,000 in the year 2013.
Exhibit
Inventory 35 29
Prepaid expenses 12 8
Taxes payable 8 6
Depreciation 16 12
Dividends paid 6 4
The total adjustment required to determine cash flow from operations from net
income can be determined by adding:
A. $5 million.
B. $21 million.
C. $25 million.

65. Bonds issued at a premium:
A. have a carrying value which declines over the term to maturity.

B. have a reported interest expense which is higher than interest payments.
C. should be amortized using the straight-line method which better reflects
the economic substance of the transaction.
66. On January 1, 2013, the carrying amount of inventory on Alliance Manufacturers’

balance sheet is $128,750. Donna Wells, the company’s procurement manager,
assesses that net realizable value is $119,352 at the time. On December 31, 2013
Wells makes a reassessment and finds that net realizable value has increased to
$130,450. Alliance Manufacturers prepares and presents its financial statements
in accordance with IFRS.
The subsequent increase in net realizable value will most likely:
A. increase gross profit by $9,398.

B. increase gross profit by $11,098.
C. not be accounted for as reversals of inventory write-downs are not
permitted.
67. An auditor who concludes that a company’s financial statements are not fairly
presented will most likely issue a (n):
A. adverse opinion.
B. qualified opinion.
C. unqualified opinion.

68. Debra Toe, CFA, is an independent financial analyst who is evaluating the
financial reporting quality of Summit Lark. Based on preliminary analysis, Toe
suspects Lark’s financial statements are lacking in financial quality. She has
collected relevant financial information for the analysis (Exhibit).
Exhibit:
Relevant Financial Information Concerning
Summit Lark (Financial Years 2012 to 2013)
Revenue 45 39
Net income 27 21
Operating cash flows 65 72
Inventory 10 14
Total assets 80 65
Which of the following conclusions is most probable based on the information

presented?
A. Lark’s efficiency is declining.

B. Lark may find it difficult to raise new equity capital.
C. The decline in inventory is higher than the increase in sales indicating that
revenues are reported aggressively.

69. Smithline Corp.’s total market value of equity equals $45 million while the
market value of debt equals $30 million. The relevant tax rate for the corporation
is 30% while the equity beta is 1.893.
Smithline Corp’s unlevered beta is closest to:
A. 1.29.
B. 1.89.
C. 2.78.
70. Line Corporation will be investing €100 million in a new research facility. The
facility is expected to generate cash flows of €30 million per year for the next
eight years. The company’s weighted average cost of capital is 7.5%. Line has 5
million shares outstanding each of which has a current market price of €26.50.
The company’s earnings yield is 8.00%.
The impact of the investment on Line’s stock price is most likely:
A. a decrease of €1.77.
B. an increase of €15.14.
C. an increase of €41.64.
71. A company that operates with a high proportion of fixed costs in its cost structure
is said to have a high level of:
A. sales risk.
B. financial risk.
C. business risk.

72. The HR Fund is seeking to include a short-term instrument in its investment

portfolio. The fund’s chief investment officer has identified an instrument with
• low degree of liquidity risk;

• insignificant credit risk; and
• interest bearing with attractive yields.
The instrument identified is most likely a:

A. U.S. Treasury bill.
B. commercial paper.
C. federal agency security.
73. Stole Limited is selling 300,000 units at a price of $40/unit. Total fixed and
variable costs are $8.5 million and $6.6 million respectively. The company’s total
financial costs are equal to $2.5 million.
The level of sales units at the operating breakeven point and breakeven point,
respectively, is:
A. 366,667 and 505,556.

B. 472,222 and 611,111.
C. 611,111 and 611,111.
74. The length of a company’s operating cycle has increased in the current year.
Which of the following statements most accurately justifies the reason for this
increase?
A. The company’s inventory balance has decreased.

B. The company is taking advantage of early payment discounts.
C. The average number of days to collect payments from customers has
increased.

75. Maritime Inc., a component manufacturer, has announced a repurchase of 800,000

shares at the prevailing market price of $10. Maritime has 3 million ordinary
shares outstanding at the time of repurchase. The company’s reported assets and
liabilities are $40.0 million and $20.5 million, respectively.
How will the share repurchase affect Maritime’s book value per share? The book
value per share will:
A. increase by 9.1%.
B. decrease by 19.6%.
C. decrease by 61.7%.
76. Which of the following shareowner policies is most consistent with good
A. Investors are given three days to cast their votes via proxies.
B. A company transfers all voting records to a third party agent.
C. In a company with dual classes of shares, a majority of the voting rights is
owned by one class of shareowners.

77. Green Associates does not currently pay dividends but is expected to do so in
three years’ time when the dividend per share is expected to $6.50 and will grow
at a perpetual rate of 3% thereon. Green Associate’s required rate of return is
10%.
The intrinsic value of Green Associate’s stock is closest to:
A. $71.86.
B. $76.74.
C. $95.64.
78. Joyce Inc., a Japanese automaker, is seeking to offer its shares in overseas
markets. The management proposed to consider an intermediary to issue shares in
foreign markets using a global sponsored depository receipt (DR).
The chosen method will:
A. expose overseas investors to considerable foreign exchange risk.

B. not allow Joyce Inc. to participate in the issuance of depository receipts.
C. grant participating investors the same voting rights as the direct owners of
the common shares.
79. A trader purchases a share of stock on margin at its current market price of $80.
The initial margin requirement is 30%.
The margin requirement for each share of stock is closest to:
A. $24.
B. $56.
C. $80.

80. Gene Saunders has purchased a stock using $15 of her funds and $30 of borrowed
funds. One month after making the investment, the stock falls by 15% in value.
Her financing mix meets minimum margin requirements.
The initial margin and unannualized return on investment, before considering the
payment of fees and commissions, is closest to:
A. 33.3% and – 22.5% respectively.

B. 33.3% and – 45.0% respectively.
C. 50.0% and – 15.0% respectively.
81. Which of the following features most likely distinguishes common and preference
shares?
A. Voting rights
B. Perpetual maturity dates
C. Presence of embedded options
82. Which of the following industries is least likely cyclical in nature?
A. Autos
B. Utilities
C. Technology
83. For one of her equity investments, investor Carol March has specified a GTC,
stop 120, limit 95 sell order. The original purchase price of her investment was
$150. If the price of the stock declines below $120, March’s GTC order will most
likely:
A. not be executed.
B. be executed and her maximum loss will be $25.
C. be executed and her maximum loss will be $55.
84. Which of the following reasons least likely justifies why companies operating in
an industry with high barriers to entry have low pricing power?
A. They are relatively new and lack a good track record.

B. Barriers to exit are high making overcapacity highly likely.
C. Price is a large component of a buyer’s purchase decision.

85. Jones Davenport submits a sell order for 12 contracts with a limit price of $25.7.
The market’s limit order book immediately prior to Davenport’s order is as
follows:
Buyer Bid size Limit Price Offer Seller

(€) Size
Martin 4 25.6
Smith 2 25.7
Peterson 7 25.8
25.9 6 Hill
26.0 8 Ali
26.1 10 Khan
Davenport’s average trade price is closest to:
A. €25.73.
B. €25.78.
C. €25.95.
86. The Gordon growth model cannot be used to estimate intrinsic value if the
associated company:
A. is rapidly growing.
B. assumes a perpetual dividend growth rate.
C. retains a portion of its profits for reinvestment purposes.

87. The exhibit below summarizes information concerning a market-capitalization

weighted index:
Stock Beginning of period Dividends End of period Shares

price per share per share price per share outstanding
($) ($) ($)
A 120 50 140 45,570
B 200 25 250 59,650
C 180 30 160 112,740
Total 217,960
The price return on the market-capitalization weighted index is closest to:
A. 4.08%.
B. 4.35%.
C. 6.49%.
88. Greenex Inc.’s option-free perpetual preferred stock is currently selling in the
market for $945.63. The annual dividend rate is quoted at 5.5% and the par value
of the stock is $1,000. If the stock is fairly valued, the required rate of return
A. 5.20%.
B. 5.50%.
C. 5.82%.

89. An investor who goes long an equity forward contract on a total return stock
index will be concerned about the management of:
A. price risk.
B. the uncertainty of dividends.
C. both price risk and uncertainty of dividends.
90. A long-term European put option will always be worth more than an otherwise
identical short-term put option if:
A. volatility is lower.
B. interest rates are lower.
C. interest rates are higher.
91. Call options are primarily purchased by investors who are:
A. bullish.
B. bearish.
C. risk-averse.
92. An investor purchased a stock several months ago for $85 currently selling for
$98. A call option selling for $7 has an exercise price of $101. If the price of
share at expiration is $107, the value of the covered call position for the investor
is closest to:
A. $91
B. $100
C. $101
93. The maximum loss for the holder of protective put position is equal to:
A. exercise price –option premium.

B. exercise price – underlying price + option premium.
C. cost of the underlying + option premium – exercise price.

94. The minimum value of which of the following is the maximum of zero and the
underlying price minus the present value of the exercise price?
A. European call
B. European put
C. Protective put

Question 95 through 106 relate to Fixed Income Investments
95. Alpha and Beta, manufacturing entities, are identical in all respects except for
industry cyclicality. Alpha operates in a cyclical industry while Beta operates in a
non-cyclical industry. If both companies increase their leverage levels by 10%,
credit risk will be:
A. higher for Beta.

B. nearly identical.
C. higher for Alpha.
96. Green Associates owns a 3% semi-annual coupon paying, 4-year bond issue with
a par value of $10,000 that is currently priced at $9,783.14. The annualized yield
to maturity of the issue is closest to:
A. 3.31%.
B. 3.59%.
C. 6.63%.
97. Rachel Lake is evaluating the potential for bond prices to change given the market
discount rate. She derives the following conclusions:
Conclusion 1: The convexity effect can be observed as the tendency for bond
prices to increase when market discount rates decrease.
Conclusion 2: For two bonds offering an identical coupon rate, the maturity effect
results in the longer-term bond being more price-sensitive than a
shorter-term bond when the change in market discount rates is
identical.
Lake is most likely correct with respect to:
A. conclusion 1 only.
B. conclusion 2 only.
C. both the conclusions.

98. The exhibit below summarizes selective financial information concerning a textile
manufacturer for the year 2013.
Exhibit:
$’000
Net income from continuing operations 450
Depreciation and amortization 18
Capital expenditures 7
Increase in non-cash working capital 70
Gains from sale of long-lived assets 12
Total debt 500
The manufacturer’s FFO/total debt is closest to:
A. 0.758.
B. 0.772.
C. 0.912.
99. Bonds that are issued by the government and backed by tax revenues are least
likely known as:
A. sovereign bonds.
B. non-sovereign bonds.
C. quassi-government bonds.
100. Lance Gibbons holds two fixed income securities, a corporate bond and a zero-
coupon bond. Details concerning his investment are as follows:
• The zero-coupon bond matures in twelve years and is trading at a market

discount rate of 5%.
• The corporate bond offers an annual coupon rate of 3.8%, matures in ten
years and is trading at a market discount rate of 4.2%.
Which of the following statement is most likely correct regarding his investments?
A. Both bonds are selling at the same price.

B. The corporate bond is trading at a lower price.
C. The zero coupon bond is trading at a discount of $44.32.

101. A limitation of using the current yield to evaluate a fixed income security is that
the measure ignores:
A. weekends and holidays.

B. the flat price of an issue.
C. time value of coupon payments.
102. A 150-day money market instrument has an add-on rate of 6.50%. Assuming
there are 360 days in a year, the bond equivalent yield of the instrument is closest
to:
A. 6.50%.
B. 6.59%.
C. 6.77%.
103. James Cunningham is evaluating the factors that influence issue ratings. He has
identified and described two factors which he has summarized below:
Factor 1: The higher the senior unsecured ranking, the lower the notching
adjustment will be.
Factor 2: In the case of structural subordination, debt of the parent holding

company is serviced before that of operating subsidiaries.
Cunningham is most likely correct with respect to:
A. factor 1 only.
B. factor 2 only.
C. both of the factors.

104. Richard Grove invests in a 2-year, 4% semi-annual coupon paying bond with a
par value of 1,000. The sequence of spot rates is as follows:
Time-to-maturity Spot Rate

0.5 year 1.0%
1.0 year 1.8%
1.5 years 2.9%
2.0 years 4.2%
2.5 years 5.6%
The price of the bond is closest to:
A. $996.48.
B. $1,058.28.
C. $1,009.57.
105. Which of the following is least likely an example of an internal credit

enhancement?
A. Claim priorities to the underlying assets are ranked.

B. Posting more collateral than is required to secure financing.
C. Providing a credit line to reimburse cash flow shortfalls backing the issue.
106. The government of Ilaka, a developing country, has issued 30-year capital
indexed bonds linked to the domestic consumer price index (CPI) in local
currency IA. The bonds have a par value of IA 1,000. The bonds make semi-
annual coupon payments at a rate of 6%. Over the most recent six months the CPI
has increased by 4%.
If the bonds were interest-indexed bonds as opposed to capital-indexed bonds,

semi-annual coupon would have been:
A. the same.
B. lower by $1.20.
C. higher by $2.40.

D. higher for Beta.

E. nearly identical.
F. higher for Alpha.
D. 3.31%.
E. 3.59%.
F. 6.63%.
109. A sinking fund arrangement on a term maturity structure:
A. accomplishes the same goals as that of a corporate bond on the same

structure.
B. carries a lower level of credit risk relative to corporate bonds on the same
structure.
C. differs from a serial maturity structure in that bondholders know which
bonds will mature.

110. Lily Hernandez is intending to purchase a two-year zero coupon bond issue and is
evaluating the possible investment options. She has concluded that she can either
1) buy and hold the bond for two years or

2) buy a 1-year bond and roll over the proceeds into another one-year zero-
coupon bond one year from today.
Yield to maturities on 1- and 2-year zero-coupon bonds are 1.65% and 1.98%
respectively.
Hernandez will opt for option ‘2’ if the minimum yield-to-maturity is:
A. 2.300%.
B. 2.311%.
C. 3.300%.

107. Carlson Smith has invested in the FD hedge fund, which has $450 million under
management. The fund charges a 2% management fee based on the funds under
management at year end and a 20% incentive fee for any returns earned in excess
of a 6% hurdle rate. The FD fund appreciated by 10% during the year. Smith’s
net-of-fees returns is closest to:
A. 7.44%.
B. 9.64%.
C. 9.76%.
108. Garcia Miguel is comparing the valuation three private equity companies for
investment using the discounted cash flow approach. She has collected cash flow
data for the three companies (Exhibit) and would like to invest in the one with
highest valuation.
Exhibit:
Cash Flow Forecast Data Concerning Companies A, B and C
Free Cash Flows Cost of
Company to Equity* equity
A $40,000 5%
B $155,000 12%
C $88,100 6%
*All cash flow forecasts are perpetual
Miguel should most likely invest in Company:
A. A.
B. B.
C. C.
109. A desirable characteristic of alternative investments is:
A. liquidity.
B. transparency.
C. low correlation with traditional investments.

110. Which of the following is most likely to be considered an alternative investment

for an investor whose major concern is liquidity?
A. ETFs only.
B. ETFs and REITs only.
C. ETFs, REITs and publicly traded private equity funds.
111. Which of the following relative value strategies in fixed income markets
incorporates trades between two corporate issuers or between different parts of an
issuer’ yield curve?
A. Multi-strategy
B. Fixed income general
C. Fixed income convertible arbitrage
112. A hedge fund with $120 million of initial investment and 2-20 fee structure
earned 35% return at year end. Assuming management fees is based on assets
under management at year end and incentive fee is calculated net of management
fee, the total fees earned by the fund is closest to:
A. $10.32 million
B. $10.40 million
C. $11.68 million

113. Which of the following is not a true statement about VaR?
A. VaR measure does not tell the maximum loss.

B. A VaR measure focuses on the right tail of the distribution.
C. VaR is subject to the same model risk as derivative pricing model.
114. Feed back step assists in rebalancing the client’s portfolio due to change in:
A. political system
B. market conditions.
C. circumstances of investment manager.
115. Which of the following is most likely to be an objective for a foundation?
A. Maintain the fund’s nominal value

B. Reduce the volatility of spending needs
C. Generate liquidity to meet spending needs

116. Sasha Gable is managing the portfolio of a pension fund, which is equally
invested in equities and real estate. The correlation between the two securities is
0.10. Details concerning expected annual returns and standard deviations are
summarized in the exhibit below:
Exhibit
Expected Annual Expected Annual Standard
Return (%) Deviation (%)
Equities 15.5 5.7
Holding all else constant, if Gable decides to increase the weight of equities to
60% by selling real estate, the portfolio standard deviation will, in percentage,
terms:
117. Stock returns are usually negatively skewed. This statement implies that:
A. standard deviation will be overestimated.

B. there is a higher than normal possibility for extreme returns.
C. there is a high frequency of positive deviations from the mean.
118. At the beginning of the year 2010 an investor deposited $25,000 in his investment
account. He generated an investment gain of $4,000 during the same year which
resulted in an ending account balance of $29,000. In 2011, the investor withdrew
$12,000 from his account at year end. At the beginning of the year 2012, the
investor deposited a further $5,000. In 2013, no further transactions were made
and the value of the investment account at the end of the year was $20,000.
The IRR of the investment account is closest to:
A. 3.44%.
B. 11.88%.
C. 20.11%.

119. Which of the following statements is least likely correct regarding investment
policy statement (IPS).
A. The IPS is a starting point of the portfolio management process.

B. The clients’ objectives are specified in terms of risk tolerance and return
requirements.
C. The unique circumstances section states any legal or regulatory
restrictions that constraint the investment of the portfolio. .
120. The exhibit below illustrates expected annual risk and beta data concerning three
textile manufacturers (A, B and C).
Exhibit
Textile Expected Annual
Manufacturer Standard Deviation (%) Beta
A 25.5 1.8
B 31.8 0.6
C 19.4 1.2
Out of the three manufacturers, the highest total risk is equal to:
A. 0.065.
B. 0.101.
C. 0.318

FinQuiz.com
June, 2016
Revision 1


33-44 Economics 18
Total 180

Questions 1 through 18 relate to Ethical & Professional Standards
1. Mosaic theory is defined as an analyst combining information that is:
A. public and material public.

B. public and material nonpublic.
C. non-public and immaterial nonpublic.
Correct Answer: A
Reference:
The mosaic theory involves the analyst combining public and material public
information as the basis for investment recommendations and decisions even if
the information had been material inside information, if communicated directly to
the analyst.
2. Jewel Knowles is a research analyst at Trimont Limited. During the course of her
research, Knowles comes across an unpublished research report in the firm’s
electronic database which is not password protected. The report concerns ADP, a
biotechnology firm, which is developing an item of lab equipment using in-house
developed technology. In his report, he recommends a strong buy based on his
personal observation of how the model operates, ADP’s financial projections
concerning the equipment, discussion with company executives, and analysis of
industry data. He intends to release his report when the firm launches a prototype
of the equipment in the market. After reading the report, Knowles would like to
purchase ADP shares for her investment portfolio.
Can Knowles purchase the stock for her investment portfolio?
A. No, she is not permitted to act on material nonpublic information.

B. Yes, she can act on a recommendation prepared using the mosaic theory.
C. Yes, but she will have to seek her supervisor’s consent prior to the
purchase.
Correct Answer: A
Reference:

Knowles cannot purchase the stock for her investment portfolio as the
recommendation is based on material nonpublic information (discussion with
company executives, observation of how the model operates, and ADP’s financial
projections concerning an unreleased equipment) despite being combined with
material public information (industry data). She must wait until the report is
released.
Receiving her supervisor’s consent to act on material nonpublic information is
itself a violation of the CFA Institute Standards of Professional Conduct
concerning responsibility of supervisors and material nonpublic information.
3. The employees of LockHurst Traders, a dealer firm, established an equity fund

that invests in highly speculative ‘hot’ issues for their personal investment
portfolios. The fund was set up after receiving employer consent and all securities
purchased are pre- cleared by a company officer. The latest security purchased by
the fund is issued by a manufacturer, which has previously undertaken an IPO of
its stock. The employees have made an agreement with the manufacturer whereby
they will purchase a large quantity of the stock to induce an increase in price. The
stock will later be sold to clients when its price has at least doubled.
Which of the following standards is least likely being violated?
A. Fair dealing
B. Misrepresentation
C. Responsibility of supervisors
Correct Answer: B
Reference:
Standards related to fair dealing and responsibility of supervisors are being

violated. The agreement made with the manufacturer is a violation of the standard
concerning fair dealing as employees will retain any profit generated from the
trade for their fund rather than giving their clients the opportunity to benefit from
price increases. The standard concerning responsibility of supervisors is also
being violated as the employer has pre cleared a purchase that does not give
priority to client interests.
There is nothing in the case to suggest that standard relating to misrepresentation

is being violated.

4. When establishing trade allocation procedures for client portfolios, members and
the
A. same execution price and charging the same commission.

B. execution price and commission on first in first out basis.
C. same execution commission and the execution price based on first in first
out basis.
Correct Answer: A
Reference:
When establishing trade allocation procedures for client portfolios, members and
the same execution price and charging the same commission.
5. Mark Michler is a financial analyst who is developing performance projections

for Tike Limited, for the financial years 2015 to 2030. He uses a forecasting
model developed by his supervisor to extrapolate historical performance
information (from the years 1990 to 2014) into the future, makes further
adjustments, and publishes the forecasts in his research report. He includes a
small disclosure at the end of the report, which reads, ‘All forecasts represent
simulations of past performance.’
Is Michler in violation of any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, he is not permitted to use simulated performance information.
C. Yes, his disclosure does not provide full details on the simulated
performance.
Correct Answer: C
Reference:

Michler’s disclosure is in violation of the CFA Institute Standards of Professional

Conduct concerning performance presentation. Although he has disclosed the fact
that forecasts represent simulations of past performance, he should fully disclose
the source of the performance data and the time period of the historical
performance.
6. Walter Stewart is the chief investment manager at Carl & Mathews, which is
renowned for its asset management services. During an official visit to an
investment conference, Stewart engages in a discussion with Marie Lance, a
philanthropist who is seeking to establish an investment fund for a charitable
foundation. Stewart casually mentions that he once managed the account of ‘a
(former) client’ who was seeking to donate a significant sum of money to a cause
like Lance’s. Stewart also offers to ask the client to get in touch with Lance.
Is Stewart in violation of the CFA Institute Standards of Professional Conduct

concerning client confidentiality?
A. Yes.
B. No, because he has not revealed the identity of the client.
C. No, because information concerning former clients is no longer
confidential.
Correct Answer: A
Reference:
Stewart has attempted to pass on client confidential information concerning his

former client and is thus in violation of the standard relating to client
confidentiality. The CFA Institute requires members and candidates to preserve
the confidentiality of former clients and so any information shared by former
clients is covered by this standard.
Even though Stewart has not revealed the identity of the client, he has shared
information that was passed on to him in confidence.

7. Donna Simpson had an exceptional performance year and is offered a two-way

ticket and fully paid trip to the Greece by her client as reward. Simpson’s best
course of action is to:

B. receive consent from her employer before accepting the offer.
C. accept the offer as long as she notifies her employer accordingly.
Correct Answer: C
Reference:
Simpson is not required to receive consent from her employer prior to accepting
the offer. Gifts from clients are less susceptible to conflicts of interest as opposed
to gifts from third-parties. Her best course of action is to accept the offer and
notify her employer either before acceptance or after, whichever is possible.
8. With respect to the acceptance of gifts, the CFA Institute:
A. discourages customary business-related entertainment.

B. encourages setting a strict value limit for acceptable gifts.
C. encourage accepting gifts from parties other than clients.
Correct Answer: B
Reference:
With respect to the acceptance of gifts, the CFA Institute encourages setting a
value limit for acceptable gifts based on local or regional customs. Customary,
business-related entertainment is not prohibited as long as its purpose is not to
influence or reward the member or candidate.

9. Which of the following is least likely the code of ethics?
A. Promote the integrity of and uphold the rules governing capital markets.
B. Maintain and improve professional competence and strive to maintain and
improve the competence of other investment professionals
C. Deal fairly and objectively with all clients when providing investment
analysis, making investment recommendations or taking investment
actions.
Correct Answer: C
Reference:
Both options A and B are the code of ethics while option C is Standard III (C)-
Fair dealing
10. With the permission of her former employer, Taylor Reed shares information
concerning her achievements at the firm with her new employer. She writes a
short summary, which includes the results she has achieved over the past ten years
and the names of several important client accounts for which she executed trades.
Taylor forgets to mention her association with her former employer in her
summary but takes caution not to share additional client information with her new
employer.
Taylor is in violation of the CFA Institute Standards of Professional Conduct

relating to:
A. record retention.
B. misrepresentation.
C. loyalty to employer.
Correct Answer: B
Reference:

Taylor is in violation of the standard relating to misrepresentation as she did not

identify the performance as being achieved at her former employer. She is
unintentionally giving the impression that she operates as an independent trader.
Taylor is not in violation of the standard relating to record retention as she has
received employer consent for sharing performance information.
By sharing the names of clients whose accounts she managed, Taylor is in

violation of the standard relating to preservation of client confidentiality as
opposed to loyalty to employer. She is not in violation of the latter standard
because she is not misusing client information nor is she misappropriating clients
or client lists. Sharing the names of former clients is a violation of their right to
confidentiality.
11. Following the conclusion of research on a steel equipment manufacturer, a

research firm releases a one word ‘sell’ recommendation to all its clients and
prospects and discloses that ‘additional information concerning the
recommendation is available from the producer of the report’.
Based on the communication used by the firm, it is most likely:
A. in violation because the firm must include the factors that were used to
arrive at the recommendation.
B. in violation because the firm must disclose the identified ‘additional
information’ as part of the recommendation.
C. not in violation of the Code and Standards as communication is defined as
‘highly diverse’ by the CFA Institute Standards of Professional Conduct.
Correct Answer: A
Reference:

According to Standard V (B) Communication with Clients and Prospects,

communication can range from an in-depth research report to a one word ‘buy’ or
‘sell’. The firm is in violation because it has not included the factors used to
arrive at the recommendation; this will allow clients and prospects to judge the
suitability of a recommendation.
However, it is necessary for the firm to follow the brief communication with a
written disclosure that additional information concerning the recommendation is
available from the producer of the report. The firm’s disclosure is not in violation
of the standard in this regard.
12. Jason Gilbert, CFA, is an exam grader for the CFA Program. He also works as an
independent research analyst. When asked about his experience as a grader and
the CFA Program’s scope in the financial market, Gilbert makes the following
comments:
Comment 1: “Although results for the CFA exam are yet to be released, pass rates
will be the lowest across all levels.”
Comment 2: “The CFA Program equips candidates to be qualified enough to deal

with a broad range of real-life topics including, but not limited to,
financial analysis, portfolio management, quantitative techniques
and corporate finance.”
Which comment most likely represents a violation of the CFA Institute Standards
A. Comment 1 only.
B. Comment 2 only.
C. Both of the comments.
Correct Answer: A
Reference

Comment 1 represents a violation of the standard relating to conduct as members

and candidates in the CFA program. As a grader for the CFA exams, Gilbert is
responsible for upholding the confidentiality of the CFA exam. Information
concerning compiled pass rates, prior to the release of exam results, is considered
confidential information and sharing it with the public is considered a violation.
Gilbert is not in violation of any standards with respect to his second comment.
His comment with respect to the CFA Program is factual and framed in such a
manner.
13. Upon receiving a written complaint, the CFA Institute Designated Officer
conducts an investigation and discovers that a violation of the Code and Standards
has occurred. If the designated officer issues a disciplinary sanction, the member
or candidate:
A. can reject it.

B. must accept it.
C. will receive a cautionary letter.
Correct Answer: A
Reference:
If the designated officer finds that a violation of the Code and Standards has
occurred, he will issue a disciplinary sanction, which may be accepted or rejected
by the member or candidate.
14. The Code and Standards require members and candidates to make a reasonable
inquiry into a client’s risk and return objectives and financial constraints prior to
making investment recommendations and taking investment action for:
A. clients with a stated mandate, strategy or style only.

B. members or candidates in an investment advisory relationship only.
C. clients with a stated mandate, strategy or style and members or candidates
in an investment advisory relationship.
Correct Answer: B

Reference:
When managing funds to a stated mandate, strategy or style members and

candidates must make investment recommendations or take investment action that
is consistent with the stated objectives and constraints of the portfolio; an inquiry
is not required.
When in an investment advisory relationship with clients, the standard relating to

suitability requires members and candidates to make a reasonable inquiry into a
client’s risk and return objectives prior to making investment recommendations
and taking investment action for clients.
15. Which of the following statements concerning claiming compliance with the
GIPS standards is most likely correct?
A. Compliance must be achieved on a firm-wide basis.

B. Compliance with the GIPS standards is enforced by legal and regulatory
authorities.
C. Software vendors supplying performance calculation software programs to
investment management firms can claim compliance with the GIPS
standards.
Correct Answer: A
Reference:
Compliance is a firm-wide process and cannot be achieved on a single composite

or product.
Compliance with the GIPS standards is entirely voluntary and is not enforced by
legal or regulatory authorities.
Only investment management firms that actually manage assets can claim
compliance, therefore software vendors who supply software to investment
management firms for the purposes of calculating performance cannot claim
compliance.

16. Which of the following is least likely tested by the verification process? Whether
the investment management firm (‘s):
A. meets the definition of a firm as laid out by the GIPS standards.

B. policies and procedures for calculating performance are in compliance
with the GIPS standards.
C. has complied with the composite construction requirements of the GIPS
standards on a firm-wide basis.
Correct Answer: A
Reference:
Verification tests whether the:
• investment management firm’s policies and procedures for calculating and

presenting performance are in compliance with the GIPS standards.
• investment management firm has complied with the composite

construction requirements of the GIPS standards on a firm-wide basis.
17. For periods beginning on or after January 1, 2011, the GIPS standards require
portfolios to be valued on the basis of:
A. fair value.
B. original cost.
C. present value.
Correct Answer: A
Reference:
For periods beginning on or after January 1, 2011, the GIPS standards require
portfolios to be valued on the basis of fair value and in accordance with its
Valuation Principles.

18. Base Corp. resides in a country that enacted laws and regulations for calculating
and presenting investment performance fifteen years ago. By complying with
local laws and regulations, Base Corp:
A. cannot claim compliance with the GIPS standards.

B. has automatically complied with the GIPS standards.
C. can also comply with the GIPS standards but must give priority to the
former in the event of conflict between the two.
Correct Answer: C
Reference:
In the event a country has imposed laws and regulations for calculating and
presenting investment performance, firms are also encouraged to comply with the
GIPS standards. Compliance with these laws or regulations does not
automatically lead to compliance with the GIPS standards; this is because a
conflict may exist between the former and latter. In the absence of a conflict,
compliance with the local laws or regulations will lead to a compliance of the
GIPS standards as both will impose the same requirements. However, when a
conflict exists, firms are required to give priority to local laws and regulations and
disclose the conflict.

19. If there is no variability in the data set, the geometric mean will equal to the:
A. arithmetic and harmonic mean.

B. harmonic mean but will be lower than the arithmetic mean.
C. arithmetic mean but will be higher than the harmonic mean.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 7, LOS m
In the absence of any variability in a data set, the geometric mean will equal to
both the arithmetic and harmonic mean. Based on how the harmonic mean is
derived mathematically, as long as all observations have the same value (i.e.,
there is no variability in the data set), this mean will equal to the geometric and
arithmetic mean.
20. A recruitment agency is short listing candidates for a position. The candidates
being evaluated are from numerous educational backgrounds. The probability that
the selected candidate is an MBA is 0.65 and the probability that the chosen
candidate is the most appropriate for the role is 0.30. The agency has worked out
that the probability a chosen candidate is appropriate given that he is of a non-
MBA is 0.25.
Using the total probability rule, what is the probability that the chosen candidate
is the most appropriate for the HR role given that he is an MBA?
A. 0.327.
B. 0.300.
C. 0.750.
Correct Answer: A
Reference:

P (A) = Probability candidate is most appropriate = 0.30

P(AC) = Probability candidate is not appropriate = 0.70
P (S) = Probability candidate is an MBA = 0.65
P(SC) = Probability candidate is of a non-MBA educational background = 0.35
P(A/SC) = Probability candidate is appropriate given non-MBA = 0.25
Total probability rule:

( )( )
P (A) = P(A S )P(S ) + P A S C P S C
P(A S ) = [0.30 – 0.25(0.35)] ÷ 0.65 = 0.3269 or 0.327
21. The most probable definition of an exhaustive event is that it:
A. covers all possible outcomes.

B. has a specified set of outcomes.
C. is the chance that a specified event will occur.
Correct Answer: A
Reference:
An exhaustive event is one that covers all possible outcomes. An event, in

general, is defined as a specified set of outcomes. Probability is defined as the
chance that a specified event will occur.
22. Dwight Enterprises holds equity stock of Max Limited. The current price per
share is $30. The probability that the investment will increase in value over the
coming year is denoted as p̂ . Over the past year, the stock had increased in value
in seven out of the twelve months. If the stock increases in value, it is expected to
earn an annualized rate of return of 2%.
Viewing the monthly change in stock prices as individual Bernoulli trials, the
probability that the stock will increase in value over the coming year is closest to:
A. 0.0117
B. 0.0200.
C. 0.5833.
Correct Answer: C

Reference:
With each stock price movement viewed as an individual Bernoulli trial, the
probability of an up move (price increase) is based on the number of up-moves in
the preceding year; i.e. out of the twelve months observed the stock increased in
value during seven of those months. Probability of an up-move is 7/12 or 0.5833.
23. Defining properties of a probability least likely include the following:
A. probabilities are based on logical analysis.

B. the probability of any event is between 0 and 1.
C. the sum of probabilities of any set of mutually exclusive and exhaustive
events equals 1.
Correct Answer: A
Reference:
Defining properties of a probability include:
• the probability of any event is between 0 and 1.

• the sum of probabilities of any set of mutually exclusive and exhaustive
events equals 1.
24. Which of the following statements is least likely correct regarding a limitation of
technical analysis?
A. Technicians restrict their analysis to studying market movements.

B. Technicians are slow to recognize changes in trends and/or patterns.
C. The analysis cannot be applied to asset classes that do not have an income
stream.
Correct Answer: C
Reference:

Technical analysis is the only form of analysis that can be used to analyze asset
classes that do not generate an income stream such as commodities, currencies
and futures; this form of analysis does not rely on valuation models but on market
trends and patterns.
A drawback of technical analysis is that it is limited to studying market

movements with little consideration given to other predictive analytical methods
such as interviewing a company’s customers to determine future demand for its
products.
A limitation of technical analysis is that trends and patterns must be in place for
some time before they are recognizable. Thus, a limitation of technical analysis is
it can be late in identifying changes in trends or patterns.
25. Which of the following features is most likely correct regarding binomial random
variable?
A. The individual trials are positively correlated.

B. The probability of success is constant for all trials.
C. The probability of success can only take on a value of 0 or 1.
Correct Answer: B
Reference:
Features distinct to a binomial random variable include:
• The individual trials are independent (uncorrelated) and

• The probability of success is constant for all trials and does not necessarily
have to equal to 0 or 1.

26. The exhibit provides information concerning quarterly returns on two otherwise
identically managed equity funds, A and B, as well as statistical estimates
concerning their mean return differences over the past fifty quarters.
Measure Fund A Return Fund B Return Differences

(%) (%) (Fund A – Fund B)
Mean 2.780 3.756 - 0.976
Standard 4.672 5.468 - 0.796
Deviation
Using a critical value of 1.671, which of the following conclusions is most likely
valid concerning differences between the mean returns on Fund A and B?
A. The difference is significant.

B. The difference is insignificant as the null hypothesis is rejected.
C. The difference is insignificant as the null hypothesis is not rejected.
Correct Answer: C
Reference:
The null hypothesis is that the difference between the mean returns is zero.
Using the critical value of 1.671, the test statistic is calculated as follows:
d − µd 0 − 0.976 − 0
t= = = 0.1734
sd − 0.796 / 50
Since neither of the rejection points (t > 1.671 or t < -1.671) is met, the null
hypothesis that the difference in mean returns is zero is not rejected. In other
words one can conclude that the difference in mean returns is not statistically
significant.
27. The real risk-free interest rate most likely reflects:
A. compensation for expected inflation.

B. the relationship between different dated cash flows.
C. time preferences of individuals for current versus future real consumption.

Correct Answer: C
Reference:
In economic theory, the real risk-free interest rate reflects time preferences of
individuals for current versus future real consumption and is the single period real
risk-free rate if no inflation were expected. The interest rate reflects the
relationship between different dated cash flows while the nominal risk-free
interest rate reflects compensation for expected inflation.
28. A cricket club’s manager is evaluating the performance of its players over the past
year and will use this as a basis for forecasting future performance. The
probability that a player performing well in the past season will continue to do so
is 0.65. The probability a chosen venue will provide favorable playing conditions
for a player is 0.20. The probability that either of the two events materialize is
0.40.
The probability that past performance and favorable playing conditions contribute
positively to player performance in the future is closest to:
A. 0.13.
B. 0.40.
C. 0.45.
Correct Answer: C
Reference:
Using the addition rule, the probability that both past performance and playing
conditions contribute positively to player performance is 0.45.
P (A or B) = P(A) + P(B) – P(A and B)
Where P(A) = Probability that a player performing well in the past will continue
to do so in the future
P(B) = Probability that playing conditions will contribute positively to player
performance
P(A and B) = 0.65 + 0.20 – 0.40 = 0.45

29. A telecommunication company’s procurement analyst has forecasted that the

average cost for one of its key inputs will equal $25.00 per unit. The analyst
would like to measure the dispersion around his cost forecast using the probability
distribution of purchase costs in the current fiscal year.
Probability Purchase Cost

($)
0.10 28.00
0.25 27.80
0.35 26.40
0.30 19.10
1.00
The standard deviation of unit purchase costs in the current fiscal year is closest
to:
A. $0.28.
B. $3.69.
C. $4.97.
Correct Answer: B
Reference:
2 2
σ 2 (Cost ) = ( 0.10 ) ( 28.00 − 25.00 ) + ( 0.25) ( 27.80 − 25) +
2 2
(0.35) (26.40 − 25.00) + (0.30) (19.10 − 25.0)
σ (Cost ) = 13.5915 = $3.686665

30. Marcus Babbage holds a $500,000 investment portfolio. In the current year
Babbage will need to withdraw $40,000 to finance a business venture. However,
he does not want the withdrawal to invade his portfolio’s principal. His portfolio
manager has identified three alternative asset allocations for Babbage:
A B C
Expected annual 13 22 15
return
Standard 17 28 19
deviation of return
Which of the three allocations is the most optimal for Babbage’s investment
portfolio?
A. A
B. B
C. C
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 9, LOS n
Based on Babbage’s withdrawal requirements, his threshold return is 8.00%

($40,000/$500,000).
To determine which allocation is optimal, the safety-first ratio for each allocation
is calculated as follows:
Allocation A: (13 – 8)/17 = 0.2941
Allocation B: (22 – 8)/28 = 0.5000
Allocation C: (15 – 8)/19 = 0.3684
Based on the calculated measures, allocation B is most optimal.

31. A nonparametric test is preferred to a parametric test when:
A. stronger measurement scales are required.

B. the randomness of a sample is being questioned.
C. the population from which the sample is drawn is assumed to be normally
distributed.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 3, Reading 11, LOS k
A nonparametric test is preferred to a parametric one when the data do not meet
distributional assumptions, when the original data are given in ranks (and a
stronger measurement scale is not required), or when the hypothesis being tested
does not concern a parameter. For instance, one may need to test whether a
sample is random or not rather than testing a parameter.
32. A portfolio manager is comparing the performance of a client’s portfolio before

and after the inclusion of real estate. He has complied relevant data in a table. He
aims to analyze whether quarterly returns have changed significantly between the
two periods.
He collects returns data five years prior to and five years after the inclusion.
Mean Variance
N Quarterly of Returns
Returns (%)
Before inclusion 20 2.584 225
After inclusion 20 1.821 151
Using a 2.1555 rejection point, the manager will most likely conclude that the
inclusion of real estate:
A. significantly alters portfolio performance.

B. does not significantly alter portfolio performance
C. has an indeterminate effect on portfolio performance.
Correct Answer: B

Reference:
The null hypothesis is stated as σ 1 = σ 2 implying that the ratio of population

variances equal, while the alternate hypothesis states that the two periodic
variances are not.
Following the convention of using the larger of the two ratios, period 1’s
variances appear in the numerator of the F-test.
The F-test statistic is calculated as follows:

2
s1 225
F= 2
= = 1.49
s2 151
The F-statistic value is lower than the rejection point and so we fail to reject the
null hypothesis that the population variances of returns is same in the five years
prior and five years post inclusion of the asset class; thus the inclusion of real
estate does not significantly alter portfolio performance.

33. Laura Martin, CFA, is a British investor currently holding Singaporean equities.
She is exploring arbitrage opportunities in the forward foreign currency market.
The current GBP/SGD spot exchange rate is 2.1050. She has devised the
following strategy:
Invest SGD for twelve months in risk-free zero coupon bonds at a rate of 4.5%.
At the end of the term convert the SGD to the GBP at an agreed upon forward rate
of GBP/SGD 2.0303.
The return on the strategy in domestic currency terms is closest to:
A. 0.35%.
B. 0.45%.
C. 0.79%.
Correct Answer: C
Reference:
Martin will convert each GBP into SGD 0.4751 (1/2.1050) today. The SGD
amount will be invested for twelve months resulting in the investment growing to
SGD 0.5098 (0.4751 × 1.045). After twelve months have elapsed, SGDs will be
sold at the forward rate generating GBP 1.0079 (SGD 0.5098 × 2.0303). This
translates into a domestic return of 7.9%.
34. In context of the gains from global trading, a country:
A. decreases its welfare by solely focusing on producing the good in which it

has a comparative advantage.
B. which does not have an absolute advantage cannot gain from trading
goods in which it has a comparative advantage.
C. can earn higher trading gains if the difference between the world price of a
good or service and autarkic price is increased.
Correct Answer: C

Reference:
A country can expect it enhance its gains from trading the greater the difference
between the world price and autarkic price.
A country that does not have an absolute advantage can gain from trading goods
in which it has a comparative advantage; this is because comparative advantage
depends on the relative costs of producing a good for export and that which is
imported from another country. If a country can produce a good or provide a
service at a cost lower than its trading partner, it has a comparative advantage.
A country increases its welfare by specializing in the production of good or

provision of service in which it has a comparative advantage. This is because it
now consumes at a higher point, which is on the world price line as well as on a
higher indifference curve.
35. The exhibit below illustrates the transactions in a country’s balance of payment
account for the fiscal year 2013:
Amount
($ millions)
Foreign remittances by non- 14.5
resident citizens
Dividend income on foreign 8.6
equity investments
Acquisition of natural gas 2.5
extraction rights
Total gift taxes 3.4
Exports of goods and 22.7
services
Foreign owned assets in the 44.9
country
Based on the information provided, the current account balance is closest to:
A. $16.8 million.
B. $45.8 million.
C. $49.2 million.

Correct Answer: B
Reference:
Current account balance =

Foreign remittances by non-resident citizens + Dividend income on foreign equity
investments + Exports of goods and services
Current account balance = $(14.5 + 8.6 + 22.7) million = $45.8 million
36. The government of a developing country intends to increase domestic savings by

reducing the budget deficit. The impact of the government’s proposed plans on
the current account balance is most likely:
A. neutral.
B. a decrease.
C. an increase.
Correct Answer: B
Reference:
A plan to reduce the budget deficit (and increase domestic savings) will increase
the current account balance as seen by the equation, CA = SP – I + (T – G – R),
where the expression (T – G – R) is the government surplus or savings. A
combination of tax increases, reduced government spending, and/or lower net
transfers to the private sector will achieve this purpose.
37. A key function of the International Monetary Fund (IMF) is to:
A. ensure the stability of international payments.

B. regulate cross-border transactions on a global scale.
C. develop robust financial systems which support lending arrangements.
Correct Answer: A
Reference:

A key function of the IMF is to support an open system of international payments

by ensuring its stability.
A key function of the World Bank Group is to develop robust financial systems,
which support activities ranging from micro credit to financing large corporate
ventures.
The World Trade Organization is the only international body that regulates cross-
border trade relations among nations on a global scale.
38. A firm can increase aggregate supply in the:
A. short run by increasing physical capital stock.

B. very short run without adjusting output prices.
C. long run by increasing wages in line with the aggregate price level
changes.
Correct Answer: B
Reference:
In the very short run a company can increase or decrease output without changing
aggregate prices as evidenced by the horizontal very short run aggregate supply
curve.
Over the short run, the aggregate supply curve is upward sloping. Despite more
costs becoming variable, physical capital stock is one input, which will remain
fixed until a few decades have elapsed.
In the long run, wages and other input prices change proportionally so that the
aggregate price level has no impact on aggregate supply. This is illustrated by a
vertical long run aggregate supply curve where an increase in the price level will
have no impact on output.

39. Ecrot is a manufacturer of computers. The exhibit below highlights the aggregate
sum of production for the firm as well as the quantity of labor employed in the
process.
Exhibit:
Labor and Aggregate Production Data
Labour Aggregate Sum
(L) of Production
0 -
1 150
2 260
3 390
4 450
5 505
6 535
Ecrot’s marginal return is maximized when the maximum number of workers

employed is no more than:
A. 3.
B. 4.
C. 6.
Correct Answer: A
Reference:
Marginal return is measured as the change in marginal product from adding an

additional unit of labor.
Marginal return or product is maximized when the number of workers employed

is no more than 3.
Marginal return = (390 – 260)/(3 – 2) = 130 units

40. Janice Lee is a British investor seeking to purchase U.S. small-cap equities in a
year’s time. The current GBP/USD nominal spot exchange rate is 0.9055 and is
forecasted to rise by 8% while Lee expects her real purchasing power to increase
by 15% by year end.
If the price of U.S. goods is expected to increase by 3%, the British price level is
forecasted to:
A. decline by 3.27%.
B. decline by 15.00%.
C. increase by 30.87%.
Correct Answer: A
Reference:
Based on the percentage change in real purchasing power (- 15%) or increase in

real exchange rate, the British price level is forecasted to decline by 3.27%.
Percentage change in real exchange rate = (1 + 8%) ×

[1 + 3%] − 1 =15%
[1 + x%]
x% = - 3.27%
41. An exchange rate dealer based in France has quoted the following exchange rates:
Exchange Rate
Quotation
EUR/USD 1.3718
EUR/GBP 0.8178
EUR/BRL 3.0214
Another dealer has quoted a USD/BRL cross rate of 2.8963. A French investor
can exploit the arbitrage opportunity and earn a profit of:
A. USD 69,380 per BRL 100,000 traded.

B. BRL 69,380 per USD 100,000 traded.
C. BRL 124,846 per USD 100,000 traded.
Correct Answer: A

Reference:
The USD/BRL cross rate quoted by the original dealer is equal to 2.2025:
USD/BRL = (1/1.3718) × 3.0214 = 2.2025
The investor will buy BRL from the original dealer and sell BRL to the dealer
quoting a rate of 2.8963 thereby earning an arbitrage profit of USD 69,380
[(2.8963 – 2.2025) × BRL 100,000].
The investor can earn an arbitrage profit of USD 289,693 per BRL 100,000
traded.
42. With respect to the impact of fiscal policy on aggregate demand:
A. Monetarists forecast the effects as powerful.

B. Keynesians believe that the effect is only temporary.
C. Keynesians forecast a powerful effect subject to the spare capacity in an
economy.
Correct Answer: C
Reference:
With respect to the impact of fiscal policy on aggregate demand, Keynesians

believe that the impact is powerful when there is substantial spare capacity in an
economy. Monetarists believe that fiscal policy changes only have a temporary
effect on aggregate demand.
43. An economist has forecasted that a country’s economy can grow credibly over the
long-term at a sustainable rate of 1.8% per year. The country’s inflation target is
2.0% and the central bank has announced its intention to implement an
expansionary monetary policy.
To implement the stated policy, the policy rate should most likely:
A. exceed 3.8%.
B. not exceed 2.0%.
C. not exceed 3.8%.

Correct Answer: C
Reference:
The central bank’s monetary policy will be expansionary if the policy rate is
below the neutral rate, 3.8% (1.8% + 2.0%).
44. Debora Eaton is analyzing money supply and demand in the nation of Nigeria.
Based on her preliminary findings, Eaton has determined that the interest rate
where there will be no excess money balances is 6.5%.
Holding all else constant, if bonds offer an interest rate of 6.2%:
A. prices will increase.

B. supply will increase.
C. individuals will decrease their money holdings.
Correct Answer: B
Reference:
If bonds offer a rate below the equilibrium rate of interest, in this case below
6.5%, there would be an excess demand for money with individuals seeking to
increase their money holdings as corporations and individuals sell their bonds.
The higher selling activity will increase the supply of bonds. In doing so, the
prices of bonds will fall and interest rate offered will increase until it reaches its
equilibrium.

45. A deferred tax asset will result when the solution to the expression ‘Income tax
payable (for income tax purposes) – Income tax expense (on the income
statement)’ is:
A. positive and the difference is due to temporary timing differences.

B. positive and the difference is due to permanent timing differences.
C. negative than income tax expense and the difference is due to temporary
timing differences.
Correct Answer: A
Reference:
A deferred tax asset will result when income tax payable based on income for tax
purposes exceeds income tax expense based on reported financial statement
income (or is positive) and the difference is due to temporary timing differences.
46. Starred Limited redeems a portion of its bond issue prior to the stated maturity
date. Which of the following statements most accurately highlights the effect of
the redemption given the company complies with IFRS? Starred will:
A. reduce bonds payable by the face value of the bonds redeemed.

B. report the cash used for redemption as a cash outflow from financing
activities.
C. report the unamortized debt issuance costs as part of gain or loss on debt
extinguishment.
Correct Answer: B
Reference:

Any cash used to redeem a bond issue will be reported as a financing cash
outflow.
If a company redeems a bond issue prior to its maturity date, bonds payable is
reduced by the carrying amount of the redeemed bonds. Given that debt issuance
costs are recognized as part of the carrying amount of a liability, the unamortized
debt issuance costs do not need to be reported in the income statement as part of
gain or loss on debt extinguishment; this is because these unamortized costs are
recognized when the difference between the carrying value and the cash paid to
redeem the bonds is reported as a gain or loss on debt extinguishment.
47. In 2013 Maritime Inc.’s ROE ratio has increased by 30.7% from its 10.7% level
in 2012. The exhibit below illustrates selective financial information concerning
the company over the two years.
Exhibit:
Selective Financial Information for Maritime Inc.
2013 2012
Average total assets $12.1 million $11.5 million
Average shareholders’ equity $11.1 million $11.1 million
Tax rate 35% 30%
The increase in the company’s ROE can most likely be attributed to an increase in:
A. the tax rate.

B. financial leverage of 5.2%.
C. net profit margin of 34.4%.
Correct Answer: B
Reference:

ROE = Return on assets × financial leverage
Financial leverage has increased from 1.036 ($11.5 million/$11.1 million) to

1.090 ($12.1 million/$11.1 million) or by 5.2% (1.090/1.036 – 1). An increase in
financial leverage will increase ROE.
An increase in tax rate implies a decrease in tax burden, which in turn will
decrease the ROE. An increase in the tax rate implies that a company will retain
less of its pre-tax profits suggesting a decrease in after-tax profits.
Net profit margin = Return on assets ÷ Total asset turnover

Net profit margin (2013) = 12.8% ÷ 2.5 = 5.12%
Net profit margin (2012) = 10.3% ÷ 1.4 = 7.36%
Net profit margin has decreased by 30.04% (5.12%/7.36% - 1). A decrease in net
profit margin will decrease ROE.
48. If a firm decides to use the straight-line method of depreciation instead of the
accelerated method for a new piece of equipment, which of the following would
most likely increase during the year of purchase?
A. Asset turnover.
B. Return on assets.
C. Operating profit margin.
Correct Answer: C
Reference:
With the straight line method, depreciation would decrease, and the operating
profit margin would increase (since the operating profit would increase).

49. Dract Limited borrows $1.5 million to finance the construction of a processing
facility that will have a useful life of 25 years at an interest rate of 6%. The
construction will be completed in three years. Dract prepares and presents its
financial statements in accordance with IFRS. Which of the following
transactions will most likely be recorded in relation to the loan?
A. Interest costs of $90,000 will be capitalized.

B. Dract will classify $270,000 as an investing cash outflow.
C. At the end of the first year, depreciation expense will equal $60,000.
Correct Answer: B
Reference:
Interest costs that are incurred to finance the construction of the facility for
company use are capitalized as part of the asset and amortization of these costs is
recorded as part of depreciation expense.
Dract will capitalize borrowing costs of $270,000 ($1,500,000 × 6% × 3).

Capitalized borrowing costs will be classified as an investing cash outflow.
Annual amortization of the capitalized interest costs will equal to $3,600
[($1,500,000 × 0.06)/25]. These will be included in the depreciation expense
related to the asset of $60,000 ($1,500,000/25).
50. With respect to the initial recognition of goodwill related to a business

combination, a deferred tax liability is:
A. recognized only to the extent of subsequent impairment charges.

B. recognized only to the extent of the difference between the carrying
amount and tax base.
C. not recognized for either the difference between the carrying and tax base
or for subsequent impairment charges.
Correct Answer: C
Reference:

With respect to initial recognition of goodwill, a deferred tax liability is not

recognized for the difference between the tax base and carrying amount of an
asset. Although impairment may lead to a temporary difference between the tax
base and carrying amount of goodwill, there will be no deferred taxation because
a deferred tax liability was not initially recognized.
51. The exhibit below illustrates the inventory purchase record for ABC Limited for
the financial year 2012. The company uses the LIFO method of inventory
accounting.
Exhibit:
Inventory Purchase Record for ABC Limited, Year 2012
Per Unit
Date Units Amount (€)
Beginning 150 20
inventory
28 Jan Purchases 20 24
15 Feb Purchases 30 25
22 March Sales 80 30
17 June Purchases 30 28
20 September Sales 100 30
9 November Purchases 40 35
The cost of sales reported for the year is closest to:
A. €2,700.
B. €3,830.
C. €4,670.
Correct Answer: C
Reference:

Cost of sales reported under the LIFO method of inventory accounting comprises
recent items of purchase.
In 2012, a total of 270 units (150 + 20 + 30 + 30 + 40) were available for sale and
180 units (100 + 80) were sold.
40 (9 November) × €35 = €1,400

30 (17 June) × €28 = €840
30 (15 February) × €25 = €750
20 (28 January) × €24 = €480
60 (Beginning inventory) × €20 = €1,200
Cost of sales = €1,400 + €840 + €750 + €480 + €1,200 = €4,670
52. A financial analyst has tabulated the following data for a large-cap firm:
Beginning shareholder’s equity $245 million

Ending shareholder’s equity $475 million
Net Income $67 million
Repurchase of common stock $0
The firm’s other comprehensive income is closest to:
A. $0.
B. $186 million.
C. $297 million.
Correct Answer: B
Reference:
475-[245+67-23) = $186 million has bypassed the income stated and is therefore
other comprehensive income.

53. Kayle Limited purchased an automated box stamping machine for $4,000. The
original useful life and salvage value of the machine is 10 years and $800,
respectively. Rob Marshall would like to evaluate the impact of the depreciation
methods on the company’s operating profit margin. During the first year of
purchase, Kayle Limited reported revenues of $25,000 while earnings before
interest, tax, depreciation and amortization (EBITDA) was $12,000.
The operating profit margin (EBIT/revenues) reported under the straight-line

method and double declining method of depreciation, respectively, in the first
year of the machine’s operations is closest to:
Straight-line Double-declining
method: method:
A. 46.72% 44.80%.
B. 46.72% 46.40%.
C. 48.00% 45.44%.
Correct Answer: A
Reference:
Depreciation expense (straight line) = ($4,000 – $800)/10 = $320
Depreciation expense (double-declining method) = (100%/10 × 2) × $4,000 =

$800
Operating profit margin (straight-line) = ($12,000 – $320)/$25,000 = 0.4672 or

46.72%
Operating profit margin (double-declining) = ($12,000 – $800)/$25,000 =

0.44800 or 44.80%

54. Which of the following statements accurately address the differences between
income tax accounting under IFRS and U.S. GAAP?
A. Deferred income taxes related to the revaluation of property, plant and

equipment are recognized in equity under IFRS only.
B. Deferred tax assets related to a step-up in the value of an acquired asset to
fair value in a business combination are recognized under IFRS only.
C. Unlike IFRS, which require a full provision to be recognized for deferred
income taxes, U.S. GAAP require a provision to be recognized to the
extent of recoverability of deferred taxes.
Correct Answer: A
Reference:
Given that the revaluation model is only permitted under IFRS any related
deferred tax is recognized in equity. The recognition of deferred taxes related to
revaluation is not applicable under U.S. GAAP; this is because revaluation is
prohibited.
The general approach to the recognition of deferred taxes is making a full

provision under both IFRS and U.S. GAAP.
Deferred tax assets related to a step-up in the valuation of assets to fair value at
the time of a business combination are required to be recognized under both IRFS
and U.S. GAAP.
55. In the financial year 2010, a company reported accounting profit and taxable
income of $150,000 and $147,400, respectively. In addition, the company
received $8,500 in tax refunds during the year while its deferred tax liabilities
account increased by $2,500. The company paid $42,000 in taxes. The applicable
tax rate is 25%.
Income tax expense for the year 2010 is closest to:
A. $36,850.
B. $39,350.
C. $42,000.

Correct Answer: B
Reference:
Income tax expense = Income tax payable + changes in deferred tax asset and
liability
Income tax expense = ($147,400 × 0.25) + $2,500 = $39,350
56. Which of the following is most likely an example of a positive covenant?
A. The company must maintain a minimum interest coverage ratio of 2.0

times.
B. Lender consent must be sought prior to undertaking any factory expansion
projects.
C. Dividends can only be paid if the company generates a minimum net profit
margin of 25%.
Correct Answer: A
Reference:
The requirement to maintain a specified interest coverage ratio is an example of a

positive covenant; this is because it requires the company to take certain actions.
Acquiring lender consent prior to undertaking factory expansion is an example of

a negative covenant; this is because it restricts the company’s ability to take
certain actions. Similarly a covenant restricting the payment of dividends is
negative in nature due to its restrictive nature.

57. An upward revaluation of a long-lived asset is treated in the same way as:
A. a downward revaluation
B. the reversal of a revaluation decrease.
C. the amount in excess of the revaluation reversal amount.
Correct Answer: C
Reference:
An upward revaluation is treated the same as the amount in excess of the

revaluation reversal amount. The excess will be recorded directly to equity and
not in the income statement.
58. Which of the following features is most likely a general requirement highlighted
by the Conceptual Framework with respect to the preparation of financial
statements according to IFRS?
A. Fair value
B. Timeliness
C. Consistency
Correct Answer: C
Reference:
According to the features laid out in the Conceptual Framework by IAS 1, the
presentation and classification of financial statements must be retained from one
period to the next; that is, financial statements should be consistent.
Fair value is a basis of measurement while timeliness is one of the characteristics

laid out by the Conceptual Framework, which enhances the usefulness of relevant
and faithfully represented financial information.

59. In 2010, Horizon Inc. sold real estate property worth $150,000 to Homestead
receiving a down payment of $15,000. The remainder of the sales price is to be
paid over an eight year period. Horizon Inc. purchased the property in the year
2000 when the original cost was $130,000.
Under the cost recovery method, the profit to be recognized by Horizon Inc. in the
year 2010 is closest to:
A. $0.
B. $15,000.
C. $20,000.
Correct Answer: A
Reference:
Since the cash received from the buyer is less than the seller’s cost of the property
in the year 2010, no profit will be recognized under the cost recovery method.
60. Defensive interval ratios measure:
A. solvency.
B. a company’s creditworthiness.
C. how long a company can rely on cash reserves to pay daily cash
expenditures.
Correct Answer: C
Reference:
Defensive interval ratios are an example of liquidity ratios, which measure a

company’s ability to meet its short-term obligations. Defensive interval ratios, in
particular, measure how long a company can pay its daily cash expenditures using
only its liquid assets (which include cash reserves), without additional cash flow
coming in.

61. In the year 2013, Time Corp. reports net income of €2.50 million and has 300,000
weighted average number of shares outstanding. At the beginning of the year the
company had 30,000 options with an exercise price of €20. The company’s
market price averaged €30 per share over the fiscal year.
Time Corp’s diluted EPS based on the treasury stock method is closest to:
A. 8.06.
B. 8.62.
C. 8.33.
Correct Answer: A
Reference:
The treasury stock method assumes that the company receives €600,000 (30,000
× €20) upon the exercise of the options. Using these proceeds, the company can
repurchase 20,000 (600,000/€30) shares at the current market price. Thus, the
incremental number of shares issued is 10,000 (30,000 – 20,000).
Diluted EPS = €2,500,000/(300,000 + 10,000) = 8.06
62. Which of the following statements most accurately explains the treatment of costs
associated with internally developing intangible assets? These costs are:
A. generally capitalized.
B. treated as investing cash outflows.
C. expensed under U.S. GAAP if they relate to research and development.
Correct Answer: C
Reference:
Research and development costs, which classify as costs associated with

internally developing intangible assets, are expensed under U.S. GAAP.
The costs associated with internally developing intangible assets are generally
expensed as incurred and classified as operating cash outflows.

63. The exhibit below highlights selective balance sheet information for Rictor Corp.
for the financial year 2013.
Exhibit:
$ millions
Accounts payables 100
Current portion of long-term debt 65
Other current liabilities 90
Long-term debt 160
Common stock 650
Retained earnings 95
The debt to equity ratio is closest to:
A. 0.30.
B. 0.35.
C. 0.56.
Correct Answer: A
Reference:
Debt to equity ratio = ($65 + $160)/($650 + $95) = 0.30

64. The exhibit below illustrates selective financial information for Mono Capital
between the financial years 2012 and 2013. Monroe reported net income of
$280,000 in the year 2013.
Exhibit
Inventory 35 29
Prepaid expenses 12 8
Taxes payable 8 6
Depreciation 16 12
Dividends paid 6 4
The total adjustment required to determine cash flow from operations from net
income can be determined by adding:
A. $5 million.
B. $21 million.
C. $25 million.
Correct Answer: B
Reference:

Adjustment required = ($30 – $25) + ($29 – $35) + ($8 – $12) + ($30 – $22) +
($8 – $6) + $16
Total adjustment required = Add $21

65. Bonds issued at a premium:
A. have a carrying value which declines over the term to maturity.

B. have a reported interest expense which is higher than interest payments.
C. should be amortized using the straight-line method which better reflects
the economic substance of the transaction.
Correct Answer: A
Reference:
Bonds issued at a premium have an initial carrying amount greater than the face
value. As the premium is amortized, the carrying amount declines to face value.
Bonds issued at a premium have a coupon rate, which is higher than the market
rate in effect at the time of issuance; the latter rate being used to calculate interest
expense. Therefore, interest expense is lower than the interest payments required
on these bonds.
In general, the effective interest rate method is preferred for amortizing premiums
and discounts as it better reflects the economic substance of a transaction relative
to the straight-line method.
66. On January 1, 2013, the carrying amount of inventory on Alliance Manufacturers’

balance sheet is $128,750. Donna Wells, the company’s procurement manager,
assesses that net realizable value is $119,352 at the time. On December 31, 2013
Wells makes a reassessment and finds that net realizable value has increased to
$130,450. Alliance Manufacturers prepares and presents its financial statements
in accordance with IFRS.
The subsequent increase in net realizable value will most likely:
A. increase gross profit by $9,398.

B. increase gross profit by $11,098.
C. not be accounted for as reversals of inventory write-downs are not
permitted.
Correct Answer: A

Reference:
IFRS permit the reversal of inventory write-downs. However, the reversal is

limited to amount of the original write-down that is equal to $9,398 ($128,750 –
$119,352). A subsequent increase in inventory value of $11,098 ($130,450 –
$119,352) exceeds the amount of the original write-down; thus a reversal
amounting to $9,398 will be reflected as a reduction in cost of sales (or increase in
gross profit).
67. An auditor who concludes that a company’s financial statements are not fairly
presented will most likely issue a (n):
A. adverse opinion.
B. qualified opinion.
C. unqualified opinion.
Correct Answer: A
Reference:
An adverse opinion is issued when an auditor believes a company’s financial

statements are not fairly presented.
A qualified opinion is issued when an auditor believes there is a scope limitation

or exception to accounting standards.
An unqualified opinion states that financial statements “give a true and fair view”
or are “fairly presented”.

68. Debra Toe, CFA, is an independent financial analyst who is evaluating the
financial reporting quality of Summit Lark. Based on preliminary analysis, Toe
suspects Lark’s financial statements are lacking in financial quality. She has
collected relevant financial information for the analysis (Exhibit).
Exhibit:
Relevant Financial Information Concerning
Summit Lark (Financial Years 2012 to 2013)
Revenue 45 39
Net income 27 21
Operating cash flows 65 72
Inventory 10 14
Total assets 80 65
Which of the following conclusions is most probable based on the information

presented?
A. Lark’s efficiency is declining.

B. Lark may find it difficult to raise new equity capital.
C. The decline in inventory is higher than the increase in sales indicating that
revenues are reported aggressively.
Correct Answer: A
Reference:
The increase in total assets of 23.08% [($80/$65 – 1) × 100] is greater than the
increase in revenues of 15.38% [($45/$39 - 1) × 100]. This indicates that the
Lark’s efficiency is declining as the assets are not generating as much revenues.
The impact of a change in Lark’s ability to raise new equity capital cannot be
determined based on the limited information presented.
The decline in inventory of 28.6% [($10/$14 – 1) × 100] is higher than the

increase in revenues of 15.38% [($45/$39 – 1) × 100]. This could indicate that the
company has written-down a portion of its inventory as the decline in inventory is
not translating into the same level of sales growth. Alternatively this may indicate
conservative reporting of revenues.

69. Smithline Corp.’s total market value of equity equals $45 million while the
market value of debt equals $30 million. The relevant tax rate for the corporation
is 30% while the equity beta is 1.893.
Smithline Corp’s unlevered beta is closest to:
A. 1.29.
B. 1.89.
C. 2.78.
Correct Answer: A
Reference:
Unlevered beta is also known as the asset beta.

⎡ ⎤ ⎡ ⎤
⎢ 1 ⎥ ⎢ 1 ⎥
β asset = β equity ⎢ ⎥ = 1.893⎢ ⎥ = 1.2907 or 1.29
⎢ ⎛ D ⎞ ⎥ ⎢ ⎛ $30 ⎞ ⎥
⎢1 + ⎜⎝ (1 − t ) E ⎟⎠ ⎥ ⎢1 + ⎜⎝ (1 − 0.3) $45 ⎟⎠ ⎥
⎣ ⎦ ⎣ ⎦
70. Line Corporation will be investing €100 million in a new research facility. The
facility is expected to generate cash flows of €30 million per year for the next
eight years. The company’s weighted average cost of capital is 7.5%. Line has 5
million shares outstanding each of which has a current market price of €26.50.
The company’s earnings yield is 8.00%.
The impact of the investment on Line’s stock price is most likely:
A. a decrease of €1.77.
B. an increase of €15.14.
C. an increase of €41.64.
Correct Answer: B
Reference:

Based on the cash flow and discount rate data provided, the NPV of the project is
€75.7191 million.
The market value of the company prior to undertaking the project is €132.50
million (5 × €26.50) while by undertaking the project the value of the company
should increase by €75.7191 to €208.2191 million.
The price per share will increase by an amount equal to the NPV per share
€75.7191 million/5 million = €15.1438.
71. A company that operates with a high proportion of fixed costs in its cost structure
is said to have a high level of:
A. sales risk.
B. financial risk.
C. business risk.
Correct Answer: C
Reference:
Business risk is the risk associated with operating earnings. Operating earnings
may be risky because the cost of producing revenues is risky as are total revenues.
Therefore, business risk comprises of sales and operating risk. Operating risk is
the risk attributed to a company’s operating structure. The greater the fixed
component of costs, the greater the operating risk.
Sales risk is the risk associated with the price and quantity of goods and services.

72. The HR Fund is seeking to include a short-term instrument in its investment

portfolio. The fund’s chief investment officer has identified an instrument with
• low degree of liquidity risk;

• insignificant credit risk; and
• interest bearing with attractive yields.
The instrument identified is most likely a:
A. U.S. Treasury bill.

B. commercial paper.
C. federal agency security.
Correct Answer: C
Reference:
The identified instrument is a federal agency security, which typically carries low
liquidity risk and has insignificant credit risk. These securities offer yields higher
than U.S. Treasuries making them an attractive form of investment.
Traded U.S. Treasury bills have low rates. In addition, they entail virtually no
risk.
73. Stole Limited is selling 300,000 units at a price of $40/unit. Total fixed and
variable costs are $8.5 million and $6.6 million respectively. The company’s total
financial costs are equal to $2.5 million.
The level of sales units at the operating breakeven point and breakeven point,
respectively, is:
A. 366,667 and 505,556.

B. 472,222 and 611,111.
C. 611,111 and 611,111.
Correct Answer: B

Reference:
CFA Level I, Volume 4, Study Session 11, Reading 37, LOS d & e
! $",!"",!!!
Operating breakeven (QOBE) = !!! = $",!"",!!! = 472,222 𝑢𝑛𝑖𝑡𝑠
!"!
!"",!!!
! ! ! $",!"",!!! ! $",!"",!!!
Breakeven point (QBE) = ! ! ! = $",!"",!!! = 611,111 units
!"!
!"",!!!
74. The length of a company’s operating cycle has increased in the current year.
Which of the following statements most accurately justifies the reason for this
increase?
A. The company’s inventory balance has decreased.

B. The company is taking advantage of early payment discounts.
C. The average number of days to collect payments from customers has
increased.
Correct Answer: C
Reference:
Operating cycle = Number of days of receivables + number of days in inventory
An increase in the number of days to collect accounts receivables signals an

increase in the number of days of receivables.
The number of days of inventory is measured as inventory divided by average

day’s cost of goods sold. A lower inventory balance signals a lower measure and
a decline in the cash operating cycle.
The number of days of payables does not feature in the calculation of operating
cycle.

75. Maritime Inc., a component manufacturer, has announced a repurchase of 800,000

shares at the prevailing market price of $10. Maritime has 3 million ordinary
shares outstanding at the time of repurchase. The company’s reported assets and
liabilities are $40.0 million and $20.5 million, respectively.
How will the share repurchase affect Maritime’s book value per share? The book
value per share will:
Correct Answer: B
Reference:
Pre-buyback book value per share = ($40.0 million – $20.5 million)/3 million =
$6.5
The buyback will reduce book value of equity by $8 million (800,000 × $10) to
$11.50 million ($19.5 million – $8.0 million) and the number of shares
outstanding by 0.80 million to 2.20 million.
Thus, book value per share will decrease to $5.227 ($11.50 million/2.20 million)
or by 19.6% ($5.227/$6.50 – 1).
76. Which of the following shareowner policies is most consistent with good
A. Investors are given three days to cast their votes via proxies.
B. A company transfers all voting records to a third party agent.
C. In a company with dual classes of shares, a majority of the voting rights is
owned by one class of shareowners.
Correct Answer: B
Reference:
CFA Level I, Volume 4, Study Session 11, Reading 40, Pages 222-224, LOS g

Using a third party agent to retain voting records is consistent with the corporate
governance codes of best practice.
Giving shareowners only three days to cast votes via proxies is not sufficient
time; this makes it difficult for shareowners to vote their common shares.
Giving the voting rights to one class of shareowners when a company has dual
classes may create a situation in which the management and board
disproportionately focus on the interests of those shareowners.

77. Green Associates does not currently pay dividends but is expected to do so in
three years’ time when the dividend per share is expected to $6.50 and will grow
at a perpetual rate of 3% thereon. Green Associate’s required rate of return is
10%.
The intrinsic value of Green Associate’s stock is closest to:
A. $71.86.
B. $76.74.
C. $95.64.
Correct Answer: B
Reference:
The dividend payment streams will need to be split into two segments with the
second representing the time period when dividend per share is perpetual.
Using the Gordon growth model, the present value of the dividend payment
stream at t = 0 is determined as follows:
V3 = [D0 (1 + g)]/(r – g) = ($6.50)(1.03)/(0.10 – 0.03) = $95.6429
V0 = $95.6429/(1 + 0.10)3 = $71.86
The first segment is represents the present value of the $6.50 dividend not
considered in the calculation:
$6.50/(1.10)3 = $4.88
Intrinsic value = $71.86 + $4.88 = $76.74

78. Joyce Inc., a Japanese automaker, is seeking to offer its shares in overseas
markets. The management proposed to consider an intermediary to issue shares in
foreign markets using a global sponsored depository receipt (DR).
The chosen method will:

A. expose overseas investors to considerable foreign exchange risk.
B. not allow Joyce Inc. to participate in the issuance of depository receipts.
C. grant participating investors the same voting rights as the direct owners of
the common shares.
Correct Answer: C
Reference:
A sponsored DR will allow participating investors to have the same rights as the
direct owners of the common shares. In addition, the foreign company whose
shares are held by the depository institution will have a direct involvement in the
issuance of the receipts.
Participating investors will need to worry less about foreign exchange risk as
price quotations and dividend payments are in their local currency.
79. A trader purchases a share of stock on margin at its current market price of $80.
The initial margin requirement is 30%.
The margin requirement for each share of stock is closest to:
A. $24.
B. $56.
C. $80.
Correct Answer: A
Reference:

If the market price declines, the trader will incur a loss on the position. To prevent
this from occurring, the trader should retain a minimum amount as equity in its
position as margin.
Margin requirement = 30% × $80 = $24.
80. Gene Saunders has purchased a stock using $15 of her funds and $30 of borrowed
funds. One month after making the investment, the stock falls by 15% in value.
Her financing mix meets minimum margin requirements.
The initial margin and unannualized return on investment, before considering the
payment of fees and commissions, is closest to:
A. 33.3% and – 22.5% respectively.

B. 33.3% and – 45.0% respectively.
C. 50.0% and – 15.0% respectively.
Correct Answer: B
Reference:
The use of leverage magnifies the gain/loss on an investment.

Percentage equity or initial margin = $15 ÷ ($30 + $15) = 0.3333
Leverage = 100% position ÷ (33.33% equity) = 3.0
Return on investment = 3.0 × (- 15%) = - 45%
81. Which of the following features most likely distinguishes common and preference
shares?
A. Voting rights
B. Perpetual maturity dates
C. Presence of embedded options
Correct Answer: A
Reference:

Preference shareholders usually do not have voting rights while common

shareholders do. On the other hand, similar to common shares, preference shares
can have perpetual maturity dates and contain embedded options, call or put
options.
82. Which of the following industries is least likely cyclical in nature?
A. Autos
B. Utilities
C. Technology
Correct Answer: B
Reference:
A cyclical industry’s profitability is strongly correlated with the strength of the

overall economy. Cyclical products and services are often relatively expensive
and/or their purchase can be delayed if necessary. Cyclical industries include
autos and technology.
A noncyclical industry’s performance is independent of the business cycle. Non-

cyclical companies produce goods and services with relatively stable demand.
Examples include utilities.
83. For one of her equity investments, investor Carol March has specified a GTC,
stop 120, limit 95 sell order. The original purchase price of her investment was
$150. If the price of the stock declines below $120, March’s GTC order will most
likely:
A. not be executed.
B. be executed and her maximum loss will be $25.
C. be executed and her maximum loss will be $55.
Correct Answer: C
Reference:

A GTC, stop 120, limit 95 sell order will be executed once the limit price falls
below $120 to limit any potential losses on the trade. The stop limit sell order will
limit the fall in price to $95. Thus, potential losses are limited to $55 ($150 –
$95).
84. Which of the following reasons least likely justifies why companies operating in
an industry with high barriers to entry have low pricing power?
A. They are relatively new and lack a good track record.

B. Barriers to exit are high making overcapacity highly likely.
C. Price is a large component of a buyer’s purchase decision.
Correct Answer: A
Reference:
Being new to an industry with low barriers to entry does not automatically
guarantee success. Therefore, this supports the fact that low barriers to entry
should not be equated with low barriers to success as opposed companies
operating in an industry with high barriers to entry having low pricing power.
When barriers to exit are high, companies may not be able to exit the industry
without incurring significant capital costs by redeploying capital, for example.
Therefore, these companies may continue to operate their loss-making plants
prolonging conditions of overcapacity.
When price is a large component of the purchase decision, companies will have a
limited ability to influence price at a level necessary to generate healthy profits.

85. Jones Davenport submits a sell order for 12 contracts with a limit price of $25.7.
The market’s limit order book immediately prior to Davenport’s order is as
follows:
Buyer Bid size Limit Price Offer Seller

(€) Size
Martin 4 25.6
Smith 2 25.7
Peterson 7 25.8
25.9 6 Hill
26.0 8 Ali
26.1 10 Khan
Davenport’s average trade price is closest to:
A. €25.73.
B. €25.78.
C. €25.95.
Correct Answer: B
Reference:
Daveport’s order will be first executed at the most aggressively priced buy order;
that is, 7 contracts will be sold to Peterson at a price of €25.8. Davenport has five
contracts remaining and two of these contracts will be sold to Smith at the next
most aggressively priced sell order; the limit price will be €25.7. Davenport has
three contracts remaining but these will not be sold to Martin as the price is lower
than the trader’s limit price.
Average trade price = [(7 × €25.8) + (2 × €25.7)]/9 = €25.78
86. The Gordon growth model cannot be used to estimate intrinsic value if the
associated company:
A. is rapidly growing.
B. assumes a perpetual dividend growth rate.
C. retains a portion of its profits for reinvestment purposes.

Correct Answer: A
Reference:
CFA Level 1, Volume 4, Study Session 14, Reading 51, LOS e & f
The Gordon growth model assumes that the dividend growth rate is perpetual and
never changes; therefore, the model cannot be used if a company is rapidly
growing; i.e. does not have a stable dividend growth rate.The Gordon growth
model can be applied if the company retains a portion of its profits for
reinvestment as long as this amount is kept constant and does not result in
fluctuating dividend payments.
87. The exhibit below summarizes information concerning a market-capitalization

weighted index:
Stock Beginning of period Dividends End of period Shares

price per share per share price per share outstanding
($) ($) ($)
A 120 50 140 45,570
B 200 25 250 59,650
C 180 30 160 112,740
Total 217,960
The price return on the market-capitalization weighted index is closest to:

A. 4.08%.
B. 4.35%.
C. 6.49%.
Correct Answer: B
Reference:

Price return = (End of period value – beginning of period value)/beginning of

period value
Beginning of period value = ($120 × 45,570) + ($200 × 59,650) + ($180 ×

112,740) = $37,691,600
End of period value = ($140 × 45,570) + ($250 × 59,650) + ($160 × 112,740) =

$39,330,700
Price return = ($39,330,700 – $37,691,600)/$37,691,600 = 4.35%
88. Greenex Inc.’s option-free perpetual preferred stock is currently selling in the
market for $945.63. The annual dividend rate is quoted at 5.5% and the par value
of the stock is $1,000. If the stock is fairly valued, the required rate of return
A. 5.20%.
B. 5.50%.
C. 5.82%.
Correct Answer: C
Reference:
If the stock is fairly valued, the intrinsic value should equal to the current market
price of $945.63.
Intrinsic value = Annual dividend/r

r = $55/$945.63 = 5.82%

89. An investor who goes long an equity forward contract on a total return stock
index will be concerned about the management of:
A. price risk.
B. the uncertainty of dividends.
C. both price risk and uncertainty of dividends.
Correct Answer: C
Reference:
The total return on the index and the forward contract payoff is based on the
payment and reinvestment of dividends.
90. A long-term European put option will always be worth more than an otherwise
identical short-term put option if:
A. volatility is lower.
B. interest rates are lower.
C. interest rates are higher.
Correct Answer: B
Reference:
A long-term European put option will be worth more than an otherwise identical
short-term put option if interest rates are lower and volatility is higher. Since
European options can only be exercised on their expiration date, a longer time to
expiration suggests that the option holder will need to wait longer to receive
money from the sale of the underlying. The lost interest will be a disadvantage of
the additional time; lower interest rates will reduce this lost interest. Higher
volatility will increase the chances that the underlying price will move in favor of
the option holder.

91. Call options are primarily purchased by investors who are:
A. bullish.
B. bearish.
C. risk-averse.
Correct Answer: A
Reference:
Call options have an unlimited upside profit potential and losses are limited to the
premium paid. Call options are thus preferred by investors who are bullish and
anticipate an increase in asset price. Furthermore, call options entice speculators.
92. An investor purchased a stock several months ago for $85 currently selling for
$98. A call option selling for $7 has an exercise price of $101. If the price of
share at expiration is $107, the value of the covered call position for the investor
is closest to:
A. $91
B. $100
C. $101
Correct Answer: C
Reference:
VT = ST – max(0, ST - X) = 107 – max(0, 107 - 101) = 107 – 6 = 101
93. The maximum loss for the holder of protective put position is equal to:
A. exercise price –option premium.

B. exercise price – underlying price + option premium.
C. cost of the underlying + option premium – exercise price.
Correct Answer: C

Reference:
The maximum loss for the holder of protective put position = cost of the
underlying + option premium – exercise price.
94. The minimum value of which of the following is the maximum of zero and the
underlying price minus the present value of the exercise price?
A. European call
B. European put
C. Protective put
Correct Answer: A
Reference:
The minimum value of a European call is the maximum of zero and the
underlying price minus the present value of the exercise price.

Question 95 through 106 relate to Fixed Income Investments
A. higher for Beta.

B. nearly identical.
C. higher for Alpha.
Correct Answer: C
Reference:
Credit risk will be higher for Alpha following an increase in leverage levels.
Industries that are cyclical have more volatile revenues, margins and cash flows
and are riskier than non-cyclical industries. Companies in cyclical industries
should carry lower level of debt relative to their ability to generate cash flows
over an economic cycle than companies in non-cyclical industries.
A. 3.31%.
B. 3.59%.
C. 6.63%.
Correct Answer: B
Reference:
Using the IRR function on the financial calculator, the semi-annual yield is
1.7934% and the annualized yield to maturity is 3.59%.
1.50 1.50 1.50 101.50

97.8314 = 1
+ 2
+.... + 7
+ 8
= 0.017934
(1+ r ) (1+ r ) (1+ r ) (1+ r )

97. Rachel Lake is evaluating the potential for bond prices to change given the market
discount rate. She derives the following conclusions:
Conclusion 1: The convexity effect can be observed as the tendency for bond
prices to increase when market discount rates decrease.
Conclusion 2: For two bonds offering an identical coupon rate, the maturity effect
results in the longer-term bond being more price-sensitive than a
shorter-term bond when the change in market discount rates is
identical.
Lake is most likely correct with respect to:
A. conclusion 1 only.
B. conclusion 2 only.
C. both the conclusions.
Correct Answer: B
Reference:
Lake is incorrect with respect to Conclusion 1 and correct with respect to

Conclusion 2. Conclusion 1 describes the inverse effect. The convexity effect is
described as the absolute percentage price change being greater when the market
discount rate goes down than when it goes up.
The maturity effect results in the longer-term bond experiencing a greater

percentage price change than a shorter-term bond when their coupons are
identical and market discount rates change by the same amount. This implies that
the longer-term bond is more price-sensitive.

98. The exhibit below summarizes selective financial information concerning a textile
manufacturer for the year 2013.
Exhibit:
$’000
Net income from continuing operations 450
Capital expenditures 7
Increase in non-cash working capital 70
Gains from sale of long-lived assets 12
Total debt 500
The manufacturer’s FFO/total debt is closest to:
A. 0.758.
B. 0.772.
C. 0.912.
Correct Answer: C
Reference:
All $ figures are in thousands

FFO = Net income from continuing operations + depreciation and amortization +
non-cash items + deferred income taxes
FFO = $450 + $18 – $12 = $456
FFO/total debt = $456/$500 = 0.912
99. Bonds that are issued by the government and backed by tax revenues are least
likely known as:
A. sovereign bonds.
B. non-sovereign bonds.
C. quassi-government bonds.
Correct Answer: C

Reference
Because quassi government entities do not have direct taxing authority, bonds are
repaid from cash flows generated from the project (s) the bond issue is financing.
Non-sovereign bonds are financed by revenues collected by the taxing authority
along with other sources.
Highly-rated sovereign bonds are backed by the taxing authority of the

government with excess revenues over expenditures being used for making
interest payments and repaying principal.
100. Lance Gibbons holds two fixed income securities, a corporate bond and a zero-
coupon bond. Details concerning his investment are as follows:
• The zero-coupon bond matures in twelve years and is trading at a market

discount rate of 5%.
• The corporate bond offers an annual coupon rate of 3.8%, matures in ten
years and is trading at a market discount rate of 4.2%.
Which of the following statement is most likely correct regarding his investments?
A. Both bonds are selling at the same price.

B. The corporate bond is trading at a lower price.
C. The zero coupon bond is trading at a discount of $44.32.
Correct Answer: C
Reference:
Based on the calculations below, the zero-coupon bond is trading at a discount of

$44.32 while the corporate bond is trading at a relatively higher price ($96.788 vs.
$55.6837 respectively).

101. A limitation of using the current yield to evaluate a fixed income security is that
the measure ignores:
A. weekends and holidays.

B. the flat price of an issue.
C. time value of coupon payments.
Correct Answer: C
Reference:
The current yield does not consider the frequency of payments over the life of the
issue nor does it consider the time value of coupon payments (i.e. payments
received after an year).
The current yield is calculated as the sum of the coupon payments received over
the year divided by the flat price.
The street convention yield-to-maturity is known to ignore weekends and

holidays.
102. A 150-day money market instrument has an add-on rate of 6.50%. Assuming
there are 360 days in a year, the bond equivalent yield of the instrument is closest
to:
A. 6.50%.
B. 6.59%.
C. 6.77%.
Correct Answer: B
Reference:

First, the redemption amount per 100 of the principal is determined.

⎛ 150 ⎞
FV = 100 + ⎜100 × × 0.065 ⎟ = 102.7083
⎝ 360 ⎠
The bond-equivalent yield is the AOR quoted on a 365-day basis.
⎛ 365 ⎞ ⎛ 102.7083 − 100 ⎞
AOR = ⎜ ⎟ × ⎜ ⎟ = 0.065902 or 6.59%
⎝ 150 ⎠ ⎝ 100 ⎠
103. James Cunningham is evaluating the factors that influence issue ratings. He has
identified and described two factors which he has summarized below:
Factor 1: The higher the senior unsecured ranking, the lower the notching
adjustment will be.
Factor 2: In the case of structural subordination, debt of the parent holding

company is serviced before that of operating subsidiaries.
Cunningham is most likely correct with respect to:
A. factor 1 only.
B. factor 2 only.
C. both of the factors.
Correct Answer: A
Reference:
Cunningham is correct with respect to factor 1 but incorrect with respect to factor
2.
The notching adjustment decreases in magnitude as unsecured debt increases in

seniority. This is because the perceived risk of default decreases with higher
credit ratings and so the need to notch to capture the potential difference in loss
severity is reduced.
In the case of structural subordination, debt at the operating subsidiaries will get
serviced by the cash flows and assets of the subsidiaries before funds can be
passed to the holding company to service debt at that level.

104. Richard Grove invests in a 2-year, 4% semi-annual coupon paying bond with a
par value of 1,000. The sequence of spot rates is as follows:
Time-to-maturity Spot Rate

0.5 year 1.0%
1.0 year 1.8%
1.5 years 2.9%
2.0 years 4.2%
2.5 years 5.6%
The price of the bond is closest to:
A. $996.48.
B. $1,058.28.
C. $1,009.57.
Correct Answer: B
Reference:
Price of the bond =

20 20 20 1,020
+ + + = 1,058.2800 or 1,058.28
1.005 (1 + 0.009) (1 + 0.0145) (1 + 0.021)4
2 3
105. Which of the following is least likely an example of an internal credit

enhancement?
A. Claim priorities to the underlying assets are ranked.

B. Posting more collateral than is required to secure financing.
C. Providing a credit line to reimburse cash flow shortfalls backing the issue.
Correct Answer: C
Reference:

External credit enhancements include letter of credits whereby a financial

institution provides the issuer with a credit line to reimburse any cash flow
shortfalls from the assets backing the issue.
Internal credit enhancements include overcollateralization, posting more collateral

than is needed to obtain or secure financing, as well as the ordering of claim
priorities for ownership or interest in an asset.
106. The government of Ilaka, a developing country, has issued 30-year capital
indexed bonds linked to the domestic consumer price index (CPI) in local
currency IA. The bonds have a par value of IA 1,000. The bonds make semi-
annual coupon payments at a rate of 6%. Over the most recent six months the CPI
has increased by 4%.
If the bonds were interest-indexed bonds as opposed to capital-indexed bonds,

semi-annual coupon would have been:
A. the same.
B. lower by $1.20.
C. higher by $2.40.
Correct Answer: A
Reference:
As capital-indexed bonds, the annual coupon rate remains the same but the
principal amount will increase to reflect inflation. Following the 4% increase in
inflation, the new principal amount will be IA 1,040 (IA 1,000 × 1.04) and the
semi-annual coupon payment is IA 31.20 (IA 1,040 × 0.03).
If the bonds are interest-indexed bonds, the principal amount will remain the same
but coupon payments will be adjusted to reflect inflation. The new semi-annual
coupon payment would thus be IA 31.20 (IA 1,000 × 1.04 × 0.03); i.e. the two
coupon payments will be identical.

107. Carlson Smith has invested in the FD hedge fund, which has $450 million under
management. The fund charges a 2% management fee based on the funds under
management at year end and a 20% incentive fee for any returns earned in excess
of a 6% hurdle rate. The FD fund appreciated by 10% during the year. Smith’s
net-of-fees returns is closest to:
A. 7.44%.
B. 9.64%.
C. 9.76%.
Correct Answer: A
Reference:
(All $ calculations are in millions)

Fund value at year end = $450 × 1.10 = $495
Management fee = $495 × 0.02 = $9.90
Hurdle amount = $450 × 0.06 = $27
Incentive fee = ($495 – $450 – $9.90 – $27) × 0.20 = $1.62
Smith’s net return = ($495 – $450 - $9.9 - $1.62)/$450 = 0.0744 or 7.44%.

108. Garcia Miguel is comparing the valuation three private equity companies for
investment using the discounted cash flow approach. She has collected cash flow
data for the three companies (Exhibit) and would like to invest in the one with
highest valuation.
Exhibit:
Cash Flow Forecast Data Concerning Companies A, B and C
Free Cash Flows Cost of
Company to Equity* equity
A $40,000 5%
B $155,000 12%
C $88,100 6%
*All cash flow forecasts are perpetual
Miguel should most likely invest in Company:
A. A.
B. B.
C. C.
Correct Answer: C
Reference:
Based on the discounted cash flow approach, Company C has the highest
valuation.
Company A = $40,000/0.05 = $800,000

Company B = $155,000/0.12 = $1,291,667
Company C = $88,100/0.06 = $1,468,333
109. A desirable characteristic of alternative investments is:
A. liquidity.
B. transparency.
C. low correlation with traditional investments.
Correct Answer: C

Reference:
A desirable characteristic of alternative investments is that they provide portfolio

diversification. Low correlation with traditional investments results in a greater
diversification effect. On the other hand, alternative investments are often illiquid
and lack transparency both of which are undesirable attributes.
110. Which of the following is most likely to be considered an alternative investment

for an investor whose major concern is liquidity?
A. ETFs only.
B. ETFs and REITs only.
C. ETFs, REITs and publicly traded private equity funds.
Correct Answer: C
Reference:
For the investors who seek liquidity, publicly traded securities such as shares of
ETFs and REITs and publicly traded private equity firms may serve as the means
for investing in alternative investments.
111. Which of the following relative value strategies in fixed income markets
incorporates trades between two corporate issuers or between different parts of an
issuer’ yield curve?
A. Multi-strategy
B. Fixed income general
C. Fixed income convertible arbitrage
Correct Answer: B
Reference:

Fixed income general focus on relative value within the fixed income markets.
These strategies may incorporate trades between two corporate issuers, between
corporate and government issuers, between different parts of the same issuer’s
capital structure or between different parts of an issuer’s yield curve.
112. A hedge fund with $120 million of initial investment and 2-20 fee structure
earned 35% return at year end. Assuming management fees is based on assets
under management at year end and incentive fee is calculated net of management
fee, the total fees earned by the fund is closest to:
A. $10.32 million
B. $10.40 million
C. $11.68 million
Correct Answer: A
Reference:
Management Fees = $120 million × 2% = $2.4 million

Incentive Fees = ($162 − $120 – $2.4)million × 20% = $7.92 million
Total Fees = $2.4 million + $7.92 million = $10.32 million

113. Which of the following is not a true statement about VaR?
A. VaR measure does not tell the maximum loss.

B. A VaR measure focuses on the right tail of the distribution.
C. VaR is subject to the same model risk as derivative pricing model.
Correct Answer: B
Reference:
VaR measure focuses on the left tail of the distribution. However, VaR measure
does not tell the maximum loss. Var measure can be used to gauge average
extreme losses. VaR is subject to the same model risk as derivative pricing model.
114. Feed back step assists in rebalancing the client’s portfolio due to change in:
A. political system
B. market conditions.
C. circumstances of investment manager.
Correct Answer: C
Reference:
Feedback step assists the portfolio manager in rebalancing the portfolio due to
change in market conditions or the circumstances of the client.
115. Which of the following is most likely to be an objective for a foundation?
A. Maintain the fund’s nominal value

B. Reduce the volatility of spending needs
C. Generate liquidity to meet spending needs
Correct Answer: C

Reference:
Two objectives of foundations include:
• Maintaining the real capital value of the fund

• Generating income (liquidity) to fund the objectives of the institution
116. Sasha Gable is managing the portfolio of a pension fund, which is equally
invested in equities and real estate. The correlation between the two securities is
0.10. Details concerning expected annual returns and standard deviations are
summarized in the exhibit below:
Exhibit
Expected Annual Expected Annual Standard
Equities 15.5 5.7
Holding all else constant, if Gable decides to increase the weight of equities to
60% by selling real estate, the portfolio standard deviation will, in percentage,
terms:
Correct Answer: B

Reference:
σ port = w12σ 12 + w2 2σ 2 2 + 2w1 w2 p1, 2σ 1σ 2
The standard deviation of the current portfolio is 7.596%
2 2 2 2
σ port = (0.5) (0.057) + (0.5) (0.138) + 2 × ( 0.5) ( 0.5) ( 0.10 ) ( 0.057) ( 0.138)
= 0.07596
The standard deviation of the new portfolio is 6.6374%.
2 2 2 2
σ port,new = (0.6) (0.057) + (0.4) (0.138) + 2 × ( 0.6 ) ( 0.4) ( 0.10 ) ( 0.057) ( 0.138)
= 0.0678
The standard deviation of the portfolio will decrease by 12.20% [(0.0678/0.0772)

– 1].
117. Stock returns are usually negatively skewed. This statement implies that:
A. standard deviation will be overestimated.

B. there is a higher than normal possibility for extreme returns.
C. there is a high frequency of positive deviations from the mean.
Correct Answer: A
Reference:
Negative skewness implies that there is a higher frequency of negative deviations

from the mean, which has the effect of overestimating standard deviation.
Kurtosis measures whether there is higher than normal probabilities for extreme
returns.

118. At the beginning of the year 2010 an investor deposited $25,000 in his investment
account. He generated an investment gain of $4,000 during the same year which
resulted in an ending account balance of $29,000. In 2011, the investor withdrew
$12,000 from his account at year end. At the beginning of the year 2012, the
investor deposited a further $5,000. In 2013, no further transactions were made
and the value of the investment account at the end of the year was $20,000.
The IRR of the investment account is closest to:
A. 3.44%.
B. 11.88%.
C. 20.11%.
Correct Answer: A
Reference:
The IRR is calculated by entering the following amounts into the financial
calculator:
CF0 = - 25,000
CF1 = 12,000
CF2 = - 5,000
CF3 = 20,000
IRR = 3.44%
119. Which of the following statements is least likely correct regarding investment
policy statement (IPS).
A. The IPS is a starting point of the portfolio management process.

B. The clients’ objectives are specified in terms of risk tolerance and return
requirements.
C. The unique circumstances section states any legal or regulatory
restrictions that constraint the investment of the portfolio. .
Correct Answer: C
Reference:

Both options A and B are correct. Option C is incorrect. The five major IPS
constraints are:
• Liquidity
• Time horizons
• Tax concerns
• Legal & regulatory factors
• Unique circumstance
120. The exhibit below illustrates expected annual risk and beta data concerning three
textile manufacturers (A, B and C).
Exhibit
Textile Expected Annual
Manufacturer Standard Deviation (%) Beta
A 25.5 1.8
B 31.8 0.6
C 19.4 1.2
Out of the three manufacturers, the highest total risk is equal to:
A. 0.065.
B. 0.101.
C. 0.318
Correct Answer: B
Reference:
Total risk is equal to total variance. The manufacturer with the highest total
variance is B and this variance is equal to 0.101 = 0.3182

FinQuiz.com
June, 2016
Revision 1



33-44 Economics 18
Total 180


Questions 1 through 18 relate to Ethical Standards
1. Victor Solanki is an economic analyst at Gate Associates. He is preparing a

research report on Monte Corp., an oil explorer and producer. Based on industry
and economic analysis, Solanki projects Monte’s quarterly earnings to rise by 5%
provided local government implements its proposed policy of permitting oil
exploration in neighboring untapped areas. Based on his discussion with Cindy
Davis, a government official, she is hopeful that the government will implement
the policy, as discussions with local environmentalists have gone well. Solanki
issues a report with the recommendation, “Monte’s earnings will rise by 5% in the
coming quarter which is projected to have a favorable effect on its share price. I
recommend a strong ‘buy’.”
Solanki is in violation of the CFA Institute Standards of Professional Conduct

because he has:
A. failed to separate opinion from fact in his recommendation.

B. acted on material nonpublic information by issuing the report.
C. issued a recommendation which lacks a reasonable and adequate basis.
2. Gus Morrison manages the accounts of several institutional clients. He purchases

the stock of Core Tech, a technology giant, for their accounts based on research
analyst Jules Wright’s recommendation. Wright serves a sell-side research firm
and happens to be a close friend of Morrison’s. He does not disclose this
relationship to his clients believing it will not influence his impartiality. A few
months following the allocation, the Core Tech stock’s market price heavily
declines due to the announcement of a major fraud committed by its chief
executive officer.
With respect to the CFA Institute Standards of Professional Conduct, Morrison is

most likely:
A. in compliance.
B. in violation; he did not uphold his duty of loyalty, prudence and care.
C. in violation; he did not conduct proper due diligence when using Wright’s
recommendation.


3. Renee Irving is part of a team of five analysts who is working on developing a

research report on a pharmaceutical company. Irving strongly believes the stock
should be rated as a ‘weak hold’. Her recommendation is based on a discussion
with a medical expert who believes the company’s latest drug has more side-
effects than originally claimed. Her team members are of the collective opinion
that her recommendation is too conservative and that a ‘hold’ recommendation is
more appropriate given that the drug has provided promising results in numerous
trial runs. Irving does not agree with the group’s recommendation.
Irving’s best course of action would be to:
A. request for a change in assignment.

B. request her name to be withdrawn from the report.
C. continue identifying herself with the report and disclose her difference in
opinion.
4. Which of the following activities most likely represents market manipulation and
is a violation of the CFA Institute Standards of Professional Conduct?
A. An investment analyst over-exaggerates his firm’s performance in order to

win new client accounts.
B. A global hedge fund increases the price of an oil producer’s stock when it
makes a significant purchase of its shares.
C. A dealer firm purchases and sells shares of stock between two accounts in
order to sell it to clients at an attractive price.
5. Joyce Mildstorm recently shifted to a competitor asset advisory firm and was
careful not to solicit any clients prior to leaving her previous employer.
Mildstorm’s first assignment involves preparing a research report on a security
systems manufacturer, which she had coincidentally covered at her previous
employer. To preserve the confidentiality of her past employer, Mildstorm
recollects information on the manufacturer from public sources as well as relies
on her memory. At the conclusion of her research, Mildstorm discovers that her
new recommendation matches the original one. Mildstorm has most likely:
A. not conducted proper due diligence when generating her latest

recommendation.
B. violated the standard relating to record retention by relying on memory to
prepare the report.
C. violated the standard concerning employer loyalty by preparing a report on
a client of her previous employer.


6. According to the CFA Institute Standards of Professional Conduct concerning

disclosure of conflicts, potential conflict situations that could prohibit a member
or candidate from fulfilling his or her duties to the employer should be dealt with
by:
A. documenting the conflict.

B. reporting it to the employer.
C. disassociating from the situation.
7. After conducting thorough analysis and compiling his research report, Jason
Woods arrives at a weak sell recommendation for a financial services firm. His
supervisor instructs Woods that his recommendation is too conservative and that
he should revise it to a strong sell. Woods’ best course of action would be to:
A. reevaluate the thoroughness of his research process.

B. maintain a weak sell recommendation and issue the report.
C. issue a strong sell recommendation to avoid violating his duty of loyalty to
his employer.
8. According to the CFA Institute Standards of Practice Handbook, which of the

following compliance procedures are members and candidates least likely
recommended to consider?
A. Prohibiting employee participation in equity-related IPOs.

B. Offering different levels of service to clients on a selective basis.
C. Limiting the number of employees who will know that a recommendation
is to be disseminated.
9. In order to assure fair dealing, members and candidates should issue an

investment recommendation:
A. to all its clients first followed by within the firm.

B. simultaneously both within the firm and to all its clients.
C. simultaneously to both suitable clients and within the firm.


10. Francis Meyer is a derivatives trader at Walsh & Spencer. Meyer has made Laura
Peterson, a trader serving the firm and reporting to Meyer, in charge of
monitoring trades executed for client accounts with a low risk tolerance. Due to a
hectic work schedule, Peterson inadvertently overlooks an accidental allocation of
a high risk equity stock to the accounts.
With respect to the CFA Institute Standards of Professional Conduct concerning

responsibility of supervisors, Meyer is:
A. not in violation as Peterson’s conduct is not covered by the standards.

B. not in violation once she has delegated her supervisory responsibilities to
Peterson.
C. in violation because she remains responsible for her supervisory duties
despite the delegation.
11. Catherine Tike serves a brokerage firm. The firm executes trades for client
accounts directed to it by Kyle Investments, an investment management firm.
Tike has had an excellent performance year generating substantial capital gains
for several client accounts. In return for her exceptional performance, the Kyle’s
CEO offers her a fully paid cruise trip to the Maldives.
According to the Standards of Practice Handbook, Tike should:
A. decline the offer as the additional compensation is excessive.

B. accept the offer and notify her employer immediately afterwards.
C. obtain a written consent from her employer before accepting the offer.
12. Trinity Associates manages an equity fund with a mandate of investing in growth
oriented securities. As Trinity has had a hard time attracting new clients therefore
this year he fund’s senior manager has decided to revise the mandate to include
value oriented securities. The fund advertises the change in mandate to all
potential clients who had rejected the fund’s previous mandate.
According to the Standards of Practice Handbook Trinity Associates is:
A. fully in compliance.
B. in violation; the change has not been disclosed to all its clients.
C. in violation; the mandate can be revised only after notifying potential
clients.


13. Sarah Ali is an investment analyst serving a firm managing several equity funds
in the country of Lartha. Local laws permit investment analysts to undertake
trades for accounts in which they have a beneficial ownership at the same time as
their employer. However, client account trades have transaction priority. Ali has
identified the stock of Gerard Tech as attractive for her investment portfolio, the
firm’s equity fund and her client accounts.
In order to claim compliance with the Code and standards, after allocating the
stock to client accounts, Ali is most likely required to purchase the stock in the
following order:
A. herself followed by her employer.

B. her employer followed by herself.
C. simultaneously for both herself and her employer.
14. Dana Irk and Carl Sholes are CFA Level II candidates who have recently sat for
the Level II exam and are awaiting their results. In a discussion between the two
candidates they make a comment each:
Irk: “This year the exam did not feature any questions on currency
futures.”
Scholes: “I found the quantitative techniques section particularly difficult

this year as there were long calculations in many questions.”
Which candidate’s statement is most likely in violation of the CFA Institute

A. Irk only.
B. Scholes only.
C. Both Irk and Scholes.


15. Hart Lewis, a fund manager at Maritime Inc., runs an emerging market fixed
income hedge fund. The latest securities being evaluated by Lewis are African
corporate bonds. Due to the inefficiency of the corporate bond markets in which
the issuers operate, security prices have not increased to reflect the early signs of
recovery in the credit markets and economy. Lewis takes advantage of the
information lag and purchases a significant number of corporate bonds for the
fund. Bond prices immediately surge following the fund’s purchase leaving
investors to question whether the firm has engaged in market manipulation.
Has Lewis engaged in market manipulation?
A. No.
B. Yes, his activities have artificially distorted bond prices.
C. Yes, he has engaged in information based manipulation.
16. Veronica Welsh is an investment manager serving an asset advisory firm.

Dissatisfied with the current broker’s performance Gray Inc., one of Welsh’s
clients, requests her to redirect his account trades to Smith Bay, a competing
brokerage firm. Smith Bay provides average execution and charges a fee higher
than the current broker. Welsh chooses not to disclose details of the directed
brokerage arrangement to Gray and further decides to allocate the transactions of
three other client accounts to Smith Bay.
According to the Standards of Practice Handbook, with respect to directing to

trades through Smith Bay, Welsh should:
A. not undertake the arrangement to avoid violating his duty of loyalty to

Gray Inc.
B. direct the trades of the three client accounts after disclosing the details of
the arrangement.
C. disclose to Gray Inc that it will not be receiving best price and execution
prior to directing trades.


17. Dale Carlson and Monica Singh are two traders dealing in Asian equities and
serving the same brokerage firm. During a trading session, Carlson receives an
overseas telephone call. Singh overhears the conversation and discovers that the
caller is an Asian trader who has received news from an inside source that an
Asian automobile maker is diversifying its line of business and will be signing an
agreement to acquire a pharmaceutical. Upon the conclusion of the telephone call,
Carlson enters a buy order for the Automobile manufacturer. Although she is
aware that Carlson has undertaken an illegal trade, Singh is unsure of what action
she should take.
Based on the standard concerning Knowledge of the Law, Singh’s best course of
action is to:
A. consult the firm’s legal department.

B. report the incident to legal authorities.
C. disassociate from trading Asian equities.
18. Alan Brown is a retired investment manager who earned his CFA charter fifteen
years ago. He recently retired and has since not paid his annual CFA dues or
signed the professional conduct statement. In a discussion with his son, Brown
states “My fifteen years as a CFA Institute member has equipped me with strong
investment management skills and has enabled me to adopt a more analytical and
reasoned approach when addressing client needs.”
Is Brown’s statement in violation of the CFA Institute’s Standards of Professional

Conduct?
A. No.
B. Yes, he has overstated his competency as a CFA Institute member.
C. Yes, his right to refer to himself as a CFA Institute member has been
suspended until he resumes paying his dues and signs the professional
conduct statement.


19. An ascending triangle pattern:
A. produces a horizontal trendline connecting the high prices.

B. implies that buyers are bearish, waiting for price declines before trading.
C. suggests that a positive price trend is always quickly offset by a negative
price trend.
20. A portfolio manager is short listing ten stocks for an equity fund he is developing.
He is selecting stocks from an equity index fund comprising of twelve company
stocks. He will gradually add the stocks to the fund but is not concerned about the
order in which they are selected.
The number of ways the manager can select his sample from the equity index is
approximately:
A. 66.
B. 75.
C. 132.
21. A factor that distinguishes ratio from interval scales is that at least one:
A. fails to rank data.

B. has a natural point of origin.
C. orders data based on an underlying characteristic.


22. After compiling the returns for a stock index fund (Exhibit), Jeremy Marshall
proceeds to measure the riskiness of the fund.
Exhibit:
Data Concerning Returns for
The Stock Index Fund
Year Returns (%)
2005 25.7
2006 18.2
2007 31.5
2008 33.0
2009 33.5
2010 37.0
Marshall makes the following comments upon the conclusion of his analysis:
Comment 1: “Based on my calculations, the mean absolute deviation (MAD) is

approximately 6.29.”
Comment 2: “The MAD is a superior measure to variance in that it uses all the
observations in a sample.”
Marshall is least accurate with respect to:
A. Comment 1.
B. Comment 2.
C. both of the comments.
23. A key tenet of the Elliot Wave Theory is that:
A. market waves follow patterns described by the Fibonacci sequence.

B. in a bull market each impulse wave is followed by another impulse wave.
C. secondary market offerings have the potential to change the supply and
demand equilibrium.


24. Scottsdale Limited is a manufacturing firm which is exploring two factory

expansion projects, Alpha and Seta. Scottsdale can only undertake one of the two
projects. Both projects require an outlay of $300,000 each. Alpha and Seta are
projected to generate $45,000 and $25,000, respectively, in cash flows in
perpetuity. The cost of capital for Alpha and Seta is 8% and 4% respectively.
Which project will Scottsdale undertake based on the:
NPV Rule? IRR Rule?

A. Alpha Seta
B. Seta Seta
C. Seta Alpha
25. The mean average monthly return generated by a stock index mutual fund is 4.5%
while the standard deviation is 6.7% over the past 96 months. The endpoints of
the intervals that must contain at least 36% of monthly returns according to
Chebyshev’s inequality are:
A. – 8.90% to 17.90%.
B. – 3.88% to 12.88%.
C. 4.50% to 8.38%.
26. An analyst strongly believes that the weather conditions in a particular country
influence the attendance of shareholders in company meetings. He intends to
prove the relationship using hypothesis testing. A fellow analyst claims that the
analysis may be prone to bias because his colleague is using an extensive number
of variables to prove this notion.
The statistical analysis is subject to the bias known as:
A. data mining.
B. relationship.
C. sample selection.


27. A portfolio is invested in stocks A and B with 30% of the portfolio invested in A.
The exhibit below illustrates the covariance matrix and expected returns with
respect to the portfolio.
A B
Stock E(R) = 12% E(R) = 8%
Covariance Matrix
Stock A B
A 450 225
B 225 180
The correlation between stocks A and B is closest to:
A. 0.00.
B. 0.63.
C. 0.79.
28. The rate of return on U.S. Treasury debt most likely reflects compensation for:
A. illiquidity.
B. default risk.
C. maturity differences.
29. Larc Enterprises, a software manufacturer, is in the process of evaluating three

takeover targets. The company’s management is determining the ability of the
target to generate efficiency gains in production following takeover.
45% of the companies which have produced steady productivity gains have been
taken over, P (Takeover) = 0.45. 30% of the companies which have secured
efficiency gains in the past have continued to do so after being taken over,
P(Gains) = 0.30. The probability that the target will generate gains following a
takeover, P(Gains Takeover), is 0.20.
Using Baye’s formula, the probability that the takeover will occur given that the
target has generated production efficiency gains, P(Takeover Gains) is closest to:
A. 0.20.
B. 0.30.
C. 0.67.


30. An analyst is using a stock’s past performance to generate forecasts concerning

the future. In the past twelve years, the stock has paid a dividend in only nine
years. The analyst will use the Binomial model to determine the expected number
of times the stock will pay dividend over the next twelve years.
The probability that the stock will pay a dividend in exactly nine out of twelve
years is closest to:
A. 0.09.
B. 0.26.
C. 0.75.
31. The probability that a uniform random variable with limits 2 and 7 is less than or
equal to 4 is closest to:
A. 0.142.
B. 0.285.
C. 0.571.
32. Douglas McGreggor is an economic analyst who is 90% confident that the
Brazilian GDP will rise to 4.6% in the coming year. His forecast is based on
monthly economic data pertaining to the past twenty years. The mean monthly
GDP over the period of analysis is 5.2% while the sample standard deviation is
9.0%. The analyst will be using a t-critical value of 1.646 for the purposes of
analysis.
Will a confidence interval constructed from the data provided include the
population mean?
A. Yes.
B. No, the population mean will exceed the upper limit of the interval.
C. No, the population mean will fall below the lower limit of the interval.


Question 33 through 44 relate to Economics
33. A U.S. based manufacturer is expecting ARS 5 million from its Argentinean
client in six months. To hedge foreign currency risk he has engaged in a forward
contract. The current spot rate is USD/ARS 0.1289 and is expected to appreciate
by 1.5% at contract expiration. Data regarding forward points is shown in exhibit
below:
Exhibit
Maturity Forward Points (%)
One month - 1.3
Three months - 3.8
Six months - 7.2
At the expiration of the forward contract the manufacturer will receive USD:
A. 0.60 million.
B. 0.64 million.
C. 0.71 million.
34. Taylor House is a German equity market analyst. He forecasts the Brazilian Real
(BRL) to appreciate against the Euro in the coming months, which will influence
the cost of imports and exports.
Based on House’s exchange rate forecast which of the following situations will
most likely materialize?
A. Long-run aggregate supply will decrease.

B. Short-run aggregate supply will decrease.
C. Aggregate demand curve will shift leftwards.


35. Jacqueline Smart is an economic analyst in Russia. Smart is making predictions

for the future value of the USD in terms of the domestic currency, the Ruble
(RUB). Based on her market analysis, Smart forecasts the nominal exchange rate
to depreciate by 3% and the U.S and Russian price levels to appreciate by 6% and
8% respectively.
Based on Smart’s forecasts, the relative purchasing power of RUB denominated

income will approximately:
A. increase by 5%.
B. decrease by 5%.
C. increase by 6%.
36. An analyst has gathered the following market share data for an industry
comprising of four companies.
Company Market Share

1. Köln 55%
2. TZR 25%
3. WOK 10%
4. Lure 10%
The industry’s two firm HHI is closest to:
A. 0.80
B. 36.5
C. 0.37
37. Brazil manufactures 85 tons of steel in a typical year. However, domestic demand
is 120 tons and thus 15 tons is imported at the world price, $780 per ton.
Domestic authorities impose a tariff of 10% on the imports raising domestic price
to $795. After the imposition of tariffs domestic steel manufacturing increases to
100 tons while domestic demand declines to 110 tons.
The loss in consumer surplus arising from the imposition of tariffs is closest to:
A. $187.50.
B. $1,725.00
C. $1,837.50.


38. Trace Corp operates in a perfectly competitive market. The supply and demand
functions are as follows:
QD = 40 – 4P
QS = 12 + 2P
Based on the supply and demand functions, the optimal price is closest to:
A. 4.67.
B. 8.67.
C. 21.33.
39. Market structures where there is no single optimum price and output analysis that
fits all market situations are most likely characterized as:
A. oligopoly.
B. perfect competition.
C. monopolistic competition.
40. The peak phase of the business cycle is characterized by:
A. a decline in business hiring rates.

B. a slowly rising unemployment rate.
C. heightened investment in shares of company with steady positive cash
flows.
41. In 2011, the inflation rate in South Africa was – 1.8% and real GDP value was
ZAR 545.6 million representing a decrease of 0.5% from the previous year. In the
same year GDP at market prices equaled ZAR 625.5 million.
Based on the data provided, the nominal GDP in 2010 would have been closest to
(in millions):
A. ZAR 593.80.
B. ZAR 645.14.
C. ZAR 668.78.


42. The automobile industry in Kyrone, a developing country situated in South Asia,
comprises of 8 manufacturers each with an equal market share. The Herfindahl-
Hirschman index (HHI) and the four-firm concentration ratio, respectively, are
closest to:
A. 0.125 and 50%.

B. 0.016 and 50%.
C. 0.500 and 100%.
43. The aggregation process most likely involves:
A. using inverse demand functions in the case of market demand.

B. summing the market prices quoted by all sellers in the case of market
supply.
C. summing the quantity demanded by all individual buyers in the case of
market demand.
44. If the market demand for a product always responds positively to an increase in
price resulting in a positively sloped demand curve, the product is most likely
classified as:
A. Giffen.
B. normal.
C. inferior .


45. The receipt of payment in advance of delivering the goods to the final customer is
most likely classified in the financial statements and recorded, respectively, as:
classification: recorded:
A. prepaid revenue increase in assets and revenue.
B. unearned revenue increase in assets and liabilities.
C. accrued revenue increase in assets and revenue.
46. An analyst is determining whether there is an improvement in a firm’s solvency

from the data available in exhibit below.
Exhibit:
2011 2010
Operating profit $24,560 $21,278
Net profit $17,548 $16,740
Net interest expense $10,460 $10,030
Interest payments $9,430 $8,900
Current assets* $30,500 $25,700
Current liabilities $21,080 $18,850
*This figure includes the closing inventory balance

that equals $12,200 and $14,520 in 2010 and 2011,
respectively.
The analyst will most likely conclude that the firm’s solvency position has
improved due to an increase in:
A. operating profit by $3,282.

B. current ratio from 1.36 in 2010 to 1.45 in 2011.
C. interest coverage ratio from 2.39 in 2010 to 2.60 in 2011.


47. Tranvix Associates is a financial services firm, which operates from a rented
office building. On January 1, 2013 the firm paid a cumulative $48,000 in rent for
the next three months. The exhibit below illustrates the company’s rent
prepayment schedule for any typical financial year that ends on December 31.
Exhibit: Tranvix’s Rent Prepayment

Schedule
Payment Date Amount paid
January 1 $48,000
April 1 Same
July 1 Same
October 1 Same
Assuming all rental transactions are recorded and adjusted at the end of each
quarter, on August 31, 2013 Tranvix Asscoiates will decrease:
A. cash by $48,000.
B. equity by $32,000.
C. current liabilities by $32,000.
48. Which of the following is least likely an example of a contra account?
A. Trade discounts to offset revenue.

B. Deferred tax assets to offset tax expense.
C. Allowance for bad debts to offset accounts receivable.
49. Which of the following financial statement implications results from the
company’s conservative expense recognition policy?
A. Equity will be understated.

B. Profitability ratios will be overstated.
C. Operating cash outflows will be overstated.


50. Which of the following equations most accurately illustrates how free cash flow to
the firm (FCFF) is calculated from cash flow from operations (CFO) under IFRS
if interest and dividends received are classified in investing activities while
interest paid in financing activities?
A. FCFF = CFO – fixed capital investment

B. FCFF = CFO + interest received + dividends received – fixed capital
investment
C. FCFF = CFO + Interest(1 – tax rate) + interest received + dividends
received – fixed capital investment
51. The exhibit below illustrates selective financial information concerning Gadget
Enterprises for the years 2012 and 2013.
Exhibit
Cash on hand 15 12
Net revenue 220 250
Net income 85 90
Based on the data presented, which of the following conclusions is most valid?
A. The company’s efficiency has improved.

B. The company’s cash to income ratio has improved by 32.4%.
C. The amount of cash generated per $1 of revenue has increased by 42.05%.


52. The exhibit below highlights selective financial information concerning Rake
Corp. and Industry averages.
Exhibit
Rake Corp Industry Average
Average sales growth 20% 16%
Average inventory $23 million $28 million
Cost of goods sold $121 million $115 million
Based on the information presented in the exhibit, which of the following

conclusions is most valid? Rake Corp.:
A. has obsolete inventory on hand.

B. has inadequate inventory levels.
C. is efficiently managing its inventory.
53. A company issued 7% fixed-rate corporate bonds at their par value. A few days
later, the market interest rate moved to 6%. The company uses the fair value
option to record all assets and liabilities. If the company continues to carry fixed
rate bonds at their historical cost:
A. net income will be understated.

B. the debt-to-capital ratio will be overstated.
C. economic liabilities will be lower than the debt’s amortized cost.
54. A company uses the FIFO method of inventory accounting while taxation
authorities require the LIFO method for tax purposes. The difference between the
carrying amount and tax base is most likely attributable to a:
A. permanent difference.
B. taxable temporary difference.
C. deductible temporary difference.


55. The exhibit below illustrates the provision for income taxes as well as profit
before taxes for a manufacturing concern for the financial years 2012, 2013 and
2014.
Exhibit
$’000 2014 2013 2012
Current income taxes 785 652 850
Deferred income taxes (420) 20 (205)
Profit before taxes 1,058 1,041 945
The effective tax rate is the highest in:
A. 2012.
B. 2013.
C. 2014.
56. On January 1, 2012, Howard Inc. entered into a lease to acquire equipment. The
lease requires five annual payments starting on January 1, 2012 and does not
transfer title of ownership to Howard Inc. at the end of the term. The company
prepares and presents its financial statements in accordance with IFRS. Details
concerning the lease are summarized in the exhibit below:
Exhibit: Details Concerning Howard Inc.’s

Lease Transaction
Useful life of the equipment 6 years
Fair value of the equipment $21,000
Salvage value of the equipment $0
Term of the lease 5 years
Annual lease payments $4,900
Discount rate 10%
Using fair values to record the leased asset and liability on the balance sheet upon
initial recognition, the interest expense reported in the fiscal year 2013 is closest
to:
A. $0.
B. $1,610.
C. $2,100.


57. Which of the following measures will be higher under an operating lease relative
to a finance lease during the initial years of a lease term?
A. Debt-to-equity ratio
B. Total asset turnover
C. Operating cash flows
58. On an income statement depreciation expense is grouped by:
A. nature
B. function
C. either nature or function.
59. Investing in the common stock of another company is most likely classified as a
(n):
A. financing activity.
60. E-rote publishes newsletters on a monthly basis by the same name. To subscribe
readers must pay an annual fee of $450 at the start of the year. E-rote currently
has 100 subscribers and this number is unexpected to change in the foreseeable
future. The company’s fiscal year commences March 1st.
For the fiscal year ending in 2013, the cumulative adjusting accounting entry
required on December 31, 2012 is:
A. increasing revenues by $75,000.

B. decreasing liabilities by $375,000.
C. decreasing revenues by $375,000.


61. Martino Ramirez is the financial officer at Sky Gates. He is analyzing the
movements in the company’s inventory account for the fiscal year ended
December 31, 2013 (Exhibit). The company uses the LIFO method of inventory
accounting. Sky Gates’ LIFO reserve has increased by $45 over the same period.
Exhibit: Movement in Sky Gates’ Inventory Account

For the Year 2013
Price per Unit
Transaction Quarter Number of Units ($)
Purchase 1 100 5
Sale 2 90 10
Purchase 3 210 8
Sale 4 200 10
Relative to LIFO, ending inventory using the FIFO method of inventory

accounting is higher by:
A. $45.
B. $60.
C. $100.
62. In response to rising input costs, CR Builders has set a target for reducing the
number of days of inventory on hand by twenty. The exhibit below highlights
selective financial information concerning the company for the fiscal year 2013.
Exhibit
Days of inventory on hand
(beginning of year) 145
Cost of goods sold – 2012 $455,000
In order to meet its target, CR Builders will need to adjust its average inventory
balance by:
A. reducing it by $120,000.
B. increasing it by $16,164.
C. increasing it by $5,900,000.


63. The financial statement effects of an anti-dilutive security are:
A. permitted to be recognized under IFRS only.

B. not incorporated in the calculation of EPS under IFRS and U.S. GAAP.
C. permitted to be recognized if it decreases diluted EPS relative to basic
EPS.
64. For the fiscal year 2012 Lakewood Inc. reported net income and revenues of
$45,550 and $65,000 respectively. The company collected $58,000 in cash from
its credit sales. Current assets increased by $30,000 over the same year.
Relative to revenue earned on a cash basis, Lakewood Inc.’s accrued revenues are
most likely:
A. equal.
B. higher by $7,000.
C. lower by $28,000.
65. Which of the following factors will most likely lead to a decline in the interest
coverage ratio?
A. A decrease in cost of sales.

B. An increase in interest income.
C. An increase in amortization expense.
66. Low quality financial reporting can most likely result from:
A. using short depreciable life of assets.

B. stretching accounting principles to achieve a desired outcome.
C. exercising pessimistic assumption about collectability of receivables .


67. An analyst estimates that the days-of-sales-outstanding for a company would

decrease from 15 days in the current year to 12 days in the coming year. Total
sales (all on credit) equaled $267 million in the current year and are expected to
increase to $350 million next year.
To achieve the lower DSO, the company’s accounts receivable balance must:
A. increase by $252,486.
B. decrease by $350,957.
C. increase by $517,934.
68. A gain or loss on debt extinguishment:
A. is not disclosed on the income statement if immaterial.

B. does not include debt issuance costs when the IFRS are used.
C. is disclosed as a separate line item on the cash flow statement when using
the indirect method.


69. The exhibit below illustrates financial data for a corporation.
Exhibit
2013 2012
Closing accounts receivable balance $450,000 $390,000
Annual sales on credit $5,800,000 $5,435,000
Average accounts receivable $460,000 $470,000
The percentage change in the number of days of receivables is closest to:
A. – 8.3%.
B. + 8.0%.
C. + 15.4%.
70. The shape of the marginal cost of capital schedule can least likely be attributable
to:
A. economies of scale in raising new capital.

B. methodology used in estimating flotation costs.
C. debt covenants restricting issuance of new debt.
71. A company’s current credit terms are 4/5 net 30. If the company continues to pay
on the 15th of each month, a decision to modify the terms to 3/8 net 30 will most
likely:
A. increase cost of trade credit.

B. decrease cost of trade credit.
C. not influence cost of trade credit.
72. Which of the following statements inaccurately illustrates the impact of taxes on
the cost of capital?
A. The cost of debt is adjusted for the tax shield.

B. The before and after-tax cost of preferred stock is always identical.
C. Estimating cost of equity is particularly challenging as taxes influence
dividend income and capital gains.


73. Glec Corp issued noncallable, nonconvertible preferred stock at an original price
of $38.50. The dividend yield quoted on the stock is 5% while dividend per share
is equal to $1.50. Glec’s weighted average cost of capital is 10%.
The preferred stock’s current price per share is closest to:
A. $30.00.
B. $38.50.
C. $150.00
74. An analyst made the following comments with respect to the principles of capital
budgeting:
Comment 1: The required rate of return comprises of several components one of

which includes financing costs.
Comment 2: Cash flows are incorporated based on an analysis of implicit

opportunity costs.
Is the analyst most likely correct with respect to his comments?
A. Only with respect to Comment 1.

B. Only with respect to Comment 2.
C. Yes, with respect to both comments.
75. Which of the following board practices is most supportive of shareowner

protection?
A. The former chief executive has assumed the role of board chair.
B. To ensure equal representation, two of the four board members are
independent.
C. Nonexecutive board members meet twice a year with only one meeting
conducted in the presence of executive members.
76. When evaluating the quality of an audit committee, an investor should consider
that:
A. all members are financial experts.

B. a majority of the members are independent.
C. the appointment of external auditors is a matter of shareowner voting.


77. Joanne Bennett has purchased 100 shares of stock each worth $56.50. The stock
does not pay an annual dividend. Bennett uses a leverage ratio of 1.8 to make the
purchase with a call money rate of 4.0%. Three months after the investment the
market price rises to $60.00.
Ignoring commissions, the return on the investment is closest to:
A. – 14.35%
B. + 6.19%.
C. + 7.95%.
78. An analyst is conducting research on a semi-strong-form efficient market. In his

research report, the analyst will most likely conclude that:
A. insider trading will not generate active returns.

B. technical analysis will generate abnormal portfolio returns.
C. investors cannot gain from exploiting publically available information.
79. Adjusting a market-capitalization-weighted index for its market float will ensure:
A. rebalancing frequency is minimized.

B. securities that have increased in price the most are not overrepresented.
C. the index is representative of the number of shares available to the public.


80. The exhibit below illustrates the beginning and ending market capitalization of an
equally weighted index. The market capitalizations exclude the dividends paid on
index shares.
Beginning Ending
Stock Market Total Market
Capitalization dividends Capitalization
A $14,500 $250 $16,870
B $25,670 $140 $20,370
C $30,090 $190 $35,670
D $21,030 $150 $26,790
The total return of the index is closest to:
A. 1.30%.
B. 11.31%.
C. 37.59%.
81. Which of the following is the most suitable trading strategy when a market is
weak-and semi-strong form efficient?
A. Passive portfolio management

B. Active portfolio management based on technical analysis
C. Active portfolio management based on fundamental analysis
82. A U.S. manufacturer of electric components has experienced a stable market

share relative to its European competitors. Which of the following factors most
likely influences the stability of the manufacturer’s market share in the
international market?
A. High switching costs

B. Fast pace of innovation
C. Stringent government regulation


83. The stock of Lake Associates, a newly established firm, is trading at a market
price of $55 per share. Company management has announced an annual dividend
per share of $2.55 for the next three years. At the end of the three years, the stock
is expected to trade at a price of $60. The required rate of return is 12%.
Lake Associates’ stock is most likely:
A. overvalued.
B. undervalued.
C. fairly valued.
84. Which of the following will least likely be the objective for a company issuing
securities in the primary market.
A. Raising capital.
B. Increasing liquidity.
C. Enhancing the market value of equity.
85. The exhibit below illustrates selective balance sheet information for two
companies in the farming industry:
Exhibit
Company A* Company B**
Current assets $450,000 $352,350
Noncurrent assets $925,000 $895,000
Noncurrent liabilities $50,050 $63,100
Market share price $145.80 $52.10
Number of shares 10,000 12,500
*The book value of assets and liabilities equal their respective market value.
**The book value of Company B’s noncurrent assets is 10% greater than market
value.
Using the asset valuation model, which of the following conclusions is most likely
valid?
A. Relative to B, company A is favorably valued.

B. Relative to A, company B is favorably valued.
C. An investor will be indifferent between the two companies.


86. A quality unique to dealers is that they:
A. do not trade with their clients.

B. provide liquidity to their clients.
C. create new financial products by repackaging securities.
87. The exhibit below illustrates the selective financial information of a firm for the
financial years 2012 and 2013:
$’000s 2013: 2012:

Net profit 45 31
Net revenues 34 30
Average total assets 89 110
Average total liabilities 70 90
Which of the following statements concerning the firm is most likely correct?
Firm’s:
A. financial leverage has increased.

B. return on equity has deteriorated.
C. productive efficiency has improved.
88. Which of the following statements is most likely correct regarding the issues index
providers need to consider when managing indexes?
A. Price-weighted indexes are significantly affected by rebalancing.

B. Equally weighted indexes are significantly affected by rebalancing.
C. Market capitalization weighted indexes are affected equally by
rebalancing and reconstitution.


89. An investor purchases 100 shares of AXZ Inc. at $65 per share and also buys one
put option covering 100 shares, with strike price of $55 and pays $2 per share put
premium. If at the expiration of the put, share trades at $58 and the investor sells
his shares at that price, his net profit is closest to:
A. $100
B. −$600
C. −$900
90. In contrast to over-the-counter derivatives markets, exchange-traded derivatives

markets provide:
A. liquidity,
B. flexibility.
C. transparency.
91. A three-month call option with an exercise price of $55 is being sold for $8. A
three-month Treasury bond is being sold in the market place with the same face
value as the option’s exercise price. The underlying is currently worth $60 and the
Assuming the put-call parity holds, a put option is being sold for:
A. $0.73.
B. $2.42.
C. $12.34.
92. Which of the following statements is most likely correct regarding derivatives?
Derivatives:
A. may have an indefinite life span.

B. transform the nature of a party’s risk exposure.
C. take their value and characteristics from the underlying.


93. Jason Briggs purchased a 3-month call option by paying $0.08. The exercise price
of the option is $1.32 while the underlying is priced at $1.35.
Is the option currently in-the-money and at what price will break-even occur?
In-the-money? Break-even price?

A. No $1.27.
B. Yes $1.40.
C. Yes $1.43.
94. Jill Howard owns 1,000 shares in RST Corp. She is concerned about a decline in
the value of her investment and is seeking to undertake a derivatives-based
strategy that will protect against potential losses but will allow her to participate
in stock price increases to the maximum extent possible.
Which of the following strategies will be most appropriate for Howard?
A. Covered call
B. Protective put
C. Equity forward contract on RST stock.


95. Jason Stambaugh purchases a three-year corporate bond that pays annual coupon
at a rate of 6%. The bond’s yield-to-maturity is 5% and it is priced at 104.3294
per 100 of par value. The bond’s coupon payment periods are evenly spaced.
The bond’s Macaulay duration is closest to:
A. 2.25
B. 2.84
C. 3.17.
96. A bond portfolio comprises of three fixed-rate issues. Details concerning the three
issues are summarized in the exhibit below. The bonds pay annual coupons.
Assume there is no accrued interest.
Time to Market Par value Coupon Modified Yield-to-

Bond maturity value Rate duration maturity
A 8 years $120,000 $100,000 4.00% 7.83 3.24%
B 5 years $98,550 $100,000 5.25% 4.42 5.06%
C 12 years $105,300 $100,000 8.90% 11.45 8.68%
The modified duration of the bond portfolio is closest to:
A. 4.25.
B. 7.90.
C. 7.97.
97. When interest rates are lower relative to a callable bond’s coupon rate, an investor
should least likely expect a reduction in:
A. call risk.
B. expected life.
C. price sensitivity.


98. A 5-year, 8% annual coupon-paying bond is priced at 94.2404 per 100 of par
value and has a yield-to-maturity of 9.50%. If interest rates rise to 10.00%
immediately following investment, the future value of reinvested coupons per 100
of par value is closest to:
A. 48.84.
B. $53.72.
C. $61.72
99. Don Sullivan, a fixed income analyst, is comparing EV/EBITDA and

debt/EBITDA ratios across issuers. He observes that the difference between the
two ratios has narrowed for a particular issuer.
Based on his observation concerning the issuer, Sullivan will most likely conclude
that there is a decline in:
A. equity cushion.
B. enterprise value.
C. interest coverage.
100. The expected percentage loss on a bond following a 45 basis points rise in rates is
6.53%. If the market value of the bond investment is $5,120,466 and the modified
duration is 8.352, the expected loss is closest to:
A. $192,448.
B. $334,366.
C. $2,792,628.
101. Best effort offerings:
A. are less risky relative to underwritten offerings.

B. are mechanisms used to issue bonds in the secondary market.
C. include a guarantee to sell the bond issue at the negotiated offering price.


102. Sally Hutchkins invested in a British corporate bond that is priced to settle on 12
June 2018. Details regarding her investment are as follows:
Coupon rate 8%
Coupon payment frequency Semi-annually
Coupon payment dates 13 April and 13 October
Maturity date 13th October 2022
Day count convention n/360
Yield to maturity 6.00%
Assuming there are 60 days in the settlement period, the full price of the issue
settling on 12th June 2018 is closest to:
A. €106.45.
B. €107.79.
C. €108.85.
103. Allan Brown is comparing cash flow structures of bonds with his colleague.
During their discussion, Brown makes the following statements:
Statement 1: “Throughout the life of bond issue, interest payments for the
partially amortized bond are higher relative to that of the fully
amortized bond issue.”
Statement 2: “Both fully and partially amortizing bonds call for fixed periodic
payments.”
Brown is most likely correct with respect to:
A. statement 1.
B. statement 2.


104. Daniel Monroe is a fixed income analyst who has observed the following prices
and yields to maturity on zero-coupon bonds:
Maturity Price Yield-to-Maturity

1 year 98.50 4.5774%
2 years 97.01 4.0434%
3 years 95.00 3.6854%
4 years 93.67 3.0374%
The “3y1y” forward rate stated on a semi-annual basis is closest to:
A. 1.11%.
B. 2.12%.
C. 2.22%.
105. Kyle Rubin invests in a 7% annual coupon-paying corporate bond issue with a
remaining term to maturity of three years. The exhibit below illustrates the annual
government spot rates based on their terms to maturity:
Exhibit: Government Bond Spot

Rates
Term Rate (%)
1-year 2.10
2-year 2.54
3-year 3.00
4-year 3.67
5-year 4.10
6-year 4.90
If the Z-spread is 140 basis points, the price of the bond per 100 of par value is
closest to:
A. $96.62.
B. $107.28.
C. $107.55.


106. A 5% annual coupon-paying, four-year U.S. corporate bond is trading at a price of

101.510 per 100 of par value. A four-year, 3% annual coupon-paying,
government bond is trading at a price of 101.083. The current four-year U.S swap
rate benchmark is 3.6780%.
The corporate bond’s G-spread is closest to:
A. 90 basis points.
B. 187 basis points.
C. 271 basis points.


107. The high water mark fee structure
A. protects clients from paying twice for the same performance.

B. reflect the highest cumulative return used to calculate the management fee.
C. can be based either on fund’s assets under management or on fund’s
realized profits.
108. Which of the following is most likely the motivation for an investor capitalizing in
private equity through ‘distressed investing’?
A. Company’s high growth potential in future

B. Selling company to strategic buyer at better price.
C. Expectation that company’s debt may increase in value
109. Which of the following arguments most likely represents a justification for
investing in real estate?
A. Low degree of regulation

B. Suitable for investors with moderate levels of wealth
C. Potential for long-term returns driven by income generation and capital
appreciation
110. Gramathon Associates is a hedge fund that manages $250 million worth of
investments. The fee structure quoted by the fund is “2 and 20”. Management fees
are calculated based on the assets under management at the beginning of the year.
At the end of the current year, the value of the fund rises to $300 million. If the
incentive fee is based on the management fee and is calculated at year-end, the
net-of-fees return earned by a fund investor is closest to:
A. 14.0%.
B. 14.4%.
C. 16.4%.


111. Paul Oriel manages his own investment portfolio that comprises of stocks and
bonds. Oriel is exploring alternative investment categories for the portfolio. He
has a long-time horizon and desires return potential, diversification and inflation
protection from his chosen investment category.
Based on Oriel’s specifications he should most likely select:
A. hedge funds.
B. commodities.
C. private equity.
112. Which of the following is most likely an alternative investment category?
A. Real estate
B. Index tracking funds


113. Based on the capital market theory, the capital allocation line is a combination of
two asset classes that are:
A. uncorrelated.
B. positively correlated.
C. negatively correlated.
114. The risk of a significant downward valuation adjustment when selling a financial
asset is most likely categorized as:
A. Credit risk
B. Market risk
C. Liquidity risk
115. Therma Oliver is contemplating investment in the stock of Gile Inc. The expected
annual return of the stock and risk-free rate of return is 9% and 3% respectively.
If the beta of the stock is 1.5, the market risk premium based on the capital asset
pricing model (CAPM) is closest to:
A. 1%.
B. 4%.
C. 7%.
116. If a point representing the estimated return of an asset plots above the security
market line (SML), the asset will most likely:
A. be fairly valued.
B. not be considered for investment.
C. has a risk level which is low relative to its expected return.


117. Lewis Smith’s wants to diversify his equity portfolio by including a corporate
bond issue. The expected annual return and standard deviation of his current
portfolio is 15.4% and 22.5%, respectively. The bond issue being evaluated has an
expected annual return and standard deviation of 7.8% and 9.9%, respectively.
The risk-free rate of return is 4% and the correlation between the existing
portfolio and the bond issue is 0.40.
Smith best course of action would be to:
A. invest in the bond issue as its standard deviation is lower than that of the
portfolio.
B. avoid the bond issue since the expected return is lower than the existing
portfolio return.
C. invest in the bond issue as the Sharpe ratio of the bond issue is greater
than that of the portfolio.
118. Debra Bates, aged 32, is divorced and mother to two children, ages 3 and 6
respectively. She works as a marketing executive and would like her financial
advisor to review her financial situation. Her advisor notes the following
information on Bates:
• Her annual salary of $720,000 comfortably covers her lavish lifestyle.

• She would like to finance her children’s college education.
• She believes her pension will be sufficient for her retirement.
• She is extremely qualified and her employer would not like her to search
for alternative employment.
• During her interview with her advisor, she stated ‘I have always disliked
bearing financial loss. As a child, my parents went through financial
difficulty and I would not like to live a similar life. That is why I prefer
caution while investing.”
Based only on the information provided, Bates is most likely said to have a (n):
A. high ability and willingness to tolerate risk.

B. high ability to tolerate risk, but low willingness to tolerate risk.
C. low ability to tolerate risk, but high willingness to tolerate risk.


119. Carlos Reid has a risk-aversion coefficient of 5.2 and a utility function of
1
U = E (r ) − Aσ 2 . Reid’s portfolio manager has identified three potential
2
securities for his client. Expected risk and return details concerning the potential
investments are summarized in the exhibit below:
Exhibit
Expected Return Expected Risk
Security (%) (%)
A 16.3 11.9
B 12.4 9.8
C 22.1 19.8
Reid will derive the highest utility from Security:
A. A.
B. B.
C. C.
120. When a client’s ability to take risk is above average but willingness is below
average, the portfolio manager should:
A. asses the investor’s risk tolerance as average overall.

B. seek to counsel the client and explain the conflict and its implications.
C. aim to change the client’s willingness to take risk by modifying the
elements of his personality.

FinQuiz.com
June, 2016
Revision 1


33-44 Economics 18
Total 180

Questions 1 through 18 relate to Ethical Standards
1. Victor Solanki is an economic analyst at Gate Associates. He is preparing a

research report on Monte Corp., an oil explorer and producer. Based on industry
and economic analysis, Solanki projects Monte’s quarterly earnings to rise by 5%
provided local government implements its proposed policy of permitting oil
exploration in neighboring untapped areas. Based on his discussion with Cindy
Davis, a government official, she is hopeful that the government will implement
the policy, as discussions with local environmentalists have gone well. Solanki
issues a report with the recommendation, “Monte’s earnings will rise by 5% in the
coming quarter which is projected to have a favorable effect on its share price. I
recommend a strong ‘buy’.”
Solanki is in violation of the CFA Institute Standards of Professional Conduct

because he has:
A. failed to separate opinion from fact in his recommendation.

B. acted on material nonpublic information by issuing the report.
C. issued a recommendation which lacks a reasonable and adequate basis.
Correct Answer: A
Reference:
Solanki is in violation of the standards because he has stated his opinion of

earnings growth as fact; actual growth may not match his forecast. Standard V (B)
‘Communication with Clients and Prospects’ requires members and candidates to
distinguish opinion from fact.
Solanki has not acted on material nonpublic information by issuing the report.
Solanki does not receive any confidential information in his discussion with
Davis. She is merely predicting the government’s actions that may or may not
materialize. Acting on this immaterial information does not constitute a violation.
Solanki’s recommendation does not lack a reasonable and adequate basis since his
forecast is backed by industry and economic analysis.

2. Gus Morrison manages the accounts of several institutional clients. He purchases

the stock of Core Tech, a technology giant, for their accounts based on research
analyst Jules Wright’s recommendation. Wright serves a sell-side research firm
and happens to be a close friend of Morrison’s. He does not disclose this
relationship to his clients believing it will not influence his impartiality. A few
months following the allocation, the Core Tech stock’s market price heavily
declines due to the announcement of a major fraud committed by its chief
executive officer.
With respect to the CFA Institute Standards of Professional Conduct, Morrison is

most likely:
A. in compliance.
B. in violation; he did not uphold his duty of loyalty, prudence and care.
C. in violation; he did not conduct proper due diligence when using Wright’s
recommendation.
Correct Answer: B
Reference:
Morrison is in violation of the standard relating to loyalty, prudence and care

because he has failed to disclose his relationship with Wright. As their portfolio
manager, Morrison should disclose all actual and potential conflicts of interest so
that clients can evaluate those conflicts.
Neither Morrison nor Wright could have anticipated the fraud incidence.
Furthermore, the incident does not put a question mark on the expertise or skills
of Wright. Since there is no doubt about the expertise of the research analyst, it is
incorrect to state that Morrison failed to conduct proper due diligence when
relying on her research and recommendation.

3. Renee Irving is part of a team of five analysts who is working on developing a

research report on a pharmaceutical company. Irving strongly believes the stock
should be rated as a ‘weak hold’. Her recommendation is based on a discussion
with a medical expert who believes the company’s latest drug has more side-
effects than originally claimed. Her team members are of the collective opinion
that her recommendation is too conservative and that a ‘hold’ recommendation is
more appropriate given that the drug has provided promising results in numerous
trial runs. Irving does not agree with the group’s recommendation.
Irving’s best course of action would be to:
A. request for a change in assignment.

B. request her name to be withdrawn from the report.
C. continue identifying herself with the report and disclose her difference in
opinion.
Correct Answer: C
Reference:
Irving’s best course of action would be to continue identifying herself with the
report. She can also consider disclosing her difference in opinion. Even though
she does not agree with the group’s recommendation, there is nothing to suggest
that their recommendation lacks a reasonable and adequate basis or is not
independent and objective.
4. Which of the following activities most likely represents market manipulation and
is a violation of the CFA Institute Standards of Professional Conduct?
A. An investment analyst over-exaggerates his firm’s performance in order to

win new client accounts.
B. A global hedge fund increases the price of an oil producer’s stock when it
makes a significant purchase of its shares.
C. A dealer firm purchases and sells shares of stock between two accounts in
order to sell it to clients at an attractive price.
Correct Answer: C
Reference:

Option C highlights market manipulation. The dealer firm is artificially

attempting to distort prices with the intent of misleading its clients who will
believe the security is trading at an attractive price.
Option A highlights misrepresentation of investment performance and not market

manipulation.
Option B does not highlight market manipulation; this is because the impact of
the trade on the oil producer’s price is understandable given the size of the global
hedge fund. Any trade undertaken by the fund will have a significant impact on
security price.
5. Joyce Mildstorm recently shifted to a competitor asset advisory firm and was
careful not to solicit any clients prior to leaving her previous employer.
Mildstorm’s first assignment involves preparing a research report on a security
systems manufacturer, which she had coincidentally covered at her previous
employer. To preserve the confidentiality of her past employer, Mildstorm
recollects information on the manufacturer from public sources as well as relies
on her memory. At the conclusion of her research, Mildstorm discovers that her
new recommendation matches the original one.
Mildstorm has most likely:
A. not conducted proper due diligence when generating her latest

recommendation.
B. violated the standard relating to record retention by relying on memory to
prepare the report.
C. violated the standard concerning employer loyalty by preparing a report on
a client of her previous employer.
Correct Answer: B
Reference:

By relying on memory to recreate information records, Mildstorm’s actions are

inconsistent with the standard concerning record retention. She should only use
information collected public sources or directly from the covered company.
Mildstorm has conducted proper due diligence by using information from public
sources to prepare the research report.
Mildstorm has not violated the standard concerning employer by covering the
manufacturer at her new employer.
6. According to the CFA Institute Standards of Professional Conduct concerning

disclosure of conflicts, potential conflict situations that could prohibit a member
or candidate from fulfilling his or her duties to the employer should be dealt with
by:
A. documenting the conflict.

B. reporting it to the employer.
C. disassociating from the situation.
Correct Answer: B
Reference:
Should a member or candidate come across a potential conflict situation that

could prevent him or her from fulfilling their duties to their employer, they should
report to their employer first and aim to promptly resolve the conflict. Neither
disassociating from the situation nor documenting the conflict is the solution.
7. After conducting thorough analysis and compiling his research report, Jason
Woods arrives at a weak sell recommendation for a financial services firm. His
supervisor instructs Woods that his recommendation is too conservative and that
he should revise it to a strong sell. Woods’ best course of action would be to:
A. reevaluate the thoroughness of his research process.

B. maintain a weak sell recommendation and issue the report.
C. issue a strong sell recommendation to avoid violating his duty of loyalty to
his employer.
Correct Answer: B

Reference:
Woods must issue a weak sell recommendation and not come under the pressure
of his supervisor to issue a strong sell recommendation. Based on the information
provided in the case, he has conducted thoroughly analysis and thus should base
his recommendation on his own independent and objective judgment.
Additionally, there is no need to revise the thoroughness of his research process.
By pressurizing Woods to revise his recommendation, the supervisor is violating
the standard concerning independence and objectivity
8. According to the CFA Institute Standards of Practice Handbook, which of the

following compliance procedures are members and candidates least likely
recommended to consider?
A. Prohibiting employee participation in equity-related IPOs.

B. Offering different levels of service to clients on a selective basis.
C. Limiting the number of employees who will know that a recommendation
is to be disseminated.
Correct Answer: B
Reference: CFA Level I, Volume 1, Study Session 1, Reading 2, LOS a
In order to deal fairly and objectively with clients and prospects, a recommended
procedure for claiming compliance is to limit the number of people who are aware
of the fact that a recommendation is to be disseminated.
Members and candidates are recommended to encourage their employer to

develop formal policies related to equity or equity-related IPOs. Firms should
require prior approval for participating in equity IPOs with prompt disclosure of
investment actions taken following the offering. However, the emphasis is on
placing limitations on participation and not imposing a ban.
Members and candidates should disclose the different service levels being offered
to clients and should not offer different service levels selectively.

9. In order to assure fair dealing, members and candidates should issue an

investment recommendation:
A. to all its clients first followed by within the firm.

B. simultaneously both within the firm and to all its clients.
C. simultaneously to both suitable clients and within the firm.
Correct Answer: B
Reference:
In order to assure fair dealing, the Standards of Practice Handbook encourages

simultaneous dissemination to both within the firm and to all clients.
Dissemination to suitable client accounts is considered a violation of this
standard.
10. Francis Meyer is a derivatives trader at Walsh & Spencer. Meyer has made Laura
Peterson, a trader serving the firm and reporting to Meyer, in charge of
monitoring trades executed for client accounts with a low risk tolerance. Due to a
hectic work schedule, Peterson inadvertently overlooks an accidental allocation of
a high risk equity stock to the accounts.
With respect to the CFA Institute Standards of Professional Conduct concerning

responsibility of supervisors, Meyer is:
A. not in violation as Peterson’s conduct is not covered by the standards.

B. not in violation once she has delegated her supervisory responsibilities to
Peterson.
C. in violation because she remains responsible for her supervisory duties
despite the delegation.
Correct Answer: C
Reference:

By delegating her supervisory responsibilities, Meyer does not appease herself of

those duties. That is, she remains accountable for the delegated responsibilities.
Negligence in the workplace constitutes a violation of the standard concerning
misconduct as it reflects adversely on professional competence. By
unintentionally allowing the allocation of an unsuitable stock to client accounts,
both Meyer and Peterson are in violation of the standard concerning responsibility
of supervisors.
11. Catherine Tike serves a brokerage firm. The firm executes trades for client
accounts directed to it by Kyle Investments, an investment management firm.
Tike has had an excellent performance year generating substantial capital gains
for several client accounts. In return for her exceptional performance, the Kyle’s
CEO offers her a fully paid cruise trip to the Maldives.
According to the Standards of Practice Handbook, Tike should:
A. decline the offer as the additional compensation is excessive.

B. accept the offer and notify her employer immediately afterwards.
C. obtain a written consent from her employer before accepting the offer.
Correct Answer: C
Reference:
Tike’s best course of action is to seek written consent from her employer before
accepting the offer. The standard relating to additional compensation
arrangements requires members and candidates to not accept gifts, benefits,
compensation or consideration that competes with or is expected to compete with
their employer’s interests unless they receive a written consent from all parties
involved.

12. Trinity Associates manages an equity fund with a mandate of investing in growth
oriented securities. As Trinity has had a hard time attracting new clients therefore
this year he fund’s senior manager has decided to revise the mandate to include
value oriented securities. The fund advertises the change in mandate to all
potential clients who had rejected the fund’s previous mandate.
According to the Standards of Practice Handbook Trinity Associates is:
A. fully in compliance.
B. in violation; the change has not been disclosed to all its clients.
C. in violation; the mandate can be revised only after notifying potential
clients.
Correct Answer: B
Reference:
The firm is in violation of the Standards of Professional Conduct by failing to

communicate the change in recommendation to current clients. The standard
requires disclosure of all information relevant to investment analysis,
recommendations or actions to clients and prospects. However, notifying potential
clients prior to a change in mandate is not necessary.
13. Sarah Ali is an investment analyst serving a firm managing several equity funds
in the country of Lartha. Local laws permit investment analysts to undertake
trades for accounts in which they have a beneficial ownership at the same time as
their employer. However, client account trades have transaction priority. Ali has
identified the stock of Gerard Tech as attractive for her investment portfolio, the
firm’s equity fund and her client accounts.
In order to claim compliance with the Code and standards, after allocating the
stock to client accounts, Ali is most likely required to purchase the stock in the
following order:
A. herself followed by her employer.

B. her employer followed by herself.
C. simultaneously for both herself and her employer.
Correct Answer: B

Reference:
The CFA Institute Standards of Professional Conduct concerning transaction

priority requires client and employer trades to be given preference to those
conducted for an account in which a member or candidate has a beneficial
ownership. Local laws are less strict in this regard as they place transactions
undertaken on behalf of employers and beneficial ownership accounts at par.
The standard relating to Knowledge of the Law defines applicable law as the
strictest between local laws or regulations and the Code and Standards. Given that
the Code and Standards are stricter with respect to transaction priority, Ali can
only purchase the stock for her portfolio after she has acquired it for her firm’s
equity fund.
14. Dana Irk and Carl Sholes are CFA Level II candidates who have recently sat for
the Level II exam and are awaiting their results. In a discussion between the two
candidates they make a comment each:
Irk: “This year the exam did not feature any questions on currency
futures.”
Scholes: “I found the quantitative techniques section particularly difficult

this year as there were long calculations in many questions.”
Which candidate’s statement is most likely in violation of the CFA Institute

A. Irk only.
B. Scholes only.
C. Both Irk and Scholes.
Correct Answer: C
Reference:

Irk’s comment is in violation of the standard concerning conduct as members and

candidates in the CFA program; this is because she is discussing a topical area
which has not been covered by the exam and in this manner is sharing
confidential exam information.
Scholes’ comment is also in violation as he is disclosing exam information related

to long calculations in quantitative techniques. When expressing a personal
opinion, a person is prohibited from disclosing content specific information.
15. Hart Lewis, a fund manager at Maritime Inc., runs an emerging market fixed
income hedge fund. The latest securities being evaluated by Lewis are African
corporate bonds. Due to the inefficiency of the corporate bond markets in which
the issuers operate, security prices have not increased to reflect the early signs of
recovery in the credit markets and economy. Lewis takes advantage of the
information lag and purchases a significant number of corporate bonds for the
fund. Bond prices immediately surge following the fund’s purchase leaving
investors to question whether the firm has engaged in market manipulation.
Has Lewis engaged in market manipulation?
A. No.
B. Yes, his activities have artificially distorted bond prices.
C. Yes, he has engaged in information based manipulation.
Correct Answer: A
Reference:
Lewis has not engaged in market manipulation. Standard II (B) Market

manipulation does not preclude transactions undertaken on legitimate trading
strategies based on perceived market inefficiencies. Lewis’s intent was to exploit
the market inefficiency rather than to distort price and mislead market
participants. Therefore, he has not engaged in market manipulation of any kind,
transaction- or information-based.

16. Veronica Welsh is an investment manager serving an asset advisory firm.

Dissatisfied with the current broker’s performance Gray Inc., one of Welsh’s
clients, requests her to redirect his account trades to Smith Bay, a competing
brokerage firm. Smith Bay provides average execution and charges a fee higher
than the current broker. Welsh chooses not to disclose details of the directed
brokerage arrangement to Gray and further decides to allocate the transactions of
three other client accounts to Smith Bay.
According to the Standards of Practice Handbook, with respect to directing to

trades through Smith Bay, Welsh should:
A. not undertake the arrangement to avoid violating his duty of loyalty to

Gray Inc.
B. direct the trades of the three client accounts after disclosing the details of
the arrangement.
C. disclose to Gray Inc that it will not be receiving best price and execution
prior to directing trades.
Correct Answer: C
Reference:
Brokerage commission is an asset of the client and is used to benefit the client, so
client-directed brokerage does not violate any duty of loyalty. However, given
that the brokerage arrangement with Smith Bay does not provide best price and
execution, disclosure to Gray Inc. is warranted.
Welsh should not direct the trades of the other three client accounts to Smith Bay.
This is because they have not made a request and directing trades to a broker that
does not provide best price and execution will be a violation of his duty of loyalty
to them.

17. Dale Carlson and Monica Singh are two traders dealing in Asian equities and
serving the same brokerage firm. During a trading session, Carlson receives an
overseas telephone call. Singh overhears the conversation and discovers that the
caller is an Asian trader who has received news from an inside source that an
Asian automobile maker is diversifying its line of business and will be signing an
agreement to acquire a pharmaceutical. Upon the conclusion of the telephone call,
Carlson enters a buy order for the Automobile manufacturer. Although she is
aware that Carlson has undertaken an illegal trade, Singh is unsure of what action
she should take.
Based on the standard concerning Knowledge of the Law, Singh’s best course of
action is to:
A. consult the firm’s legal department.

B. report the incident to legal authorities.
C. disassociate from trading Asian equities.
Correct Answer: A
Reference:
Carlson is acting on material nonpublic information by trading on inside

information. It is necessary for Singh to take action and disclose the unethical
activity to her supervisor. Since Singh is uncertain of what course of action to
take, she should consult her firm’s compliance or legal department who can
advise her accordingly.
The Code and Standards do not compel members and candidates to report the
illegal activity to regulatory organizations unless mandated by the applicable law.
Singh should consider disassociating from trading Asian activities if her employer
does not take any action to put an end to the illegal activity.

18. Alan Brown is a retired investment manager who earned his CFA charter fifteen
years ago. He recently retired and has since not paid his annual CFA dues or
signed the professional conduct statement. In a discussion with his son, Brown
states “My fifteen years as a CFA Institute member has equipped me with strong
investment management skills and has enabled me to adopt a more analytical and
reasoned approach when addressing client needs.”
Is Brown’s statement in violation of the CFA Institute’s Standards of Professional

Conduct?
A. No.
B. Yes, he has overstated his competency as a CFA Institute member.
C. Yes, his right to refer to himself as a CFA Institute member has been
suspended until he resumes paying his dues and signs the professional
conduct statement.
Correct Answer: A
Reference:
Brown is not in violation of the Code and Standards; this is because his claims of
the merits of being a CFA Institute member are facts. The program enhances
portfolio management skills and enables managers to handle client affairs in a
more informed manner.
Brown has ceased to be a member of the CFA Institute and he cannot identify
himself as such since he has not paid his annual dues or signed the professional
conduct statement. However, he is not in violation by merely referring to the
years in which he was an active member.

19. An ascending triangle pattern:
A. produces a horizontal trendline connecting the high prices.

B. implies that buyers are bearish, waiting for price declines before trading.
C. suggests that a positive price trend is always quickly offset by a negative
price trend.
Correct Answer: A
Reference:
In an ascending triangle pattern, a horizontal trendline connects the high prices

while an upward sloping trendline connects the low prices. The price patterns
suggests that buyers are getting more and more bullish as demonstrated through
their trading at increasingly higher prices to halt sell-offs instead of waiting for
further price declines.
20. A portfolio manager is short listing ten stocks for an equity fund he is developing.
He is selecting stocks from an equity index fund comprising of twelve company
stocks. He will gradually add the stocks to the fund but is not concerned about the
order in which they are selected.
The number of ways the manager can select his sample from the equity index is
approximately:
A. 66.
B. 75.
C. 132.
Correct Answer: A
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 8, LOS o
n! 12!
n Cr = = = 66.0 .
(n − r )!r! (12 − 10)!10!

21. A factor that distinguishes ratio from interval scales is that at least one:
A. fails to rank data.

B. has a natural point of origin.
C. orders data based on an underlying characteristic.
Correct Answer: B
Reference:
A factor that distinguishes ratio from interval scales is that the former has an
actual point of origin, zero. Interval scales do not have an actual zero as a zero
value does not amount to the absence of something.
A limitation of the nominal scale is that it fails to rank data.
Ordinal scales order data based on a particular characteristic.

22. After compiling the returns for a stock index fund (Exhibit), Jeremy Marshall
proceeds to measure the riskiness of the fund.
Exhibit:
Data Concerning Returns for
The Stock Index Fund
Year Returns (%)
2005 25.7
2006 18.2
2007 31.5
2008 33.0
2009 33.5
2010 37.0
Marshall makes the following comments upon the conclusion of his analysis:
Comment 1: “Based on my calculations, the mean absolute deviation (MAD) is

approximately 6.29.”
Comment 2: “The MAD is a superior measure to variance in that it uses all the
observations in a sample.”
Marshall is least accurate with respect to:
A. Comment 1.
B. Comment 2.
C. both of the comments.
Correct Answer: C
Reference:

Marshall is incorrect with respect to both his comments. Based on the data
provided, MAD should equal 5.24. Both the MAD and standard deviation
incorporate all the observations in a sample.
n
∑X I −X
MAD = i =1
n
25.7 + 18.2 + 31.5 + 33.0 + 33.5 + 37.0
X= = 29.81667
6
MAD =
25.7 − 29.81667 + 18.2 − 29.81667 + 31.5 − 29.81667 + 33.0 − 29.81667 + 33.5 − 29.81667 + 37.0 − 29.81667
6
= 5.24
23. A key tenet of the Elliot Wave Theory is that:
A. market waves follow patterns described by the Fibonacci sequence.

B. in a bull market each impulse wave is followed by another impulse wave.
C. secondary market offerings have the potential to change the supply and
demand equilibrium.
Correct Answer: A
Reference
A key tenet of the Elliot wave theory is market waves follow patterns that are
ratios of the numbers in the Fibonacci sequence.
Secondly, the theory states that the market moves in a pattern of five waves in a
bull market. Each impulse wave is followed by a corrective wave.

24. Scottsdale Limited is a manufacturing firm which is exploring two factory

expansion projects, Alpha and Seta. Scottsdale can only undertake one of the two
projects. Both projects require an outlay of $300,000 each. Alpha and Seta are
projected to generate $45,000 and $25,000, respectively, in cash flows in
perpetuity. The cost of capital for Alpha and Seta is 8% and 4% respectively.
Which project will Scottsdale undertake based on the:
NPV Rule? IRR Rule?

A. Alpha Seta
B. Seta Seta
C. Seta Alpha
Correct Answer: C
Reference:
NPV (Alpha) = - $300,000 + $45,000/0.08 = $262,500

NPV (Seta) = - $300,000 + $25,000/0.04 = $325,000
Based on the NPV rule, Seta should be selected.
Investment = CF/IRR
IRR (Alpha) = $45,000/$300,000 = 0.15 or 15%
IRR (Seta) = $25,000/$300,000 = 0.0833 or 8.33%
Based on the IRR rule, Alpha should be selected.
25. The mean average monthly return generated by a stock index mutual fund is 4.5%
while the standard deviation is 6.7% over the past 96 months. The endpoints of
the intervals that must contain at least 36% of monthly returns according to
Chebyshev’s inequality are:
A. – 8.90% to 17.90%.
B. – 3.88% to 12.88%.
C. 4.50% to 8.38%.
Correct Answer: B

Reference:
According to Chebyshev’s inequality, 36% of the observations must fall within

1.25 standard deviations of the mean. The interval around the sample mean is
4.5% ± (1.25 × 6.7%) = 4.50% ± 8.38%. The lower endpoint containing at least
36% of the observations is – 3.88% while the higher endpoint is 12.88%.
26. An analyst strongly believes that the weather conditions in a particular country
influence the attendance of shareholders in company meetings. He intends to
prove the relationship using hypothesis testing. A fellow analyst claims that the
analysis may be prone to bias because his colleague is using an extensive number
of variables to prove this notion.
The statistical analysis is subject to the bias known as:
A. data mining.
B. relationship.
C. sample selection.
Correct Answer: A
Reference:
The analysis is subject to data mining bias. This is exhibited by the analyst’s
attempts to test numerous variables to prove his notion. Data mining relates to the
overuse of data to search for statistically significant patterns. Too much digging is
a warning sign of this bias.

27. A portfolio is invested in stocks A and B with 30% of the portfolio invested in A.
The exhibit below illustrates the covariance matrix and expected returns with
respect to the portfolio.
A B
Stock E(R) = 12% E(R) = 8%
Covariance Matrix
Stock A B
A 450 225
B 225 180
The correlation between stocks A and B is closest to:
A. 0.00.
B. 0.63.
C. 0.79.
Correct Answer: C
Reference:
p(RA , RB ) = Cov(RA , RB )/ σ (RA )σ ( RB )

= 225/[(450)0.5 × (180)0.5] = 0.79057
28. The rate of return on U.S. Treasury debt most likely reflects compensation for:
A. illiquidity.
B. default risk.
C. maturity differences.
Correct Answer: C
Reference:

The difference between the interest rate on longer-term Treasury debt and shorter-
term Treasury debt reflects the maturity premium.
U.S. Treasury debt can be converted to cash quickly and thus its rate of return
does not reflect an illiquidity premium. Debt can be bought and sold quickly
without affecting market prices.
U.S. Treasury debt is issued by the U.S. government and thus does not entail
default risk as they are guaranteed by the full faith of the government.
29. Larc Enterprises, a software manufacturer, is in the process of evaluating three

takeover targets. The company’s management is determining the ability of the
target to generate efficiency gains in production following takeover.
45% of the companies which have produced steady productivity gains have been
taken over, P (Takeover) = 0.45. 30% of the companies which have secured
efficiency gains in the past have continued to do so after being taken over,
P(Gains) = 0.30. The probability that the target will generate gains following a
takeover, P(Gains Takeover), is 0.20.
Using Baye’s formula, the probability that the takeover will occur given that the
target has generated production efficiency gains, P(Takeover Gains) is closest to:
A. 0.20.
B. 0.30.
C. 0.67.
Correct Answer: B
Reference:
CFA Level I, Volume 1, Study Session 2, Reading 8, LOS n
The probability that a takeover will occur given the information that the target has
generated productive efficiency gains, P(Takeover Gains) , is calculated as
follows:
P(Gains Takeover ) 0.20
P(Takeover Gains) = P(Takeover ) = × 0.45 = 0.30
P(Gains ) 0.30

30. An analyst is using a stock’s past performance to generate forecasts concerning

the future. In the past twelve years, the stock has paid a dividend in only nine
years. The analyst will use the Binomial model to determine the expected number
of times the stock will pay dividend over the next twelve years.
The probability that the stock will pay a dividend in exactly nine out of twelve
years is closest to:
A. 0.09.
B. 0.26.
C. 0.75.
Correct Answer: B
Reference:
n! 12! 3
p ( x) = P( X = x) = p x (1 − p) n−x = 0.75 9 (0.25) = 0.258
(n − x)! x! (12 − 9)!(9)!
31. The probability that a uniform random variable with limits 2 and 7 is less than or
equal to 4 is closest to:
A. 0.142.
B. 0.285.
C. 0.571.
Correct Answer: B
Reference:
To determine the probability, we need to find the area under the curve with base
equal to 2 (4 – 2) and height of (1/7). The probability, F(4), is equal to 2/7 or
0.285.

32. Douglas McGreggor is an economic analyst who is 90% confident that the
Brazilian GDP will rise to 4.6% in the coming year. His forecast is based on
monthly economic data pertaining to the past twenty years. The mean monthly
GDP over the period of analysis is 5.2% while the sample standard deviation is
9.0%. The analyst will be using a t-critical value of 1.646 for the purposes of
analysis.
Will a confidence interval constructed from the data provided include the
population mean?
A. Yes.
B. No, the population mean will exceed the upper limit of the interval.
C. No, the population mean will fall below the lower limit of the interval.
Correct Answer: A
Reference: CFA Level I, Volume 1, Study Session 3, Reading 10, LOS j
The confidence interval for the population mean is determined as follows:

s 9.0%
X ± t 0.05 = 5.2% ± (1.646) = 4.2438% to 6.1562%
n 20 × 12
Since the population mean lies within the interval, McGreggor can be 90%
confident that the range includes the population mean.

Question 33 through 44 relate to Economics
33. A U.S. based manufacturer is expecting ARS 5 million from its Argentinean
client in six months. To hedge foreign currency risk he has engaged in a forward
contract. The current spot rate is USD/ARS 0.1289 and is expected to appreciate
by 1.5% at contract expiration. Data regarding forward points is shown in exhibit
below:
Exhibit
Maturity Forward Points (%)
One month - 1.3
Three months - 3.8
Six months - 7.2
At the expiration of the forward contract the manufacturer will receive USD:
A. 0.60 million.
B. 0.64 million.
C. 0.71 million.
Correct Answer: A
Reference:
The manufacturer will receive USD 0.60 million (0.1196 × 5 million) by selling
ARS 5 million at the expiration of the contract. The rate at which the transaction
will take place is USD/ARS 0.1196 (calculated below):
Forward/Transaction rate = USD/ARS 0.1289 × (1 – 0.072) = 0.1196

34. Taylor House is a German equity market analyst. He forecasts the Brazilian Real
(BRL) to appreciate against the Euro in the coming months, which will influence
the cost of imports and exports.
Based on House’s exchange rate forecast which of the following situations will
most likely materialize?
A. Long-run aggregate supply will decrease.

B. Short-run aggregate supply will decrease.
C. Aggregate demand curve will shift leftwards.
Correct Answer: B
Reference:
A change in the exchange rate will have no impact on long-run aggregate supply.
However, a forecasted depreciation (appreciation) of the domestic (foreign)
currency will increase the cost of BRL denominated imports and raw materials.
This, in turn, will increase production costs in Germany causing the aggregate
supply curve to shift to the left.
In response to a depreciation of the domestic currency, the Euro, German exports

will be relatively cheaper relative to other foreign products being sold in
Germany. Exports will increase and imports will decline as a result of the decline
in the value of the Euro. The aggregate demand curve will shift to the right.
35. Jacqueline Smart is an economic analyst in Russia. Smart is making predictions

for the future value of the USD in terms of the domestic currency, the Ruble
(RUB). Based on her market analysis, Smart forecasts the nominal exchange rate
to depreciate by 3% and the U.S and Russian price levels to appreciate by 6% and
8% respectively.
Based on Smart’s forecasts, the relative purchasing power of RUB denominated

income will approximately:
A. increase by 5%.
B. decrease by 5%.
C. increase by 6%.
Correct Answer: A

Reference:
A depreciation in the real value of the RUB/USD by an approximate 5% (- 3% +

6% – 8%) means that it will cost less to buy U.S. goods. Stated differently, the
Russian investor’s real purchasing power relative to U.S. goods has increased.
36. An analyst has gathered the following market share data for an industry
comprising of four companies.
Company Market Share

1. Köln 55%
2. TZR 25%
3. WOK 10%
4. Lure 10%
The industry’s two firm HHI is closest to:
A. 0.80
B. 36.5
C. 0.37
Correct Answer: C
Reference:
Two firm HHI = 0.552 + 0.252 = 0.3650 ≈ 0.37

37. Brazil manufactures 85 tons of steel in a typical year. However, domestic demand
is 120 tons and thus 15 tons is imported at the world price, $780 per ton.
Domestic authorities impose a tariff of 10% on the imports raising domestic price
to $795. After the imposition of tariffs domestic steel manufacturing increases to
100 tons while domestic demand declines to 110 tons.
The loss in consumer surplus arising from the imposition of tariffs is closest to:
A. $187.50.
B. $1,725.00
C. $1,837.50.
Correct Answer: B
Reference:
Loss in consumer surplus = ($795 – $780) × 110 + 0.5 × ($795 – $780) × (120 –
110) = $1,725.00
38. Trace Corp operates in a perfectly competitive market. The supply and demand
functions are as follows:
QD = 40 – 4P
QS = 12 + 2P
Based on the supply and demand functions, the optimal price is closest to:
A. 4.67.
B. 8.67.
C. 21.33.
Correct Answer: A
Reference:
The optimal price, 4.67, is found at the intersection of the market supply and
demand curves, where Q* represents equilibrium quantity.

P = 10 – 0.25QD = - 6 + 0.5QS
16 = 0.75Q*
Q* = 21.3333
Based on the market demand curve, the optimal price is 4.67 [10 –
0.25(21.3333)].
39. Market structures where there is no single optimum price and output analysis that
fits all market situations are most likely characterized as:
A. oligopoly.
B. perfect competition.
C. monopolistic competition.
Correct Answer: A
Reference:
There is no single price and output analysis that fits all oligopoly market
situations. The interdependence among the firms makes market structures provide
a set of varied, complex alternatives.
In perfectly competitive markets the optimal price and output is where the market
supply and demand curves intersect; i.e. the equilibrium price and quantity,
respectively.
In the case of monopolistic competition, in the short run, output is maximized

where marginal revenue is equal to marginal cost while the optimal price is
determined from the demand curve.
40. The peak phase of the business cycle is characterized by:
A. a decline in business hiring rates.

B. a slowly rising unemployment rate.
C. heightened investment in shares of company with steady positive cash
flows.
Correct Answer: A

Reference:
The peak phase of the business cycle is characterized by a declining hiring rate.
However, the unemployment rate continues to fall.
During business cycle recessions there will be higher demand for safe assets such
as the stocks of companies with stable operating cash flows.
41. In 2011, the inflation rate in South Africa was – 1.8% and real GDP value was
ZAR 545.6 million representing a decrease of 0.5% from the previous year. In the
same year GDP at market prices equaled ZAR 625.5 million.
Based on the data provided, the nominal GDP in 2010 would have been closest to
(in millions):
A. ZAR 593.80.
B. ZAR 645.14.
C. ZAR 668.78.
Correct Answer: C
Reference:
All ZAR figures are in millions.

Inflation rate = Percentage change in GDP price deflator
GDP price deflator2011
= Nominal GDP/Real GDP × 100
= ZAR 625.5/ZAR 545.6 × 100
= 114.64
GDP price deflator2010

= 114.64/0.982 = 116.74
Real GDP2010
= ZAR 545.6 × 1.05 = ZAR 572.88
Nominal GDP2010
= (116.74/100) × ZAR 572.88
= ZAR 668.78

42. The automobile industry in Kyrone, a developing country situated in South Asia,
comprises of 8 manufacturers each with an equal market share. The Herfindahl-
Hirschman index (HHI) and the four-firm concentration ratio, respectively, are
closest to:
A. 0.125 and 50%.

B. 0.016 and 50%.
C. 0.500 and 100%.
Correct Answer: A
Reference:
HHI = 1/8 = 0.125
Each firm has a market share of 12.5% (1/8 × 100), therefore the four-firm
concentration ratio is 50% (12.5% × 4).
43. The aggregation process most likely involves:
A. using inverse demand functions in the case of market demand.

B. summing the market prices quoted by all sellers in the case of market
supply.
C. summing the quantity demanded by all individual buyers in the case of
market demand.
Correct Answer: C
Reference:
Aggregating demand involves summing the quantity demanded by all individual

buyers. The demand function, and not the inverse demand function, is multiplied
by the number of buyers.
Aggregating market supply involves summing the quantity supplied, not the price,
by all sellers.

44. If the market demand for a product always responds positively to an increase in
price resulting in a positively sloped demand curve, the product is most likely
classified as:
A. Giffen.
B. normal.
C. inferior .
Correct Answer: A
Reference:
In the case of Giffen goods, the magnitude of the income effect is larger and
negative such that it overpowers the substitution effect. This will result in a
positively sloped demand curve and will imply that consumers will buy more
(less) of the product when price increases (decreases).
In the case of normal goods, the market demand’s response to price changes is
always inverse; a decrease in price will increase quantity demanded producing a
negatively sloped demand curve.
In the case of inferior, non-Giffen goods, an increase in income will cause the
consumer to buy less of the good. Demand curves are negatively sloped for
inferior goods in general.

45. The receipt of payment in advance of delivering the goods to the final customer is
most likely classified in the financial statements and recorded, respectively, as:
classification: recorded:
A. prepaid revenue increase in assets and revenue.
B. unearned revenue increase in assets and liabilities.
C. accrued revenue increase in assets and revenue.
Correct Answer: B
Reference:
The receipt of payment in advance of delivering the goods to the final customer is
classified as unearned revenue. The transaction is recorded by increasing assets
(cash) and liabilities (deferred or unearned revenue).
46. An analyst is determining whether there is an improvement in a firm’s solvency

from the data available in exhibit below.
Exhibit:
2011 2010
Operating profit $24,560 $21,278
Net profit $17,548 $16,740
Net interest expense $10,460 $10,030
Interest payments $9,430 $8,900
Current assets* $30,500 $25,700
*This figure includes the closing inventory balance
that equals $12,200 and $14,520 in 2010 and 2011,
respectively.
The analyst will most likely conclude that the firm’s solvency position has
improved due to an increase in:
A. operating profit by $3,282.

B. current ratio from 1.36 in 2010 to 1.45 in 2011.
C. interest coverage ratio from 2.39 in 2010 to 2.60 in 2011.

Correct Answer: C
Reference:
Solvency measures the ability of a company to meet its long-term debt

obligations. The interest coverage ratio is one measure of solvency which is
calculated as ‘EBIT (or operating profit)/Interest payments’.
Interest coverage ratio (2010) = $21,278/$8,900 = 2.39
Interest coverage ratio (2011) = $24,560/$9,430 = 2.60
47. Tranvix Associates is a financial services firm, which operates from a rented
office building. On January 1, 2013 the firm paid a cumulative $48,000 in rent for
the next three months. The exhibit below illustrates the company’s rent
prepayment schedule for any typical financial year that ends on December 31.
Exhibit: Tranvix’s Rent Prepayment

Schedule
Payment Date Amount paid
January 1 $48,000
April 1 Same
July 1 Same
October 1 Same
Assuming all rental transactions are recorded and adjusted at the end of each
quarter, on August 31, 2013 Tranvix Asscoiates will decrease:
A. cash by $48,000.
B. equity by $32,000.
C. current liabilities by $32,000.

Correct Answer: B
Reference:
Monthly rental is $16,000 ($48,000/3). On August 31, 2013 two months of rental
have accrued. Therefore, the relevant accounting entry is to decrease prepaid rent
(current assets) by $32,000 ($16,000 × 2) and increase rent expense (or decrease
net income which is a component of equity) by the same amount.
48. Which of the following is least likely an example of a contra account?
A. Trade discounts to offset revenue.

B. Deferred tax assets to offset tax expense.
C. Allowance for bad debts to offset accounts receivable.
Correct Answer: B
Reference:
A contra account is used to offset or deduct the value of another account.

Deferred tax asset is not an example of a contra account as changes in the
deferred tax asset are added to taxes payable to determine tax expense.
49. Which of the following financial statement implications results from the
company’s conservative expense recognition policy?
A. Equity will be understated.

B. Profitability ratios will be overstated.
C. Operating cash outflows will be overstated.
Correct Answer: A
Reference:

A conservative expense recognition policy will result in recognizing expenses

sooner rather than later (i.e. accelerating expense recognition). This will serve to
understate profitability and consequently retained earnings, which in turn will
understate equity.
A company’s overall cash flow statement and its individual components will not
be affected by a company’s expense recognition policy.
50. Which of the following equations most accurately illustrates how free cash flow to
the firm (FCFF) is calculated from cash flow from operations (CFO) under IFRS
if interest and dividends received are classified in investing activities while
interest paid in financing activities?
A. FCFF = CFO – fixed capital investment

B. FCFF = CFO + interest received + dividends received – fixed capital
investment
C. FCFF = CFO + Interest(1 – tax rate) + interest received + dividends
received – fixed capital investment
Correct Answer: B
Reference:
CFO represents cash flow from operations under IFRS if interest paid was
included in financing activities. Since this is the case in the question, the CFO
does not have to be adjusted for Interest(1 – tax rate).
Since interest and dividends received are placed in investing activities, these
should be added back to determine CFO.

51. The exhibit below illustrates selective financial information concerning Gadget
Enterprises for the years 2012 and 2013.
Exhibit
Cash on hand 15 12
Net revenue 220 250
Net income 85 90
Based on the data presented, which of the following conclusions is most valid?
A. The company’s efficiency has improved.

B. The company’s cash to income ratio has improved by 32.4%.
C. The amount of cash generated per $1 of revenue has increased by 42.05%.
Correct Answer: C
Reference:

The company’s cash to income ratio has improved by 1.56%
(0.09375/0.092308 – 1).
Cash to income ratio (2013) = $15/$160 = 0.093750

Cash to income ratio (2012) = $12/$130 = 0.092308
The change in the company’s efficiency cannot be determined based on the data
presented.
Cash/revenue (2013) = $15/$220 = 0.068182

Cash/revenue (2012) = $12/$250 = 0.048000
The amount of cash generated per dollar of revenue has increased by 42.05%
(0.068182/0.04800 – 1).

52. The exhibit below highlights selective financial information concerning Rake
Corp. and Industry averages.
Exhibit
Rake Corp Industry Average
Average sales growth 20% 16%
Average inventory $23 million $28 million
Cost of goods sold $121 million $115 million
Based on the information presented in the exhibit, which of the following

conclusions is most valid? Rake Corp.:
A. has obsolete inventory on hand.

B. has inadequate inventory levels.
C. is efficiently managing its inventory.
Correct Answer: C
Reference:

Rake Industry
Average
Inventory turnover $121/$23 $115/$82
= 5.26 = 4.11
Days of inventory 365/5.26 365/4.11
on hand = 69 days = 89 days
Relative to the industry, a higher inventory turnover ratio, lower number of days
of inventory on hand, above-average sales growth and minimal inventory write-
downs all point towards highly effective inventory management.
Minimal write-downs coupled with above average industry sales growth can also
indicate efficient inventory management.

53. A company issued 7% fixed-rate corporate bonds at their par value. A few days
later, the market interest rate moved to 6%. The company uses the fair value
option to record all assets and liabilities. If the company continues to carry fixed
rate bonds at their historical cost:
A. net income will be understated.

B. the debt-to-capital ratio will be overstated.
C. economic liabilities will be lower than the debt’s amortized cost.
Correct Answer: B
Reference:
At the time of issuance, market interest rate was 7% (bonds are issued at par and
hence have a market rate of interest equal to the coupon rate). A few days later,
the rate declined resulting in fair value of the liability increasing relative to the
historical amortized cost. If the company fails to increase the value of the liability
to its fair value, debt-to-capital ratio will be understated as debt is carried at a
lower value.
Net income will understated because the increase in value of the liability is not
recognized as a gain in the income statement.
The decrease in market interest rates will cause the value of economic liabilities
to rise above amortized cost.
54. A company uses the FIFO method of inventory accounting while taxation
authorities require the LIFO method for tax purposes. The difference between the
carrying amount and tax base is most likely attributable to a:
A. permanent difference.
B. taxable temporary difference.
C. deductible temporary difference.
Correct Answer: B
Reference:

The carrying amount of the asset is greater than its tax base giving rise to a
taxable temporary difference. Under LIFO, ending inventory comprises of older,
relatively cheaper inventory units while ending inventory under FIFO comprises
recent, relatively expensive inventory units.
55. The exhibit below illustrates the provision for income taxes as well as profit
before taxes for a manufacturing concern for the financial years 2012, 2013 and
2014.
Exhibit
$’000 2014 2013 2012
Current income taxes 785 652 850
Deferred income taxes (420) 20 (205)
Profit before taxes 1,058 1,041 945
The effective tax rate is the highest in:
A. 2012.
B. 2013.
C. 2014.
Correct Answer: B
Reference:
All $ figures are in thousands.
Effective tax rate (2014) = ($785 – $420)/$1,058 = 0.344499 or 35.0%
Effective tax rate (2013) = ($652 + $20)/$1,041 = 0.6455 or 65.0%
Effective tax rate (2012) = ($850 – $205)/$1,045 = 0.6172 or 62.0%
The effective tax rate is the highest in the year 2013.

56. On January 1, 2012, Howard Inc. entered into a lease to acquire equipment. The
lease requires five annual payments starting on January 1, 2012 and does not
transfer title of ownership to Howard Inc. at the end of the term. The company
prepares and presents its financial statements in accordance with IFRS. Details
concerning the lease are summarized in the exhibit below:
Exhibit: Details Concerning Howard Inc.’s

Lease Transaction
Useful life of the equipment 6 years
Fair value of the equipment $21,000
Salvage value of the equipment $0
Term of the lease 5 years
Annual lease payments $4,900
Discount rate 10%
Using fair values to record the leased asset and liability on the balance sheet upon
initial recognition, the interest expense reported in the fiscal year 2013 is closest
to:
A. $0.
B. $1,610.
C. $2,100.
Correct Answer: B
Reference:

The lease undertaken by Howard Inc. is a finance lease. This is evident by the
following:
• The lease term is for the major part of the economic life of the asset,
83.33% (5 years/6 years), despite the title of ownership not being
transferred.
• The present value of the leased payments is substantially all of the fair
value of the leased asset.
• Present value of lease payments at a discount rate of 10%:
• CF0 = $4,900
• CF1 = $4,900
• CF2 = $4,900
• CF3 = $4,900
• CF4 = $4,900
• PV = $20,432.34
• Fair value of leased asset $21,000. Therefore, the proportion of
leased asset to the fair value of equipment is 97.3%.
Interest expense is calculated in the exhibit below:

Lease liability
Reduction of on 31
Lease Annual lease Interest (at lease December
liability, 1 payment, 1 10% accrued liability, 1 after Lease
Year January January in previous January Payment on 1
year) January same
year
2012 $21,000 $4,900 $0 $4,900 $16,100
2013 $16,100 $4,900 $1,610 $3,290 $12,810
57. Which of the following measures will be higher under an operating lease relative
to a finance lease during the initial years of a lease term?
A. Debt-to-equity ratio
B. Total asset turnover
C. Operating cash flows
Correct Answer: B
Reference:

Total asset turnover will be higher under an operating lease; this is because the
lease is treated as a rental and the underlying asset is not recorded on the balance
sheet. For a finance lease, the lessee will record an asset on the balance sheet
equal to the lower of the present value of the leased asset and present value of
leased payments.
A lessee who has undertaken an operating lease will report lower debt (no lease
liability is reported) and higher equity (profit is higher as only rental expense is
deducted). Thus, debt-to-equity ratio will be lower for operating leases.
Operating cash flows will be lower under operating leases as the full lease
payment is shown as operating cash outflow. For a finance lease, only the portion
of the lease payment relating to interest expense reduces operating cash flow.
58. On an income statement depreciation expense is grouped by:
A. nature
B. function
C. either nature or function.
Correct Answer: C
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 25, LOS
On an income statement depreciation can be grouped by nature whereby

depreciation on equipment as well as depreciation on administrative facilities is
combined into a single line item.
Depreciation can also be grouped by function, which involves including the

expense as part of cost of goods sold. In this case, depreciation is related to
equipment used to generate sales.
59. Investing in the common stock of another company is most likely classified as a
(n):
A. financing activity.
Correct Answer: B

Reference:
The purchase of another entity’s equity securities is classified as an investing

activity.
60. E-rote publishes newsletters on a monthly basis by the same name. To subscribe
readers must pay an annual fee of $450 at the start of the year. E-rote currently
has 100 subscribers and this number is unexpected to change in the foreseeable
future. The company’s fiscal year commences March 1st.
For the fiscal year ending in 2013, the cumulative adjusting accounting entry
required on December 31, 2012 is:
A. increasing revenues by $75,000.

B. decreasing liabilities by $375,000.
C. decreasing revenues by $375,000.
Correct Answer: B
Reference:
At the beginning of the year, customers have prepaid $4,500 ($450 × 100). E-rote
will record a cash payment and establish an unbilled subscription account
(liability) amounting to $4,500 each.
By December 31, 2012, ten months have passed. The adjustment accounting entry
would be to reduce the unbilled subscription account and increase revenues by
$375,000 ($4,500/12 × 10 × 100).

61. Martino Ramirez is the financial officer at Sky Gates. He is analyzing the
movements in the company’s inventory account for the fiscal year ended
December 31, 2013 (Exhibit). The company uses the LIFO method of inventory
accounting. Sky Gates’ LIFO reserve has increased by $45 over the same period.
Exhibit: Movement in Sky Gates’ Inventory Account

For the Year 2013
Price per Unit
Transaction Quarter Number of Units ($)
Purchase 1 100 5
Sale 2 90 10
Purchase 3 210 8
Sale 4 200 10
Relative to LIFO, ending inventory using the FIFO method of inventory

accounting is higher by:
A. $45.
B. $60.
C. $100.
Correct Answer: B
Reference:

Ending inventory using the FIFO method:

Total sales units = 200 + 90 = 290
Using the FIFO method, the first units purchased are assumed to be sold first.
This means the 100 units purchased in the first quarter will be fully sold. The
remainder 190 (290 – 100) units will be sold from the 210 units purchased in the
third quarter. The number of units remaining in ending inventory is thus 20 units
(210 – 190).
Ending inventory = 20 × $8 = $160.
Ending inventory using the LIFO method:

Total sales units = 200 + 90 = 290
Using the LIFO method, the most recent units purchased are assumed to be sold
first. This means the 210 units purchased in the third quarter will be fully sold.
The remainder 80 (290 – 210) units are assumed to be sold from the 100 units
purchased in the first quarter. The number of units remaining in ending inventory
is thus 20 units (100 – 80).
Ending inventory = 20 × $5 = $100.
Ending inventory reported under FIFO is higher by $60 ($160 – $100).
62. In response to rising input costs, CR Builders has set a target for reducing the
number of days of inventory on hand by twenty. The exhibit below highlights
selective financial information concerning the company for the fiscal year 2013.
Exhibit
Days of inventory on hand
(beginning of year) 145
In order to meet its target, CR Builders will need to adjust its average inventory
balance by:
A. reducing it by $120,000.
B. increasing it by $16,164.
C. increasing it by $5,900,000.

Correct Answer: B
Reference:
Days of inventory on hand will need to be reduced to 125 days (145 – 20).
!"#$%&# ()"#)*+$,
Days of inventory on hand = ×365
-+.* +/ &++0. .+10
Average inventory (2012) = (145 × $455,000)/365 = $180,753.42
Average inventory (2013) = (125 × $575,000)/365 = $196,917.81
Average inventory balance will need to be increased by approximately $16,164

($196,917.81 – $180,753.42).
63. The financial statement effects of an anti-dilutive security are:
A. permitted to be recognized under IFRS only.

B. not incorporated in the calculation of EPS under IFRS and U.S. GAAP.
C. permitted to be recognized if it decreases diluted EPS relative to basic
EPS.
Correct Answer: B
Reference:
Anti-dilutive securities are not included in the calculation of diluted EPS under
IFRS or US GAAP. Anti-dilutive securities increase a company’s EPS relative to
the basic EPS.
64. For the fiscal year 2012 Lakewood Inc. reported net income and revenues of
$45,550 and $65,000 respectively. The company collected $58,000 in cash from
its credit sales. Current assets increased by $30,000 over the same year.
Relative to revenue earned on a cash basis, Lakewood Inc.’s accrued revenues are
most likely:
A. equal.
B. higher by $7,000.
C. lower by $28,000.

Correct Answer: B
Reference:
Increase (Decrease) in accounts receivable = Revenue – cash received from

customers
Accounts receivable increased by $7,000 ($65,000 – $58,000). Relative to cash

receipts from customers, revenue on an accrual basis is higher by $7,000.
65. Which of the following factors will most likely lead to a decline in the interest
coverage ratio?
A. A decrease in cost of sales.

B. An increase in interest income.
C. An increase in amortization expense.
Correct Answer: C
Reference:
The interest coverage ratio is calculated with EBIT or operating earnings in the
numerator and interest expense in the denominator. An increase in amortization
expense will reduce operating earnings thereby decreasing this measure.
A decrease in cost of sales will increase gross profit and hence operating income
which in turn will lead to an increase in the interest coverage ratio.
Interest income does not feature in the calculation of this measure and so an
increase in interest income will not affect this measure.
66. Low quality financial reporting can most likely result from:
A. using short depreciable life of assets.

B. stretching accounting principles to achieve a desired outcome.
C. exercising pessimistic assumption about collectability of receivables .
Correct Answer: B

Reference:
Using extraordinarily long depreciable lives, unrealistically optimistic assumption

about collectability of receivables and stretching accounting principles to achieve
a desired outcome will lead to low financial reporting quality.
67. An analyst estimates that the days-of-sales-outstanding for a company would

decrease from 15 days in the current year to 12 days in the coming year. Total
sales (all on credit) equaled $267 million in the current year and are expected to
increase to $350 million next year.
To achieve the lower DSO, the company’s accounts receivable balance must:
A. increase by $252,486.
B. decrease by $350,957.
C. increase by $517,934.
Correct Answer: C
Reference:
Receivable turnover:365/15 = 24.333 and 365/12 = 30.42

Accounts receivable: 267 million/24.3 = 10,987,654
350/30.42 = 11,505,588
Hence, the difference is $517,934

68. A gain or loss on debt extinguishment:
A. is not disclosed on the income statement if immaterial.

B. does not include debt issuance costs when the IFRS are used.
C. is disclosed as a separate line item on the cash flow statement when using
the indirect method.
Correct Answer: B
Reference:
Under IFRS, debt issuance costs are included in the measurement of the liability
and thus are a part of its carrying amount; therefore, these costs are not included
as part of gain or loss on debt extinguishment.
A gain or loss on debt extinguishment is not disclosed as a separate line item

when immaterial; this does not imply that it is excluded from the income
statement.
When preparing a statement of cash flows using the indirect method, net income
is adjusted to remove the effects of gains or losses on debt extinguishment.

69. The exhibit below illustrates financial data for a corporation.
Exhibit
2013 2012
Closing accounts receivable balance $450,000 $390,000
Annual sales on credit $5,800,000 $5,435,000
Average accounts receivable $460,000 $470,000
The percentage change in the number of days of receivables is closest to:
A. – 8.3%.
B. + 8.0%.
C. + 15.4%.
Correct Answer: B
Reference:
Number of days of receivables

= Accounts receivables/Average day’s sales on credit
= Accounts receivables/(sales on credit/365)
Number of days of receivables (2013) = $450,000/($5,800,000/365) = 28.3 days

Number of days of receivables (2012) = $390,000/($5,435,000/365) = 26.2 days
The number of days of receivables has increased by 8.0% (28.3/26.2 – 1).
70. The shape of the marginal cost of capital schedule can least likely be attributable
to:
A. economies of scale in raising new capital.

B. methodology used in estimating flotation costs.
C. debt covenants restricting issuance of new debt.
Correct Answer: B
Reference:

The marginal cost of capital schedule is a step-up cost schedule, which results
from the cost of capital changing as more capital is raised. The shape of the
schedule can be attributed to debt covenants that may make raising debt more
costly. A company with an existing debt with a bond covenant may restrict the
company from issuing debt with similar seniority as existing debt. Thus a
company may need to incur higher costs in raising additional debt.
The shape of the schedule may also be attributable to the deviation of increasing
marginal costs of capital from the target capital structure. This deviation may
arise from economies of scale in raising new capital, which encourages a
company to issue new securities in proportions, which may be larger and result in
the marginal capital structure deviating from the proportions required by the
target.
Flotation costs do not influence the shape of the marginal cost of capital schedule.
71. A company’s current credit terms are 4/5 net 30. If the company continues to pay
on the 15th of each month, a decision to modify the terms to 3/8 net 30 will most
likely:
A. increase cost of trade credit.

B. decrease cost of trade credit.
C. not influence cost of trade credit.
Correct Answer: A
Reference:

To evaluate the impact of the change in credit terms, the cost of credit will be
calculated for each credit terms based on the stated payment date.
Discount %( )
365
" Nofdaysbeyonddiscountoeriod
Cost of trade credit = $1+ ' −1
# 1− Discount &
(36510 )
⎛ 0.04 ⎞
Cost of trade credit (4/5 net 30) = ⎜1 + ⎟ − 1 = 343.71%
⎝ 1 − 0.04 ⎠
(3657 )
⎛ 0.03 ⎞
Cost of trade credit (3/8 net 30) = ⎜1 + ⎟ − 1 = 389.51%
⎝ 1 − 0.03 ⎠
Changing the terms of the credit policy will increase the cost of trade credit if the
customer continues to pay on the 15th of each month.
72. Which of the following statements inaccurately illustrates the impact of taxes on
the cost of capital?
A. The cost of debt is adjusted for the tax shield.

B. The before and after-tax cost of preferred stock is always identical.
C. Estimating cost of equity is particularly challenging as taxes influence
dividend income and capital gains.
Correct Answer: C
Reference:
Although estimating the cost of equity is challenging, this component is not to be

adjusted for taxes.
The cost of preferred stock is similarly not adjusted for taxes. Thus, the before
and after-tax cost of preferred stock is identical.
The cost of debt is the only cost of capital component to be adjusted for taxes.
Interest paid on cost of debt is tax deductible. Hence, the interest on debt
financing is taken as a deduction to arrive at taxable income.

73. Glec Corp issued noncallable, nonconvertible preferred stock at an original price
of $38.50. The dividend yield quoted on the stock is 5% while dividend per share
is equal to $1.50. Glec’s weighted average cost of capital is 10%.
The preferred stock’s current price per share is closest to:
A. $30.00.
B. $38.50.
C. $150.00
Correct Answer: A
Reference:
Dividend yield = Dividends per share/price per share

Given that the cost of preferred stock = dividends per share/price per share,
dividend yield should equal to the cost of preferred stock.
Price of preferred stock = $1.50/0.05 = $30.00
74. An analyst made the following comments with respect to the principles of capital
budgeting:
Comment 1: The required rate of return comprises of several components one of

which includes financing costs.
Comment 2: Cash flows are incorporated based on an analysis of implicit

opportunity costs.
Is the analyst most likely correct with respect to his comments?
A. Only with respect to Comment 1.

B. Only with respect to Comment 2.
C. Yes, with respect to both comments.
Correct Answer: C
Reference:

The analyst is correct with respect to Comment 1. Financing costs are ignored
when estimating cash flows because they are already reflected in the required rate
of return.
He is also correct with respect to comment 2. Cash flows are based on opportunity
costs. That is, incremental cash flows are determined by comparing what cash
flows would have been with or without an investment.
75. Which of the following board practices is most supportive of shareowner

protection?
A. The former chief executive has assumed the role of board chair.
B. To ensure equal representation, two of the four board members are
independent.
C. Nonexecutive board members meet twice a year with only one meeting
conducted in the presence of executive members.
Correct Answer: C
Reference:
Independent (nonexecutive) board members should meet at least once annually

without executives present. This will allow them to make decisions without the
influence from executive members.
Corporate governance codes recommend that appointing a former chief executive

as board chair could compromise the independence of the board and their ability
to act without the undue influence of management and in best interests of
shareowners.
Independent board members should make up a majority of the board. A board

comprising of 2 nonexecutives and 2 executives does not satisfy this criterion.
76. When evaluating the quality of an audit committee, an investor should consider
that:
A. all members are financial experts.

B. a majority of the members are independent.
C. the appointment of external auditors is a matter of shareowner voting.

Correct Answer: C
Reference:
When evaluating an audit committee, an investor should consider:

• all committee members are independent;
• whether any of the members serving the committee are financial experts
(this implies that all members are not required to be financial experts); and
• the board puts the appointment of external auditors to shareowner vote.

77. Joanne Bennett has purchased 100 shares of stock each worth $56.50. The stock
does not pay an annual dividend. Bennett uses a leverage ratio of 1.8 to make the
purchase with a call money rate of 4.0%. Three months after the investment the
market price rises to $60.00.
Ignoring commissions, the return on the investment is closest to:
A. – 14.35%
B. + 6.19%.
C. + 7.95%.
Correct Answer: C
Reference:
A leverage ratio of 1.8 indicates that Bennett has financed 55.56% (1 ÷ 1.8) of the
purchase price with equity. The equity investment is $3,138.89 (0.5556 × $56.50
× 100) while the borrowed amount is $2,511.11 [($56.50 × 100) – $3,138.89].
The interest cost is $100.44 ($2,511.11 × 0.04).
Remaining equity = $3,138.89 + [($60.00 × 100) – $5,650] – $100.44 = $3,388.45
Return = ($3,388.45 – $3,138.89)/$3,138.89 = 7.95%
78. An analyst is conducting research on a semi-strong-form efficient market. In his

research report, the analyst will most likely conclude that:
A. insider trading will not generate active returns.

B. technical analysis will generate abnormal portfolio returns.
C. investors cannot gain from exploiting publically available information.
Correct Answer: C
Reference:
CFA Level 1, Volume 4, Study Session 14, Reading 48, LOS d & e

A market which is semi-strong-form efficient is also weak-form efficient. In such

markets prices reflect all publically known and available information. No investor
has access to information that is not already available to the public and therefore,
investors cannot generate abnormal profit from exploiting publically available
information (fundamental analysis) and/or predicting security prices (technical
analysis).
However, a market which is semi-strong-form efficient does not necessarily have

to be strong-form efficient. A market in the latter state will make insider trading
strategies unprofitable as prices reflect all private information.
79. Adjusting a market-capitalization-weighted index for its market float will ensure:
A. rebalancing frequency is minimized.

B. securities that have increased in price the most are not overrepresented.
C. the index is representative of the number of shares available to the public.
Correct Answer: C
Reference:
By adjusting the market capitalization of each constituent security in a market-

capitalization-weighted index for its market float, the index is representative of
the securities that are available to the public for investment.

80. The exhibit below illustrates the beginning and ending market capitalization of an
equally weighted index. The market capitalizations exclude the dividends paid on
index shares.
Beginning Ending
Stock Market Total Market
Capitalization dividends Capitalization
A $14,500 $250 $16,870
B $25,670 $140 $20,370
C $30,090 $190 $35,670
D $21,030 $150 $26,790
The total return of the index is closest to:
A. 1.30%.
B. 11.31%.
C. 37.59%.
Correct Answer: B
Reference:
Weight of each security = ¼ × 100 = 25%
Total return (Stock A) = [($16,870 + $250)/($14,500) – 1] × 100 = 18.07%

Total return (Stock B) = [($20,370 + $140)/($25,670) – 1] × 100 = - 20.10%
Total return (Stock C) = [($35,670 +$190)/($30,090) – 1] × 100 = 19.18%
Total return (Stock D) = [($26,790 + $150)/($21,030) – 1] × 100 = 28.10%
Index total return = (0.25)(18.07%) + (0.25)(- 20.10%) + (0.25)(19.18%) +

(0.25)(28.10%) = 11.31%
81. Which of the following is the most suitable trading strategy when a market is
weak-and semi-strong form efficient?
A. Passive portfolio management

B. Active portfolio management based on technical analysis
C. Active portfolio management based on fundamental analysis

Correct Answer: A
Reference:
When a market is weak- and semi-strong form efficient, active strategies based on
exploiting price patterns (technical analysis) or public information (fundamental
analysis) are not expected to generate abnormal returns. In such a scenario,
passive portfolio management strategies should outperform active strategies.
82. A U.S. manufacturer of electric components has experienced a stable market

share relative to its European competitors. Which of the following factors most
likely influences the stability of the manufacturer’s market share in the
international market?
A. High switching costs

B. Fast pace of innovation
C. Stringent government regulation
Correct Answer: A
Reference:
When switching costs are high, customers will be reluctant to shift their purchases
to other companies. Therefore, the demand for the U.S. manufacturer’s products
will be relatively stable resulting in a stable market share.
When the pace of innovation is rapid, the quality and performance of products
will improve and will lower the costs of switching. This will cause the market
share to become unstable.
The degree of government regulation should not directly influence the stability of
a company’s market share in the international market.

83. The stock of Lake Associates, a newly established firm, is trading at a market
price of $55 per share. Company management has announced an annual dividend
per share of $2.55 for the next three years. At the end of the three years, the stock
is expected to trade at a price of $60. The required rate of return is 12%.
Lake Associates’ stock is most likely:
A. overvalued.
B. undervalued.
C. fairly valued.
Correct Answer: A
Reference:
Lake Associates’ stock is selling for a price greater than its intrinsic value making
it overvalued ($55 vs. $48.83 respectively).
$7.99 $7.99 $7.99?$@A.AA

Intrinsic value = + + =$48.83
(;.;7) ;.;7 > ;.;7 B
84. Which of the following will least likely be the objective for a company issuing
securities in the primary market.
A. Raising capital.
B. Increasing liquidity.
C. Enhancing the market value of equity.
Correct Answer: C
Reference:
Companies issue securities in the primary market to improve liquidity and raise
capital. However the management’s actions cannot influence the market value of
equity that is why this will least likely be an objective.

85. The exhibit below illustrates selective balance sheet information for two
companies in the farming industry:
Exhibit
Company A* Company B**
Noncurrent assets $925,000 $895,000
Noncurrent liabilities $50,050 $63,100
Market share price $145.80 $52.10
Number of shares 10,000 12,500
*The book value of assets and liabilities equal their respective market value.
**The book value of Company B’s noncurrent assets is 10% greater than market
value.
Using the asset valuation model, which of the following conclusions is most likely
valid?
A. Relative to B, company A is favorably valued.

B. Relative to A, company B is favorably valued.
C. An investor will be indifferent between the two companies.
Correct Answer: B
Reference:

Company A:
Adjusted book value
= ($450,000 + $925,000) – ($125,120 + $50,050)
= $1,199,830
Adjusted book value per share

= $1,199,830/10,000
= $119.98
Company B:
Adjusted book value
= [$352,350 + (1.1 × $895,000) – ($105,000 + $63,100)
= $1,168,750
Adjusted book value per share

= $1,168,750/12,500
= $93.50
Comparing their respective intrinsic values with market values, Company B is

undervalued (or favorably valued) as each share is selling at a price less than the
intrinsic value. Company A is overvalued as each share’s market price exceeds
intrinsic value.
86. A quality unique to dealers is that they:
A. do not trade with their clients.

B. provide liquidity to their clients.
C. create new financial products by repackaging securities.
Correct Answer: B
Reference:
Dealers fill their clients’ orders by trading with them. Dealers allow clients to
trade with them when they want to trade; in this way they provide liquidity to
them.

87. The exhibit below illustrates the selective financial information of a firm for the
financial years 2012 and 2013:
$’000s 2013: 2012:

Net profit 45 31
Net revenues 34 30
Average total assets 89 110
Average total liabilities 70 90
Which of the following statements concerning the firm is most likely correct?
Firm’s:
A. financial leverage has increased.

B. return on equity has deteriorated.
C. productive efficiency has improved.
Correct Answer: C
Reference:
Based on the calculated ratios, return on equity has improved, financial leverage
has decreased and productive efficiency has improved.
Return on equity (2013) = $45/($89 – $70) = 2.37
Return on equity (2012) = $31/($110 – $90) = 1.55
Financial leverage (2013) = $89/($89 – $70) = 4.68

Financial leverage (2012) = $110/($110 – $90) = 5.50
Productive efficiency (2013) = $34/$89 = 0.38

Productive efficiency (2012) = $30/$110 = 0.27
88. Which of the following statements is most likely correct regarding the issues index
providers need to consider when managing indexes?
A. Price-weighted indexes are significantly affected by rebalancing.

B. Equally weighted indexes are significantly affected by rebalancing.
C. Market capitalization weighted indexes are affected equally by
rebalancing and reconstitution.

Correct Answer: A
Reference:
Equally weighted indexes will need to be rebalanced frequently to ensure the

equal weighting scheme is maintained.
Price-weighted indexes are not rebalanced because the weight of each constituent
security is determined by its price.
While rebalancing is less of a concern to market capitalization index providers, an

index provider will need to change the weights of other securities in order to
maintain the market capitalization of the index. Therefore, reconstitution needs to
be considered by index providers managing this type of index.

89. An investor purchases 100 shares of AXZ Inc. at $65 per share and also buys one
put option covering 100 shares, with strike price of $55 and pays $2 per share put
premium. If at the expiration of the put, share trades at $58 and the investor sells
his shares at that price, his net profit is closest to:
A. $100
B. −$600
C. −$900
Correct Answer: C
Reference:
The loss on his stock = ($58 − $65) × 100 = − $700

Paid for put premium = $2 × $100 = $200
As put expires worthless so his total loss = $200 + $700 = $900
90. In contrast to over-the-counter derivatives markets, exchange-traded derivatives

markets provide:
A. liquidity,
B. flexibility.
C. transparency.
Correct Answer: C
Reference:

Exchange-traded derivatives markets provide transparency to their participants as

full information on all transactions is disclosed to exchanges and regulatory
bodies. In contrast, many transactions in OTC markets will retain a degree of
privacy with lower transparency.
Exchange-traded markets provide their participants with liquidity as contract

terms are standardized. Although over-the-counter markets offer contracts that are
flexible and customized, this does not mean that there is an absence of liquidity.
Many OCT contracts can be easily created and offset with by doing the exact
opposite transaction often with the same party. On the other hand, some
exchange-traded derivatives may have very little trading interests and thus
liquidity. Liquidity is driven by trading interest, which may be strong or weak in
both markets.
91. A three-month call option with an exercise price of $55 is being sold for $8. A
three-month Treasury bond is being sold in the market place with the same face
value as the option’s exercise price. The underlying is currently worth $60 and the
Assuming the put-call parity holds, a put option is being sold for:
A. $0.73.
B. $2.42.
C. $12.34.
Correct Answer: B
Reference:
Put-call parity = c0 + X/(1 + r)T = S0 + p0

p0 = $8 + [$55/(1.043)0.25 – $60 = $2.42
92. Which of the following statements is most likely correct regarding derivatives?
Derivatives:
A. may have an indefinite life span.

B. transform the nature of a party’s risk exposure.
C. take their value and characteristics from the underlying.

Correct Answer: C
Reference:
Derivatives take their performance from an underlying asset; this suggests that
they take their value and certain other characteristics from the underlying asset.
Derivatives have a definite life-span which is agreed upon at the time of contract
initiation.
Similar to insurance, derivatives transfer risk from one party to another such that
the risk itself does not change but the party bearing it does.
93. Jason Briggs purchased a 3-month call option by paying $0.08. The exercise price
of the option is $1.32 while the underlying is priced at $1.35.
Is the option currently in-the-money and at what price will break-even occur?
In-the-money? Break-even price?

A. No $1.27.
B. Yes $1.40.
C. Yes $1.43.
Correct Answer: B
Reference:
The call option is in-the-money as the underlying price is greater than the exercise
price ($1.35 vs. $1.32 respectively).
Break-even price = X + c0 = $1.32 + $0.08 = $1.40

94. Jill Howard owns 1,000 shares in RST Corp. She is concerned about a decline in
the value of her investment and is seeking to undertake a derivatives-based
strategy that will protect against potential losses but will allow her to participate
in stock price increases to the maximum extent possible.
Which of the following strategies will be most appropriate for Howard?
A. Covered call
B. Protective put
C. Equity forward contract on RST stock.
Correct Answer: B
Reference:
CFA Level 1, Volume 6, Study Session 17, Readings 60, LOS b
Given Howard’s requirements, a protective put strategy will be most appropriate.

Such a strategy will provide downside protection from a decline in stock price and
at the same time upside potential, as any increase in stock price is unlimited.
While a covered call provides protection against a potential decline in stock

prices, upside potential is limited. Once prices rise beyond the call’s exercise
price, the option is exercised by the option holder and the seller will be obligated
to make a payment to the option holder; this obligation will serve to reduce
expected return.
An equity forward contract is unsuitable because Howard is required to deliver at

the agreed upon forward price regardless of the stock price at contract expiration.
Being short an equity forward, if the stock price rises, Howard will have no
choice but to deliver her stock or make cash payment at the forward price; she
will be unable to increase her expected return by selling at the higher market
price.

95. Jason Stambaugh purchases a three-year corporate bond that pays annual coupon
at a rate of 6%. The bond’s yield-to-maturity is 5% and it is priced at 104.3294
per 100 of par value. The bond’s coupon payment periods are evenly spaced.
The bond’s Macaulay duration is closest to:
A. 2.25
B. 2.84
C. 3.17.
Correct Answer: B
Reference:
The Macaulay duration for the bond is 2.84.
Period Cash flow Present value Weight Period ×

Weight
1 6 5.7143 0.0556 0.05556
2 6 5.4422 0.05298 0.1060
3 106 91.5667 0.89140 2.6742
Total 102.7233 1.000000 2.8358

96. A bond portfolio comprises of three fixed-rate issues. Details concerning the three
issues are summarized in the exhibit below. The bonds pay annual coupons.
Assume there is no accrued interest.
Time to Market Par value Coupon Modified Yield-to-

Bond maturity value Rate duration maturity
A 8 years $120,000 $100,000 4.00% 7.83 3.24%
B 5 years $98,550 $100,000 5.25% 4.42 5.06%
C 12 years $105,300 $100,000 8.90% 11.45 8.68%
The modified duration of the bond portfolio is closest to:
A. 4.25.
B. 7.90.
C. 7.97.
Correct Answer: C
Reference:
The portfolio’s modified duration is equal to 7.97.

Portfolio market value = $120,000 + $98,550 + $105,350 = $323,850
Modified duration = ($120,000/$323,850)(7.83) + ($98,550/$323,850)(4.42) +
($105,300/$323,850)(11.45) = 7.9681
97. When interest rates are lower relative to a callable bond’s coupon rate, an investor
should least likely expect a reduction in:
A. call risk.
B. expected life.
C. price sensitivity.
Correct Answer: A
Reference:

When interest rates decline relative to a callable bond’s coupon rate, the issuer is
more likely to exercise the option to refinance the debt at the lower cost of funds.
The investor will face a higher degree of call risk since he must reinvest the
proceeds at a lower interest rate.
When interest rates are low, the effective duration of a callable bond is lower
relative to a non-callable bond. This is because the price appreciation of the
former bond is restricted by the presence of the call option. With a lower effective
duration, price sensitivity is lower for callable bonds relative to non-callable
bonds.
When interest rates are falling, the bond is more likely to be called thus lowering
the effective duration and expected life (time in receipt of underlying cash flows)
of the bond.
98. A 5-year, 8% annual coupon-paying bond is priced at 94.2404 per 100 of par
value and has a yield-to-maturity of 9.50%. If interest rates rise to 10.00%
immediately following investment, the future value of reinvested coupons per 100
of par value is closest to:
A. 48.84.
B. $53.72.
C. $61.72
Correct Answer: B
Reference:
Future value of reinvested coupons:
"8 × (1.10 ) 4 $ + "8 × (1.10 )3 $ + "8 × (1.10 )2 $ + "8 × (1.10 )1 $ + 8 = 48.84

# % # % # % # %

99. Don Sullivan, a fixed income analyst, is comparing EV/EBITDA and

debt/EBITDA ratios across issuers. He observes that the difference between the
two ratios has narrowed for a particular issuer.
Based on his observation concerning the issuer, Sullivan will most likely conclude
that there is a decline in:
A. equity cushion.
B. enterprise value.
C. interest coverage.
Correct Answer: A
Reference:
Bond investors use EV because it shows the amount of equity cushion beneath the
debt. Narrow differences between the EV/EBITDA and debt/EBITDA ratios
indicate that there is a smaller equity cushion and therefore higher risk.
Interest coverage ratio is measured by dividing enterprise value by interest

payments.
100. The expected percentage loss on a bond following a 45 basis points rise in rates is
6.53%. If the market value of the bond investment is $5,120,466 and the modified
duration is 8.352, the expected loss is closest to:
A. $192,448.
B. $334,366.
C. $2,792,628.
Correct Answer: A
Reference:
Money duration = Ann. Mod. Dur. × PVFull = 8.352 × $5,120,466 =

$42,766,132.03
Expected loss = $42,766,132.03 × 0.0045 = $192,447.59

101. Best effort offerings:
A. are less risky relative to underwritten offerings.

B. are mechanisms used to issue bonds in the secondary market.
C. include a guarantee to sell the bond issue at the negotiated offering price.
Correct Answer: A
Reference:
Best effort offerings are less risky relative to underwritten offerings as they do not
involve a guarantee by the investment bank to sell the underlying bond issue. Best
effort offering is a mechanism to issue bonds in the primary market. This offering
tries to sell the bond issue at the negotiated offering price and does not include
any guarantee.
102. Sally Hutchkins invested in a British corporate bond that is priced to settle on 12
June 2018. Details regarding her investment are as follows:
Coupon rate 8%
Coupon payment frequency Semi-annually
Coupon payment dates 13 April and 13 October
Maturity date 13th October 2022
Day count convention n/360
Yield to maturity 6.00%
Assuming there are 60 days in the settlement period, the full price of the issue
settling on 12th June 2018 is closest to:
A. €106.45.
B. €107.79.
C. €108.85.
Correct Answer: C
Reference:

The price at the beginning of the period is equal to €107.7861.

4 4 4 4 104
PV = 1
+ 2
+ 3
+ 4
+ ... + = 107.7861
(1.03) (1.03) (1.03) (1.03) (1.03)9
The full price of the issue on 12th June is €108.85.

PVFull = 107.7861 × (1.03)60/180 = 108.85337
103. Allan Brown is comparing cash flow structures of bonds with his colleague.
During their discussion, Brown makes the following statements:
Statement 1: “Throughout the life of bond issue, interest payments for the
partially amortized bond are higher relative to that of the fully
amortized bond issue.”
Statement 2: “Both fully and partially amortizing bonds call for fixed periodic
payments.”
Brown is most likely correct with respect to:
A. statement 1.
B. statement 2.
Correct Answer: B
Reference:

Statement 1 is incorrect. In the first year of the issue, interest payments are equal
for the two payment structures. Thereafter, payments for partially amortized
bonds are higher relative to fully amortized bonds. In the case of partially
amortized bonds a greater portion of the principal remains outstanding as
principal is not fully amortized.
Statement 2 is correct. A fully amortized bond calls for a fixed periodic payment
schedule. A partially amortized bond also makes fixed periodic payments until
maturity.
104. Daniel Monroe is a fixed income analyst who has observed the following prices
and yields to maturity on zero-coupon bonds:
Maturity Price Yield-to-Maturity

1 year 98.50 4.5774%
2 years 97.01 4.0434%
3 years 95.00 3.6854%
4 years 93.67 3.0374%
The “3y1y” forward rate stated on a semi-annual basis is closest to:
A. 1.11%.
B. 2.12%.
C. 2.22%.
Correct Answer: C
Reference:
The “3y1y” forward rate is 2.22% (0.011088 × 2). A = 6 (periods), B = 8 periods,

and B – A = 2 periods
6 8
⎛ 0.036854 ⎞ ⎛ 0.030374 ⎞
⎜1 + ⎟ × (1 + IFR6, 2 ) = ⎜1 + ⎟
⎝ 2 ⎠ ⎝ 2 ⎠
IFR6,2 = 0.011088

105. Kyle Rubin invests in a 7% annual coupon-paying corporate bond issue with a
remaining term to maturity of three years. The exhibit below illustrates the annual
government spot rates based on their terms to maturity:
Exhibit: Government Bond Spot

Rates
Term Rate (%)
1-year 2.10
2-year 2.54
3-year 3.00
4-year 3.67
5-year 4.10
6-year 4.90
If the Z-spread is 140 basis points, the price of the bond per 100 of par value is
closest to:
A. $96.62.
B. $107.28.
C. $107.55.
Correct Answer: B
Reference:
Price =
$7 $7 $107
1
+ 2
+ = 107.2760
(1 + 0.0210 + 0.014) (1 + 0.0254 + 0.014) (1 + 0.030 + 0.014)3
106. A 5% annual coupon-paying, four-year U.S. corporate bond is trading at a price of

101.510 per 100 of par value. A four-year, 3% annual coupon-paying,
government bond is trading at a price of 101.083. The current four-year U.S swap
rate benchmark is 3.6780%.
The corporate bond’s G-spread is closest to:
A. 90 basis points.
B. 187 basis points.
C. 271 basis points.

Correct Answer: B
Reference:
The G- spread is the spread of the corporate bond yield over the four-year
government bond yield. The G-spread is equal to 1.8676% (4.5783% - 2.7107%)
or 187 basis points.
The corporate bond issue’s yield-to-maturity is 4.5783%.

5 5 5 105
101.510 = + + +
(1 + r ) (1 + r ) (1 + r ) (1 + r )4
1 2 3
r = 4.5783%
The government bond’s yield-to-maturity is 2.5134%.

3 3 3 103
101.083 = + + +
(1 + r ) (1 + r ) (1 + r ) (1 + r )4
1 2 3
r = 2.710657%

107. The high water mark fee structure
A. protects clients from paying twice for the same performance.

B. reflect the highest cumulative return used to calculate the management fee.
C. can be based either on fund’s assets under management or on fund’s
realized profits.
Correct Answer: A
Reference:
Option A is correct. The high water mark provision in a fee structure reflect the
highest cumulative return used to calculate the incentive fees and it protects
clients from paying twice for the same performance.
108. Which of the following is most likely the motivation for an investor capitalizing in
private equity through ‘distressed investing’?
A. Company’s high growth potential in future

B. Selling company to strategic buyer at better price.
C. Expectation that company’s debt may increase in value
Correct Answer: C
Reference:
Distressed investing typically entails buying debt of mature but troubled

companies that are in financial difficulties. These companies may be in
bankruptcy proceedings, have defaulted on debt, or seem likely to default on debt.
Some investors buy companies’ debt in expectation of the company and its debt
increasing in value. Some investors buy debt and plan to be more active in the
management and direction of the company.

109. Which of the following arguments most likely represents a justification for
investing in real estate?
A. Low degree of regulation

B. Suitable for investors with moderate levels of wealth
C. Potential for long-term returns driven by income generation and capital
appreciation
Correct Answer: C
Reference:
Real estate provides the potential for long-term returns in the form of income
generation and capital appreciation.
Real estate may be subject to government regulations affecting factors such as

property modifications, transfer of ownership, and restrictions on ownership.
Real estate typically requires large investment and is thus restricted to a certain
class of investors.
110. Gramathon Associates is a hedge fund that manages $250 million worth of
investments. The fee structure quoted by the fund is “2 and 20”. Management fees
are calculated based on the assets under management at the beginning of the year.
At the end of the current year, the value of the fund rises to $300 million. If the
incentive fee is based on the management fee and is calculated at year-end, the
net-of-fees return earned by a fund investor is closest to:
A. 14.0%.
B. 14.4%.
C. 16.4%.
Correct Answer: B
Reference:

All $ figures are in millions

Management fees = $250 × 0.02 = $5
Incentive fees = ($300 – $250 – $5)(0.20) = $9
Net-of-fees return = ($300 – $250 – $5 – $9)/$250 = 14.4%
111. Paul Oriel manages his own investment portfolio that comprises of stocks and
bonds. Oriel is exploring alternative investment categories for the portfolio. He
has a long-time horizon and desires return potential, diversification and inflation
protection from his chosen investment category.
Based on Oriel’s specifications he should most likely select:
A. hedge funds.
B. commodities.
C. private equity.
Correct Answer: B
Reference:
A feature that sets commodities apart from hedge funds and private equity is
inflation protection. Commodities are effective hedges against inflation.
Additionally, commodities have had historically low correlations with traditional
investments (bonds and stocks) and are thus effective for portfolio diversification.
Investors may invest in commodities if they believe prices will increase in the
short or intermediate term (return potential).
112. Which of the following is most likely an alternative investment category?
A. Real estate
B. Index tracking funds
Correct Answer: A
Reference:

Categories of alternative investments include:

• Hedge funds
• Private equity funds
• Real estate
• Commodities
• Other
Exchange traded funds and index-tracking funds do not represent an alternative

investment category.

113. Based on the capital market theory, the capital allocation line is a combination of
two asset classes that are:
A. uncorrelated.
B. positively correlated.
C. negatively correlated.
Correct Answer: A
Reference:
According to the capital market theory, the capital allocation line is a combination
of risk-free asset that has a zero correlation with a risky asset.
114. The risk of a significant downward valuation adjustment when selling a financial
asset is most likely categorized as:
A. Credit risk
B. Market risk
C. Liquidity risk
Correct Answer: C
Reference:
Liquidity risk is the risk of a significant downward valuation adjustment when

selling a financial asset.

115. Therma Oliver is contemplating investment in the stock of Gile Inc. The expected
annual return of the stock and risk-free rate of return is 9% and 3% respectively.
If the beta of the stock is 1.5, the market risk premium based on the capital asset
pricing model (CAPM) is closest to:
A. 1%.
B. 4%.
C. 7%.
Correct Answer: A
Reference:
E(r) = rf + Bi(Rm – rf)

9% − 3%
Market Risk Premium = Rm - Rf = = 4%
1.5
116. If a point representing the estimated return of an asset plots above the security
market line (SML), the asset will most likely:
A. be fairly valued.
B. not be considered for investment.
C. has a risk level which is low relative to its expected return.
Correct Answer: C
Reference:
Should a point representing an asset plot above the SML, the asset should be
considered for investment; this is because the asset is undervalued as it provides a
level of risk that is low relative to the expected return.
If the point plots below the SML, the security is overvalued and should be sold
short. This implies that the level of risk is high relative to expected return.

117. Lewis Smith’s wants to diversify his equity portfolio by including a corporate
bond issue. The expected annual return and standard deviation of his current
portfolio is 15.4% and 22.5%, respectively. The bond issue being evaluated has an
expected annual return and standard deviation of 7.8% and 9.9%, respectively.
The risk-free rate of return is 4% and the correlation between the existing
portfolio and the bond issue is 0.40.
Smith best course of action would be to:
A. invest in the bond issue as its standard deviation is lower than that of the
portfolio.
B. avoid the bond issue since the expected return is lower than the existing
portfolio return.
C. invest in the bond issue as the Sharpe ratio of the bond issue is greater
than that of the portfolio.
Correct Answer: C
Reference:
Smith should invest in the bond issue as the Sharpe ratio of the new portfolio is
higher than that of the current portfolio (see below).
Invest if:
E (Rnew ) − R f E (RP ) − R f
> × p new, p
σ new σP
E (Rnew ) − R f 0.078 − 0.040
= = 0.3838
σ new 0.099
E (RP ) − R f 0.154 − 0.04
× p new, p = × 0.40 = 0.202667
σP 0.225

118. Debra Bates, aged 32, is divorced and mother to two children, ages 3 and 6
respectively. She works as a marketing executive and would like her financial
advisor to review her financial situation. Her advisor notes the following
information on Bates:
• Her annual salary of $720,000 comfortably covers her lavish lifestyle.

• She would like to finance her children’s college education.
• She believes her pension will be sufficient for her retirement.
• She is extremely qualified and her employer would not like her to search
for alternative employment.
• During her interview with her advisor, she stated ‘I have always disliked
bearing financial loss. As a child, my parents went through financial
difficulty and I would not like to live a similar life. That is why I prefer
caution while investing.”
Based only on the information provided, Bates is most likely said to have a (n):
A. high ability and willingness to tolerate risk.

B. high ability to tolerate risk, but low willingness to tolerate risk.
C. low ability to tolerate risk, but high willingness to tolerate risk.
Correct Answer: B
Reference:
Bates is said to have a high ability to tolerate risk but a low willingness to tolerate
risk.
Her high ability is evident from her secure employment and retirement,
comfortable lifestyle and a salary that adequately covers her living expenses.

119. Carlos Reid has a risk-aversion coefficient of 5.2 and a utility function of
1
U = E (r ) − Aσ 2 . Reid’s portfolio manager has identified three potential
2
securities for his client. Expected risk and return details concerning the potential
investments are summarized in the exhibit below:
Exhibit
Expected Return Expected Risk
Security (%) (%)
A 16.3 11.9
B 12.4 9.8
C 22.1 19.8
Reid will derive the highest utility from Security:
A. A.
B. B.
C. C.
Correct Answer: A
Reference: CFA Level 1, Volume 4, Study Session 12, Reading 43, LOS h
UA = 0.153 – 0.5(5.2)(0.119)2 = 0.12618
UB = 0.124 – 0.5(5.2)(0.098)2 = 0.09903
UC = 0.221 – 0.5(5.2)(0.188)2 = 0.11907
120. When a client’s ability to take risk is above average but willingness is below
average, the portfolio manager should:
A. asses the investor’s risk tolerance as average overall.

B. seek to counsel the client and explain the conflict and its implications.
C. aim to change the client’s willingness to take risk by modifying the
elements of his personality.
Correct Answer: B

Reference:
When a client’s ability to take risk is above average but willingness is below
average, the portfolio manager should seek to counsel the client and explain the
conflict and its implications.

FinQuiz.com
June, 2016
Revision 1



33-44 Economics 18
Total 180

1. Janice Hart is a research analyst serving Time Associates, an investment banking

firm. She has been asked to write a research report on Blue Inc. Time was the
chief underwriter of Blue Inc.’s stock when it had undertaken an IPO two years
ago. In addition, two of Time’s directors continue to hold a significant proportion
of Blue Inc. shares.
Hart’s best course of action will be to:
A. decline writing the research report due to the presence of a conflict of

interest.
B. write the research report and disclose the special relationship to clients on
a request basis.
C. write the research report and include a disclosure of the special
relationship between Time Associates and Blue Inc.
2. Wallace Associates is a sell-side research firm with clients primarily from the
financial services sector. Midland Trust is Wallace Associates’ most recent client.
Sarah Parker, a research analyst has been assigned Midland Trust. Parker is
compensated with a basic research fee and agent options, which allow her to
purchase 2% of her client’s common shares if the stock performs well. After
conducting thorough research using public sources, she determines that a buy
recommendation will be most appropriate. She includes a small footnote at the
end of the report that discloses the volume and expiration date of the options she
is eligible for.
According to the Standards of Practice Handbook, Parker is in:
A. violation because her disclosure is not prominent.

B. compliance because she has disclosed the extent of her participation in the
options.
C. violation because the acceptance of the agency options may impair her

3. Trisha Jose is a supervisor at a commercial bank. She has been informed that
particular employee has been deliberately delaying sending reminders to clients
whose accounts are overdue.
With respect to the employee, Jose’s best course of action to take is:
A. dismissal.
B. issuing a warning.
C. suspension of responsibilities.
4. An investment manager notifies clients of a change in recommendation via email.

He then calls three of his oldest clients to discuss the change in greater detail. Not
all his clients receive the recommendation at the same time and are unhappy with
the delay in notification.
Has the investment manager dealt with his clients fairly?
A. Yes, he is only required to ensure each client is fairly dealt with.

B. No, he should have discussed the recommendation in greater detail with
all his clients.
C. No, he should have ensured each client received the recommendation at
the same time.
5. According to the Standards of Practice Handbook, an investment manager who

learns that his client is engaged in an illegal activity should:
A. seek legal counsel.

B. inform legal authorities.
C. disclose the activity to the CFA Institute.

6. Joyce & Monroe (J&M) is an investment bank with its own research division.
Investment banker Ron Howard serves J&M and has recently arranged corporate
financing for its client, Westdale Limited. Westdale will be using the financing to
expand production to Australia. Several weeks later J&M’s chief research analyst
issues a research report on Westdale wherein he recommends, “Westdale’s
decision to expand into Australia is an excellent move because the potential
market for its products should be vast. I am extremely confident that the company
will see a remarkable and positive difference in its earnings over the coming
months. Based on this, I recommend a strong BUY.”
According to the Standards of Practice Handbook, the analyst’s recommendation

is most likely in violation with respect to the standard concerning:
A. misrepresentation; he is guaranteeing investment performance.

B. disclosure of conflicts; he has not disclosed J&M’s relationship with
Westdale.
C. communication with clients and prospects; he has failed to separate
opinion from fact.
7. According to the Standards of Practice Handbook, adequate compliance

procedures are least likely those that:
A. meet industry standards.

B. are uniform on a global basis.
C. can be tailored to the circumstances of a firm.
8. When managing pooled assets to a specific mandate, investment manager (‘s):
A. actions are not governed by the suitability standard.

B. must consider the suitability of an investment for clients.
C. need not consider the suitability of an investment for clients.
9. Which of the following most likely to be the key feature of GIPS standards?
GIPS standards:
A. rely on the integrity of input data.

B. address every aspect of performance measurement.
C. have evolved over time to focus primarily on returns.

10. Nelson Won, CFA, is a tax advisor at a financial services firm. His recent article,
on how tax minimization strategies can be effectively implemented for client
portfolios with high tax brackets, has increased his popularity in the industry.
Won is offered to deliver a lecture on tax minimization strategies to employees of
an investment management firm in New Zealand. The firm offers to pay for his
travel expenses and hotel accommodation. Won accepts the offer, informs his
employer, and travels to New Zealand with the trip fully paid by his employer. At
the conclusion of the lecture, Won is invited to a game of golf at an exclusive club
by the senior investment manager. He accepts the offer and informs his supervisor
of the invitation upon his return. According to the Standards of Practice
Handbook, Won is most likely:
A. in violation; he should have paid for the New Zealand trip out of his own
pocket.
B. in violation; he did not seek written permission prior to accepting the golf
game offer.
C. in compliance; details of the golf game were not available to him before
departing for New Zealand.
11. Conduct that constitutes a violation of the CFA Institute Standards of Professional
Conduct concerning ‘Conduct as Members and Candidates in the CFA Program’
includes:
A. cheating on an MBA exam.

B. soliciting employer clients prior to departing.
C. not following security measures implemented for the CFA exam.

12. Fredric Hart has shifted to Trust Management from Rightway Investments, both
of which are brokerage firms providing asset advisory services. At Trust
Management Hart prepares a brief introduction letter where he highlights the type
of accounts and asset classes he managed as well as the performance results
achieved at Rightway. Hart’s first client at Trust Management is Denver Sports
Inc. He will be responsible for managing the client’s pension plan. After
conducting a suitability analysis, Hart determines that direct real estate is a
suitable asset class and makes an allocation basing his decision on the following
three reasons: 1) Denver has low liquidity needs, 2) Denver has a long-time
horizon and 3) Denver is in a low capital gains tax bracket. According to the
Standards of Practice of Handbook, Hart is most likely in violation of the standard
concerning:
A. loyalty to employer; he has divulged confidential past employer

information.
B. loyalty, prudence and care; he has not acted in the best interests of his
clients.
C. client confidentiality; information concerning account types is considered
confidential information.
13. Marie Thatcher serves the CFA Institute Board of Governors, which is
responsible for the oversight and responsibility for the Professional Conduct
Program. She also manages the investment portfolios of several friends and
family members. In a discussion with one of her clients, Thatcher states, “As a
board member, I will take additional steps to ensure that your interests are looked
after and violations of the Code and Standards are avoided at all costs.
Furthermore, as your portfolio manager I will be kept up-to-date with the latest
developments of and revisions in the Code and Standards.”
Thatcher’s statement is most likely:
A. in violation; she is guaranteeing client account performance.

B. in compliance with the CFA Institute Standards of Professional Conduct.
C. in violation; she is using her association with the CFA Institute to further
professional goals.

14. Two investment managers engaged in a debate that quickly turned into a conflict
disrupting the working environment of their fellow co-workers. Which of the
following has most likely been violated?
A. Code of Ethics only.

B. Standards of Professional Conduct only.
C. Both Code of Ethics and Standards of Professional Conduct.
15. In order to comply with the CFA Institute Code of Ethics, members and
candidates must:
A. promote the integrity of the legal system.

B. maintain their duty of loyalty towards clients, prospects and employers.
C. place the integrity of the investment profession above their own personal
interests.
16. Which of the following statements least likely highlights a benefit of claiming
compliance with GIPS standards?
A. GIPS standards eliminate the need for the investor to conduct in-depth due
diligence.
B. Investment managers can assure clients that the reported historical track
record is complete.
C. Prospective clients can easily compare the performance of their
investment managers across different firms.
17. Hollard Associates manages two funds, a diversified fund and a fixed-income
fund. The diversified fund is three years old while the fixed-income fund is as old
as the firm (five years old). The performance records of both funds are GIPS-
compliant. The firm is now considering claiming compliance to the GIPS
standards. Which of the following statements most accurately highlights what
Hollard Associates should do in order to claim compliance? Hollard Associates
should:
A. wait for at least two years to claim compliance.

B. only claim compliance for the fixed-income fund.
C. can claim compliance by presenting performance since both composites’
creation dates.

18. Which of the following is not a section of the Global Investment Performance
Standards?
A. Hedge funds
B. Private equity

19. A limitation most likely associated with IRR is that it:
A. is sensitive to the external discount rate.

B. it does not represent an achievable rate of return on an investment.
C. cannot be calculated for projects with an unconventional cash flow
pattern.
20. Tara Gibbons would like to ensure she lives comfortably during her retirement,
which will commence thirty years from now. Her financial manager, Raul
Peterson, advises that she should save a fixed amount each year for the next
twelve years and determines that her savings will grow to $45,155 by the end of
the twelfth year if she does so. Peterson also determines that the present value of
the funds required for retirement will amount to $250,878 at t = 12. Funds are
invested to generates 6% annual rate of return.
For the savings to grow from $45,155 to $250,878, Gibbons will need to make an
annual investment of:
A. $19,000.
B. $19,635.
C. $35,042.
21. A desirable property of an estimator includes:
A. consistency.
B. universality.
C. independence.
22. Mona Patel has invested a portion of her savings in a fund with a stated annual
rate of 4%, which is compounded quarterly.
If Patel’s fund was continuously compounded, the fund’s stated annual rate of
return would have been closest to:
A. 3.98%.
B. 4.00%.
C. 4.06%.

23. Which of the following cycles is most likely a component of the Kondratieff
Wave?
A. 18-year cycle
B. Presidential cycle
C. Decennial pattern
24. The National Fund is managed by Douglas Webb and is used to finance equity
purchases on behalf of firm client accounts. The exhibit below demonstrates the
movement in the fund over a four year period:
1 ($) 2 ($) 3 ($) 4($)

Beginning value 5,000,000 6,250,000 8,120,000 11,050,000
Investment 1,000,000 2,250,000 1,050,000 (2,000,000)
Ending value 6,250,000 8,120,000 11,050,000 9,230,000
The annualized time-weighted rate of return for the National Fund is closest to:
A. 16.56%.
B. 23.74%.
C. 38.15%.
25. Howard Briggs is conducting a hypothesis test to determine whether the

difference in mean returns between two asset classes is statistically significant.
Briggs is using a 95% confidence interval. A decision to decrease the level of
confidence to 90% will most likely:
A. increase the probability of a Type I error.

B. increase the probability of a Type II error.
C. decrease the probability of a Type I and Type II error.

26. A portfolio is fully invested in an index fund tracking the S&P500. The returns
earned by the index over the past three years are highlighted in the exhibit below:
S&P 500 Equity Index (%)

Year 1: Return 18.5
Year 2: Return 15.1
Year 3: Return 22.2
Mean Return 18.6
Sample variance 3.6
The portfolio’s coefficient of variation is closest to:
A. 0.10.
B. 0.19.
C. 5.17.
27. When a short term moving average crosses from above the longer term moving
average it is called a:
A. dead cross.
B. golden cross.
C. neutral cross.
28. Lindsay Thomas, an independent investor, has been following the price of a stock
for the previous eight months observing a head and shoulders pattern. After
peaking at $67, Thomas forecasts a decline in share price. She estimates the
neckline at $50. The closing price of the stock at the end of the current trading
day is $59.
If Thomas undertakes a short sale, her expected profit on the transaction will be
closest to:
A. $9 per share.
B. $26 per share.
C. $33 per share.

29. Priori probabilities are based on:
A. logical analysis.
B. data from prior periods.
C. relative frequencies of occurrence.
30. Walsh Enterprises, a web based books delivery system, has been in existence for
30 years and always maintained an inventory turnover ratio of 140 times. Using
inventory information from the firm’s inception, Celia Young estimates Walsh
Enterprises’ annual mean inventory turnover ratio as 130 times with an annual
population standard deviation of 50 times. Young is attempting to determine
whether the slowdown in inventory movement is statistically significant. She is
using a 90% confidence interval for her analysis.
Young will most likely conclude that the slowdown in inventory movement
(assuming normal distribution) is:
A. statistically insignificant.
B. statistically significant; the mean ratio exceeds the higher critical value.
C. statistically significant; the mean ratio falls below the lower critical value.
31. A financial analyst is evaluating the liquidity position of a manufacturing concern.

For the purposes of analysis, he has compiled various financial measures such as
the cash, quick and current ratios and cash operating cycles over a ten-year
period. The data used by the analyst can most likely be classified as:
A. panel.
B. time-series.
C. longitudinal.
32. Which of the following is most likely a step in hypothesis testing?
A. Stating the confidence level

B. Identifying the sampling error
C. Identifying potential sampling biases

33. Grace Corp. is seeking to expand its existing production facilities. Its
management is debating on whether to automate production or maintain manual
procedures. Automation will require purchasing machinery units while manual
procedures will require employing additional labor. The projected marginal
product per day and price of each factor for the first four months following
expansion is illustrated in the exhibit below:
Exhibit
Month Marginal Product Price of Input
per Day ($ per unit of input)
Labor Machinery Labor Machinery
1 200 600 100 245
2 320 760 100 245
3 400 820 120 250
4 480 1,080 110 255
Given the independence of the two decisions, during which month will Grace
favor manual over automated procedures?
A. 2
B. 3
C. 4
34. Excess demand and supply in the automobile industry is given by the following
respective equations:
Qxd = 15,000 – 300Px

Qxs = - 2,000 + 400Px
There will be excess demand if the unit price of each automobile is:
A. less than $24.29.

B. less than $130.00.
C. greater than $24.29

35. Which of the following competitive market structures is most likely characterized
by a large number of potential buyers and sellers, low barriers to entry, and firms
with pricing power?
A. Oligopoly
B. Perfectly competitive
C. Monopolistically competitive
36. The economic activity in a developing country has started to accelerate resulting
in higher domestic inflation. In order to maintain its exchange rate target, the
government’s actions will most likely lead to a (n):
A. increase in domestic money supply.

B. decrease in foreign currency reserves.
C. decrease in the cost of short-term borrowing.
37. A South African company undertook the following transactions, translated into
the South African Rand (ZAR), in the financial year 2013:
• Borrowed ZAR 50 million from a U.S. bank

• Purchased machinery worth ZAR 1.4 million from Japan
• Received ZAR 2.5 million interest income on Dutch fixed income
investments
• Issued ZAR 0.5 million worth of its corporate bonds to an investor in
Brazil.
• Acquired financial leases worth ZAR 1.1 million during the year.
• Total sales proceeds received on foreign sales amounted to ZAR 48.8
million.
The total value of the transactions reflected in the current account is closest to (in
ZAR millions):
A. 51.3.
B. 51.8.
C. 99.3.

38. Grace Singh is a research analyst based in Australia. She is attempting to forecast
exchange rate movements using data collected in the exhibit:
Expected Spot
Spot rate Rate in One Year
AUD/GBP 1.8255 1.8010
GBP/EUR 0.8141 0.8350
GBP/MXN 0.0460 0.0602
Based on the data in the exhibit, the expected appreciation in the EUR against the
MXN over the next year is closest to:
A. – 21.63%.
B. + 2.57%.
C. + 34.23%.
39. Firms operating in perfectly competitive markets will maximize profits if:
A. total revenues at least cover total costs.

B. marginal revenues exceed marginal costs.
C. total revenues at least cover variable costs.
40. A-Tech is the sole software developer in its country’s market. The total revenue,
marginal revenue and cost functions of the developer are as follows:
Total revenue = 1,500QD – 12.5Q2D

Marginal revenue = 1,500 – 25QD
Marginal cost = 650 + 10QD
A-Tech’s profit will be maximized if its level of output equals:
A. 2 units.
B. 24 units.
C. 57 units.

41. Green Alliance operates in an industry in which an increase in product demand

has led to an increase in short-run economic profits. Cost of production has
increased as a consequence of an increased demand for resources by companies
entering the industry. The recent industry changes have forced industry
participants to revise product prices upwards in light of output expansion.
The slope of Green Alliance’s supply curve in the long run is most likely:
A. flat.
B. positive.
C. negative.
42. Which of the following factors will most likely influence the success of a
collusive agreement?
A. Degree of regulation
B. Severity of retaliation
C. Availability of substitutes
43. The sustainable growth rate of potential GDP is calculated as the sum of the
growth rates in labor, capital and:
A. real GDP.
B. technology.
C. natural resources.
44. In December 2011 the value of the Fisher and Paasche index was 115.6 and 125.1
respectively. The value of the price index when the consumption basket is held
constant was closest to:
A. 106.82.
B. 120.26.
C. 135.38.

45. An equity investor is utilizing the following metrics to screen stock investments:
• P/BV < 0.69.

• Dividend yield ≥ 3.5%
• NI/Sales ≥15%
Given the screening criteria, the equity investor is most likely a:
A. Value investor.
B. Growth investor.
C. Market-oriented investor.
46. TS Associates issues $1,000,000 face value of ten-year bonds dated January 1,
2010. The total interest expense on the bonds for the ten-year period is $653,123
while the annual coupon rate is 6%.
Using the straight-line method, the interest expense for the fiscal year 2012 is
closest to:
A. $54,877.
B. $60,000.
C. $65,312.
47. Which of the following ratios will least likely be affected by a company’s choice
of the fair value over cost model for reporting long-lived assets (assuming fair
value is always higher than carrying value) over the long-term?
A. Debt-to-equity
B. Interest coverage
C. Cash flow to revenue

48. On January 1, 2012 TRX Associates purchased a component. Tim Rubin, TRX
Associates’ chief financial analyst, is of the option that the component’s balance
sheet value may need to be reduced. Rubin collects relevant financial information
Exhibit: Relevant Financial Information for the Component

Carrying amount £423,000
Undiscounted expected future cash flows £420,000
Present value of expected future cash flows £415,000
Fair value £455,000
Costs to sell £28,000
If TRX prepares and presents its financial statements in accordance with IFRS,
Rubin is most likely:
A. Incorrect.
B. correct; the component will be valued at £415,000.
C. correct; the component will be valued at £420,000.
49. The notes to a company’s financial statements disclose the present value of lease
payments relating to the next five years as $35,000. These payments concern an
operating lease,which the company had entered into two years ago. If the
company’s total assets and equity are $450,000 and $300,000, respectively, the
debt-to-equity ratio after capitalizing the effect of the lease transaction equals:
A. 50.0%.
B. 61.7%.
C. 74.4%.
50. One of Silvex Corp.’s assembly machines was revalued upwards giving rise to
deferred tax effects. The company will most likely classify the associated tax
effects as an adjustment to total:
A. assets.
B. equity.
C. liabilities.

51. An analyst has collected information for two companies in the paint
manufacturing industry, Violet and Technard.

Violet and Technard
Violet Technard
ROE 14.5% 13.3%
Asset turnover 1.6 1.8
Which of the following reasons most likely justifies why Violet has a higher
ROE? Higher:
A. efficiency.
B. return on assets.
C. financial leverage.
52. The write-off of a particular account receivable is reflected by reducing:
A. bad debt expense.

B. sales returns and allowances.
C. allowance for doubtful accounts.
53. TSO Limited reported the following information for the fiscal year 2013:
Exhibit
Beginning retained earnings $45,550
Cash dividends paid $1,200
Equity $85,350
Contributed capital $36,155
Operating income $7,520
Taxes paid $2,140
Based on the information presented, reported net income for 2013 is closest to:
A. $2,445.
B. $4,845.
C. $5,380.

54. According to the Conceptual Framework’s qualitative characteristics of financial

reports, information that is materially misstated is not:
A. relevant.
B. consistent.
C. faithfully represented.
55. Arc Inc. has entered into a five-year contract to construct a new production plant
on January 1, 2013 at a contract price of £63,500. The estimated costs to complete
the project are £55,000. The exhibit below illustrates the estimated project
completion percentage over the life of the project. Arc Inc. complies with IFRS
with respect to financial reporting.
Exhibit: Project Completion
Percentages
Estimated Completion
Year Percentages (%)
1 20
2 15
3 5
4 40
5 20
Total 100
If the estimated loss in the second year of the project is $500, the profit reported
in the second year of the project using the percentage-of-completion method is
closest to:
A. £775.
B. £1,275.
C. £2,475.
56. Standard-setting bodies:
A. are self-regulated organizations.

B. can recognize the standards they set.
C. exert control over entities that participate in the capital markets of their
jurisdiction.

57. Xilta, a surgical equipment manufacturer, is constructing a new building for its
administrative staff. Total construction costs amount to $450,000. Xilta has
acquired a three-year loan at an interest rate of 6% to finance the construction.
Only 5% of the loan proceeds are required for the first few months and so the
company invests the remaining proceeds at an annual interest rate of 5% for eight
months.
Ignoring any compounding effects, the total amount of interest to be capitalized

under:
IFRS? U.S. GAAP?

A. $12,750 $27,000
B. $66,750 $81,000.
C. $81,000 $81,000.
58. Which of the following items will most likely be higher if a lease is operating as
opposed to financing in nature under U.S. GAAP?
A. Total asset turnover

B. Financing cash outflows
C. Net income in the later years
59. The exhibit below illustrates selective financial information for Hoarce Inc. for
the fiscal years 2012 and 2013.
Exhibit
2013 2012
Total assets $500,000 $615,000
Revenue $45,850 $51,200
Total equity $325,000 $300,000
Based on the information presented above, which of the following statements is

most likely correct? Hoarce Inc.’s:
A. efficiency has improved.

B. solvency position has deteriorated.
C. need for capital to fund current assets has increased.

60. The use of periodic versus perpetual inventory systems will result in the same
value for cost of sales and ending inventory using the:
A. FIFO and LIFO method.

B. FIFO and specific identification method.
C. FIFO and weighted average cost method.
61. The exhibit below illustrates selective financial information for Thompson Walsh
for the financial years 2013 and 2014.
Exhibit
Current assets 48 45
Revenue 85 80
Based on the information presented in the exhibit, Thompson Walsh’s efficiency:
A. has improved.
B. has deteriorated.
C. cannot be interpreted based on the information presented.
62. ARDA Associates has reported two transactions for the financial year ending
2013. The applicable tax rate is 30%.
Transaction 1: Payment of $300,000 as advanced rent at the end of the year. Tax
authorities require advanced rent to be taxed on a cash basis.
Transaction 2: A company purchased machinery worth $100,000 on January 1,

2013. The useful life of the machine is 25 years and the machine is depreciated
using the straight-line method for accounting purposes. Tax authorities require the
double declining method be used for depreciation purposes. The machine has a
zero salvage value.
transactions?
A. Transaction 2 will give rise a deferred tax liability of $1,200.

B. Transaction 2 will give rise a deferred tax liability of $4,000
C. Transaction 1 will give rise a deferred tax liability of $300,000.

63. Dale Buchanan is a credit analyst evaluating the debt repaying ability of two
companies in the same industry, Rax Limited and Halt. The exhibit below
includes selective financial information with respect to the two companies.
Exhibit
Rax Limited Halt
Operating earnings 45 30
Interest payments 12 13
Total debt 35 25
Which company demonstrates a greater ability to service debt?
A. Halt Limited due to lower financial leverage.

B. Rax Limited due to lower interest payments.
C. Rax Limited due to a higher interest coverage ratio.
64. The exhibit below demonstrates inventory value assessments for Targer Limited
for the fiscal year ended December 31, 2012. On January 2, 2013 the inventory
was revalued.
Exhibit: Inventory Value Assessments (2012-2013)
Carrying value – January 1, 2012 £100,000

Market value – July 13, 2012* £85,000
Carrying value – December 31, 2012 £80,000
Revaluation – January 2, 2013 £110,000
*Market value is equal to the net realizable value
On the date of revaluation, the inventory will be valued at an amount equal to:
A. £80,000.
B. £105,000.
C. £110,000.

65. On its balance sheet, ARC Limited reports a deferred tax asset arising from the
different depreciation methods being used for financial reporting and tax
purposes. After further assessment concerning future recoverability, ARC Limited
reduces the carrying amount of the asset using a valuation allowance.
At the end of the financial year Lindsay Smart reassesses the valuation allowance
and determines that any uncertainty concerning future recoverability has been
alleviated. Smart will most likely reverse the valuation if the firm complies with:
A. IFRS but not U.S. GAAP.

B. U.S. GAAP but not IFRS.
C. neither U.S. GAAP nor IFRS.
66. Revenue from barter transactions will be measured under:
A. U.S. GAAP at the carrying amount of the asset surrendered.

B. IFRS on the basis of fair value of revenues from similar non-barter
transactions with unrelated parties.
C. U.S. GAAP on the basis of fair value if a company has not received cash
payments for such services in the past.
67. Qualitative characteristics that enhance the usefulness of relevant and faithfully
represented information include information:
A. not presented in a manner so as to bias a users’ decisions.

B. presented in a consistent manner across time and between entities.
C. which is understandable to a wide range of users including those with
minimal business knowledge.
68. Unrealized gains or losses on available for sale securities are most likely excluded
from:
A. equity.
B. net income.
C. other comprehensive income.

69. Natalie Brooks is contemplating an investment in the GR stock. She would like to
ensure that she is entitled to the first dividend payment upon purchase. The
corporation has declares a dividend of $2.50 on December 1. On December 3 the
share price will be reduced by the dividend per share and the stock will trade at
the reduced price. The dividend will be paid on December 15.
In order to receive dividends, Brooks should purchase shares of GR stock on:
A. December 2.
B. December 3.
C. December 15.
70. The exhibit below summarizes key financial results for IAO Inc. for the years
2012 and 2013:
Exhibit
2012 2013
Degree of financial leverage 2.5 1.8
Operating income (in millions) $10.6 $11.2
Net revenues (in millions) $25.5 $20.2
Based on the information presented, the percentage change in net income is

closest to:
A. – 28.0%
B. – 9.6%.
C. + 10.2%.
71. A company’s suppliers have modified its credit terms from 2/10 net 30 to 3/10 net
30. The impact of the change in credit policy will most likely:
A. increase the available cash flow.

B. lengthen the net operating cycle.
C. increase the number of days of payables.

72. The exhibit below illustrates selective financial information for a manufacturing
concern for the years 2012 and 2013.
2013 2012
Current ratio 0.8 1.2
Quick ratio* 0.5 0.8
Current liabilities (in millions) $30.5 $32.7
Cost of goods sold (in millions) $15.6 $18.4
*Differs from the current ratio by excluding the inventory balance only.
The company’s number of days of inventory has most likely:
A. shortened by 4 days.
B. shortened by 55 days.
C. lengthened by 45 days.
73. Karl Salone is the chief financial officer at T.R. Enterprises. While evaluating the
company’s liquidity position, Salone makes the following observations:
Observation 1: The company routinely pays its vendors prior to the stated due
dates.
Observation 2: Following the recent deterioration in economic conditions,

arranging short-term borrowing is more restrictive in terms of
both availability and cost.
Observation 3: Due to technological advances in the industry, a significant

proportion of T.R. Enterprises’ inventory has become obsolete.
How many of the above observations reflect a drag on liquidity?
A. 1
B. 2
C. 3
74. Relative to a stock dividend, a cash dividend:
A. decreases the current ratio.

B. does not affect financial leverage ratios.
C. has no economic impact on company value.

75. Bill Somers, an equity analyst, is evaluating the stock of Westmore Associates.
Somers has collected the following data with respect to the Westmore stock and
equity market:
Exhibit:
Data Concerning the Market and Westmore Associates’ Stock
Return on equity 5%
Earnings per share $7.50
Market required rate of return 8%
Risk-free rate 3%
Forecasted next period’s price per share $25.50
Current price per share $22.35
The cost of equity (re) using the discounted dividend model (DDM) is closest to:
A. 16.76%.
B. 18.36%.
C. 18.74%.
76. The code of ethics covered by the codes of corporate governance least likely
prohibits:
A. donating cash to management.

B. management from holding company shares.
C. a compensation package dominated by the basic salary.

77. The market price of Yacto’s stock decreased by $2 over the financial year 2013. If
the share price at the beginning of the year was $52.50, what dividend yield must
the company maintain to ensure total return is equal to 15%?
A. 3.81%.
B. 11.19%.
C. 18.81%.
78. A trader who purchases a global registered share will most likely:
A. not need to be concerned with currency conversions.

B. be able to track the performance of the underlying index.
C. have an indirect, economic interest in a foreign company.
79. ABC Limited has reported a return on equity, net profit margin and financial
leverage ratio of 15.0%; 0.32; and 2.5 respectively. Asset turnover of ABC
Limited is closest to:
A. 0.12.
B. 0.19.
C. 18.75%
80. Blake Associates is a financial services firm operating in a fragmented industry.

Lucas Mathews, a market analyst, determines that the structure of the industry
will have implications for the company’s market share, coordination among
industry players, and price competition in the industry.
Which of the following conclusions is most likely valid concerning industry

structure?
A. Price competition is fierce.

B. The relationship among industry players is cooperative.
C. A small increase in Blake’s market share can significantly increase its
profitability.

81. An analyst has collected the following information concerning a value weighted
index:
Beginning of End of Period

Period
Security Price ($) Shares Price ($) Shares
A 45.56 100 51.87 100
B 61.05 200 67.00 200
C 88.07 300 91.35 300
The return on the index is closest to:
A. 6.50%.
B. 7.42%.
C. 18.51%.
82. A brokered market:
A. is organized as an order-driven market.

B. uses a crossing network to organize market trades.
C. is the platform for trading unique and infrequently traded instruments.
83. Sylvia Perez has purchased a 3-month put option with an exercise price of $35.00
by paying $5.50. The purpose behind the option purchase is to protect her
investment from adverse price movements. Perez will exercise the option if the
share price:
A. rises above $35.00.

B. declines below $35.00.
C. declines below $40.50.

84. The exhibit below illustrates the limit order book for the Japanese equity market:
Exhibit: Japanese Equity Market’s Limit Order Book

Bid Size Limit price (¥) Offer Size
172.68 10
168.90 12
163.57 8
160.00 5
14 158.42
16 151.75
7 146.89
9 145.63
The market bid-ask spread is closest to:
A. 1.58.
B. 16.68.
C. 27.05.
85. In contrast to public equity firms, the private equity firm:
A. operates in larger, unregulated markets.

B. management tend to focus on maximizing short-term results.
C. has less effective corporate governance policies and procedures.
86. In contrast to the method of fundamentals, the method of comparables:
A. does not consider the future.

B. is based on the law of one price.
C. is more sensitive to assumptions.
87. Gem Inc. has paid a dividend of $4.55 in the current year. From next year
onwards, annual dividend will grow at an indefinite rate of 2%. The company’s
shareholders require an 8% return to compensate for the risk associated with
equity shares. The intrinsic value of the stock is closest to:
A. $75.83.
B. $77.35.
C. $78.90.

88. Lockwood Associates is a recently established financial services firm. The

company will not be paying its shareholders dividends in the near future due to
insufficient profits. The date for initiating dividend payments is highly uncertain.
Which model will be most suitable for valuing the intrinsic value of company
stock?
A. Free cash flow model

B. Gordon growth model
C. Dividend discount model

89. Which of the following derivative instruments entails default risk which is from
the short to the long only?
A. Swaps
B. Options
C. Forwards
90. Which of the following statements most accurately describes margin in securities
and futures markets? Margins in:
A. futures markets are set by federal regulators.

B. securities markets magnify the gains and losses on an investment.
C. securities and futures markets serve to reduce the amount required for
investment.
91. Which of the following factors will have the most significant and positive impact
on call option prices where the underlying is non-financial in nature? Increase in:
A. volatility.
B. interest rates.
C. underlying cash flows.
92. Jacqueline Rogers holds shares with a current market price of $25 and would like
to protect her investment from a decline in value. She undertakes a protective put
strategy by purchasing 6-month options selling for $2.55 each with an exercise
price of $22. On the expiration date of the options, the market price declines to
$20.
The breakeven price of the share at expiration is closest to:
A. $22.55.
B. $24.55.
C. $27.55.

93. Consider a put option selling for $4 in which the exercise price is $34 and the
price of the underlying is $36. If the price of the underlying at expiration is $37,
the profit for the option seller is closest to:
A. 0
B. $4
C. $7
94. Over the counter derivatives are:
A. subject to the risk of default.

B. are guaranteed against default through the clearinghouse.
C. are guaranteed against decrease in value through the clearinghouse.

95. Alex Cunningham is comparing three fixed-income securities held in his

investment portfolio. He would like to determine the issue offering the highest
interest yield. Details regarding the three issues are summarized in the exhibit
below:
Exhibit:
Details Concerning Fixed Income Issues
A B C
Full price per 100 of par value $98.85 $99.70 $103.30
Accrued interest $5.40 $3.10 $2.85
Coupon rate 3% 2% 3%
Coupon payment frequency Annually Quarterly Semi-annually
Which issue offers the highest interest yield?
A. A
B. B
C. C
96. A 5%, fifteen-year callable bond issue is priced at 98.56 per 100 of par value at
the time of issue. The par value of each bond is $1,000. The bond is first callable
on December 31, 2018 at a price of 105.34 of par value. Thereafter, call prices
will steadily decline being equal to 103.45 in the year 2019 and finally declining
to 100 in 2020, the year of maturity.
The call premium in 2018 is closest to:
A. $1.44.
B. $34.50.
C. $53.40.
97. A deferred coupon bond:
A. is issued at a premium to par.

B. permits in kind interest payments.
C. provides tax advantages to the issuer.

98. Karl Tatsimo invests in two bond issues; a two-year, 5.00% semi-annual coupon
payment corporate bond priced at 95.67 per 100 of par value and a three-year,
3.00% semi-annual coupon payment government bond priced at 93.45 per 100 of
par value.
The corporate bond’s annual yield-to-maturity stated on a semi-annual basis is:
A. equal to 7.37%.
B. equal to that of the government bond.
C. lower than that of the government bond.
99. Fixed-income securities that are issued with a maturity of less than one year are
most likely known as:
A. Eurobonds.
B. money market securities.
C. capital market securities.
100. In the event of company default, the debt category that will rank the highest is:
A. first lien debt.

B. second lien debt.
C. senior unsecured debt.
101. A risk of relying on credit agency ratings least likely include that they:
A. may be fallible.
B. overestimate event risk.
C. tend to lag bond prices and credit spread movements.

102. The Jameson Foundation has a fixed income portfolio comprising of three
corporate bonds, A, B and C. The exhibit below summarizes details concerning
the fixed income portfolio:
Exhibit
A B C
Annual modified duration 3.4 7.8 12.3
Annual modified convexity 12.2 16.9 23.8
Price per par value 92.34 95.78 99.35
If the yield changes by 50 basis points, the security that will exhibit the greatest
percentage price change is:
A. A.
B. B.
C. C.
103. Which of the following prices is most likely quoted by dealers?
A. Clean price
B. Matrix price
C. Invoice price
104. Based on the information provided in the exhibit below, Tower Two Inc.’s
interest coverage is closest to:
Exhibit
$ ‘000s
Gross profit 2,450
Operating expenses 950
Operating income 1,500
Interest expense 85
Interest income 20
A. 17.65x.
B. 21.41x.
C. 28.00x.

105. Relative to an option-free, a putable bond will most likely:
A. trade at a higher yield.

B. trade at a higher price.
C. is associated with a higher reinvestment risk.
106. An investor purchases a 2-year, 10% annual coupon payment corporate bond at a
market discount rate of 5%. The forward curve for one-year rates is demonstrated
Exhibit
Time period Forward rate
0y1y 1.0535%
1y1y 2.7984%
2y1y 3.0367%
3y1y 4.7842%
Using the forward rates, the price of the corporate bond per 100 of par value is
closest to:
A. $109.30.
B. $113.32.
C. $115.78.

107. The exhibit below illustrates real estate valuation data collected by Simone Irk, an
investment analyst. The data collected by Irk concerns real estate investment
trusts (REITs). The analyst would like to employ a direct capitalization approach
when comparing the relative valuations of the three REITs (A, B and C).
Exhibit:
Valuation Data Concerning REIT A, B, and C
Net Gains Recurring
REIT Funds from from Sales Capital Capitalization
operations of Real Estate Expenditures Rate
A $35,000 $4,200 $12,000 5%
B $80,000 $12,400 $28,000 8%
C $75,000 $9,900 $33,500 6%
Using adjusted funds from operations (AFFO), the REIT with the highest
valuation is:
A. A.
B. B.
C. C.
108. The most suitable measure for evaluating the performance of alternative
investments, in general, is the:
A. Sharpe ratio.
B. Sortino ratio.
C. value added risk (VAR).
109. When commodity futures prices are higher than spot prices, the futures market is
said to be in a state of:
A. contango and the convenience yield is low.

B. contango and the convenience yield is high.
C. backwardation and the convenience yield is low.

110. The characteristics that make a company particularly attractive as an LBO target
least likely include a firm:
A. with depressed stock price.

B. that is inefficiently managed.
C. with weak & unsustainable cash flows.
111. A hedge fund with $120 million of initial investment, 2-20 fee structure and a
hurdle rate of 5%, earned 35% return at year end. Assuming management fee is
based on assets under management at year end and incentive fee is calculated net
of management fee and is based on return in excess of the hurdle rate, an
investor’s net return in $ terms is closest to:
A. $15.12 million
B. $27.40 million
C. $32.88 million
112. An analyst listed the following characteristics of alternative investments as an

asset class in general.
1. Less transparency
2. High level of regulation
3. Narrow manager specialization
4. Potentially problematic historical risk and return data
How many characteristics he identified correctly?
A. 2
B. 3
C. 4

113. Maxine Carrell, a university professor, made the following statements during a
lecture:
Statement 1:“The capital allocation line joins the optimal risky portfolio and the
risk-free asset.”
Statement 2:“The portfolio of an optimal investor must lie on the capital

allocation line.”
Carrell is most likely correct with respect to:
114. Risk infrastructure most likely refers to:
A. The people and systems required to track risk exposures.

B. The top level system of structures, rights and obligations by which
organizations are controlled.
C. The extensions of risk governance into both the day-to-day operation and
decision making processes of the organization.
115. In contrast to open-end funds, a disadvantage of investing in closed-end funds is

that they:
A. have a limited ability to grow.

B. charge fees for investing in and redeeming from the fund.
C. may require the manager to liquidate assets for meeting redemptions at a
point in time when least desirable.

116. The exhibit below summarizes data concerning annual returns, annual standard
deviation and betas for an investor’s two asset portfolio. The portfolio’s expected
return is equal to 15%.
Exhibit:
Annual Annual Standard
Asset Return (%) Deviation (%) Beta
A 14 10 1.5
B 18 16 0.9
The amount invested in both assets is respectively closest to:
Asset A: Asset B:
A. 17% 83%
B. 42% 58%.
C. 75% 25%.
117. Mitchell Young holds an investment portfolio comprising two equity securities, A
and B. The portfolio is equally invested in the two securities. The exhibit below
summarizes annual risk and return data concerning Young’s portfolio:
Exhibit
Security Annual Annual Standard
A 22 17
B 16 13
If the covariance of returns between the two securities is – 0.0157, the correlation
between the two securities is closest to:
A. – 0.71.
B. – 0.44.
C. + 0.19.
118. The slope of the capital allocation line (CAL) is measured using the:
A. Sharpe ratio.
B. Treynor ratio.
C. information ratio.

119. The exhibit below summarizes risk, return and beta information concerning the
Lightman Foundation’s investment portfolio.
Exhibit:
Annual Standard Weight in
Stock Deviation (%) Beta Portfolio (%)
A 23.5 1.5 25
B 9.4 0.6 30
C 8.5 1.1 10
D 12.5 0.3 35
Total 100
Based on the information presented, portfolio beta is closest to:
A. 0.14.
B. 0.77.
C. 0.87.
120. Tactical asset allocation:
A. focuses on adding portfolio value in the short-run.

B. deviates from policy exposures to nonsystematic risk factors.
C. selects securities with an expected return higher than the asset class
benchmark.

FinQuiz.com
June, 2016
Revision 1



33-44 Economics 18
Total 180


1. Janice Hart is a research analyst serving Time Associates, an investment banking

firm. She has been asked to write a research report on Blue Inc. Time was the
chief underwriter of Blue Inc.’s stock when it had undertaken an IPO two years
ago. In addition, two of Time’s directors continue to hold a significant proportion
of Blue Inc. shares.
Hart’s best course of action will be to:
A. decline writing the research report due to the presence of a conflict of

interest.
B. write the research report and disclose the special relationship to clients on
a request basis.
C. write the research report and include a disclosure of the special
relationship between Time Associates and Blue Inc.
Correct Answer: C
Reference:
In order to comply with the standard relating to disclosure of conflicts Hart’s best
course of action would be to write the research report and disclose the special
relationship between Time Associates and Blue Inc. Being an underwriter in an
IPO represents a relationship that could threaten the independence and objectivity
of the report writer.


2. Wallace Associates is a sell-side research firm with clients primarily from the
financial services sector. Midland Trust is Wallace Associates’ most recent client.
Sarah Parker, a research analyst has been assigned Midland Trust. Parker is
compensated with a basic research fee and agent options, which allow her to
purchase 2% of her client’s common shares if the stock performs well. After
conducting thorough research using public sources, she determines that a buy
recommendation will be most appropriate. She includes a small footnote at the
end of the report that discloses the volume and expiration date of the options she
is eligible for.
According to the Standards of Practice Handbook, Parker is in:
A. violation because her disclosure is not prominent.

B. compliance because she has disclosed the extent of her participation in the
options.
C. violation because the acceptance of the agency options may impair her
Correct Answer: C
Reference:
The standard relating to disclosure of conflicts requires members and candidates

to disclose the volume and expiration date of any agent options received.
Although Parker has complied in this regard, she is in violation because she
should not have accepted options which were contingent on the report’s
recommendation and have the potential to impair her independent and objective
judgment. She should have agreed to a flat fee only.
3. Trisha Jose is a supervisor at a commercial bank. She has been informed that
particular employee has been deliberately delaying sending reminders to clients
whose accounts are overdue.
With respect to the employee, Jose’s best course of action to take is:
A. dismissal.
B. issuing a warning.
C. suspension of responsibilities.


Correct Answer: C
Reference:
The employee is violating his duty of loyalty to his employer by not performing
his role as employee properly. Therefore, as supervisor, Jose must respond
promptly and conduct a thorough investigation of the activities to determine the
scope of the wrongdoing. Jose must also increase supervision the employee’s
responsibilities pending the outcome of the investigation. Simply warning or
dismissing the employee is not considered the appropriate course of action
according to the Code and Standards.
4. An investment manager notifies clients of a change in recommendation via email.

He then calls three of his oldest clients to discuss the change in greater detail. Not
all his clients receive the recommendation at the same time and are unhappy with
the delay in notification.
Has the investment manager dealt with his clients fairly?
A. Yes, he is only required to ensure each client is fairly dealt with.

B. No, he should have discussed the recommendation in greater detail with
all his clients.
C. No, he should have ensured each client received the recommendation at
the same time.
Correct Answer: A
Reference:
Members and candidates are required to deal with clients and prospects fairly and
objectively when making investment recommendations, taking investment action
or engaging in other professional activities. However, the manager is not required
to ensure that each client is dealt with equally because it is not possible to reach
all the clients at the same time. Furthermore, since he has sent the investment
recommendation to all his clients, discussing it in greater detail with a select few
does not constitute a violation.


5. According to the Standards of Practice Handbook, an investment manager who

learns that his client is engaged in an illegal activity should:
A. seek legal counsel.

B. inform legal authorities.
C. disclose the activity to the CFA Institute.
Correct Answer: A
Reference:
An investment manager who learns that his client is engaged in an illegal activity
should inform their supervisor of the activity and together they can work to
remedy the violations. If that does not prove successful, the investment manager
and his supervisor should seek the advice of a legal counsel to determine the
appropriate steps to take.
Disclosing an illegal activity to legal and regulatory authorities is considered a

violation of the Code and Standards unless disclosure is required by law.
Similarly, members and candidates cannot disclose confidential client information
to the CFA Institute unless permissible under the applicable law.
6. Joyce & Monroe (J&M) is an investment bank with its own research division.
Investment banker Ron Howard serves J&M and has recently arranged corporate
financing for its client, Westdale Limited. Westdale will be using the financing to
expand production to Australia. Several weeks later J&M’s chief research analyst
issues a research report on Westdale wherein he recommends, “Westdale’s
decision to expand into Australia is an excellent move because the potential
market for its products should be vast. I am extremely confident that the company
will see a remarkable and positive difference in its earnings over the coming
months. Based on this, I recommend a strong BUY.” According to the Standards
of Practice Handbook, the analyst’s recommendation is most likely in violation
with respect to the standard concerning:
A. misrepresentation; he is guaranteeing investment performance.

B. disclosure of conflicts; he has not disclosed J&M’s relationship with
Westdale.
C. communication with clients and prospects; he has failed to separate
opinion from fact.


Correct Answer: B
Reference:
The analyst’s recommendation is not in compliance with the Code and Standards
as he has not disclosed J&M’s relationship with Westdale. By arranging corporate
financing, J&M’s relationship with the manufacturer will be long-term and should
be disclosed on each report sent to clients and prospects. Failing to do so may
give clients the impression that the relationship impairs the analyst’s independent
and objective judgment.
The analyst is not in violation of the standard relating to misrepresentation

because he has not made any attempt to guarantee investment performance. The
statement, ‘I am extremely confident that the company will see a remarkable and
positive difference in its earnings over the coming months.’ provides evidence
that is making a projection with no attempt to make any guarantee.
The analyst is not in violation of the standard relating to communication with

clients and prospects; he has separated opinion from fact. His recommendation is
based on an opinion of the potential market for Westdale’s products; using the
terms ‘should be vast’ provides evidence that he is voicing his opinion.
7. According to the Standards of Practice Handbook, adequate compliance

procedures are least likely those that:
A. meet industry standards.

B. are uniform on a global basis.
C. can be tailored to the circumstances of a firm.
Correct Answer: B
Reference:
The Code and standards define adequate compliance procedures as those that
meet industry standards, regulatory requirements, requirements of the Code and
standards, and the circumstances of the firm. Being globally uniform is not a
requirement.


8. When managing pooled assets to a specific mandate, investment manager (‘s):
A. actions are not governed by the suitability standard.

B. must consider the suitability of an investment for clients.
C. need not consider the suitability of an investment for clients.
Correct Answer: C
Reference:
When managing pooled funds to a stated mandate, investment managers need not
consider the suitability of the investment for those investing in the fund. The
responsibility of determining the suitability of an investment for a client lies on
those members and candidates who have an advisory relationship with clients.
However, the actions of members and candidates as investment managers

continue to be governed by the suitability standard. They are required to “make
investment decisions and take investment actions that are consistent with the
stated objectives and constraints of the portfolio”.
9. Which of the following most likely to be the key feature of GIPS standards?
GIPS standards:
A. rely on the integrity of input data.

B. address every aspect of performance measurement.
C. have evolved over time to focus primarily on returns.
Correct Answer: A
Reference:
One of the key features of GIPS standards include that the GIPS rely on the
integrity of the input data.
The GIPS standards do not address every aspect of performance measurement.

Historically the GIPS standards focus primarily on returns but the standards
evolved overtime to address additional areas of investment performance.


10. Nelson Won, CFA, is a tax advisor at a financial services firm. His recent article,
on how tax minimization strategies can be effectively implemented for client
portfolios with high tax brackets, has increased his popularity in the industry.
Won is offered to deliver a lecture on tax minimization strategies to employees of
an investment management firm in New Zealand. The firm offers to pay for his
travel expenses and hotel accommodation. Won accepts the offer, informs his
employer, and travels to New Zealand with the trip fully paid by his employer. At
the conclusion of the lecture, Won is invited to a game of golf at an exclusive club
by the senior investment manager. He accepts the offer and informs his supervisor
of the invitation upon his return. According to the Standards of Practice
Handbook, Won is most likely:
A. in violation; he should have paid for the New Zealand trip out of his own
pocket.
B. in violation; he did not seek written permission prior to accepting the golf
game offer.
C. in compliance; details of the golf game were not available to him before
departing for New Zealand.
Correct Answer: C
Reference:
By asking his employer to pay for his trip and declining the investment
management firm’s offer, Won has taken the necessary steps to avoid the
appearance of any potential conflicts of interest.
Details of the golf game were not available to Won before his departure to New
Zealand and so disclosing the details after his return is the most appropriate
course of action. Won’s actions are in compliance with the Code and Standards
with regard to both his decisions.
11. Conduct that constitutes a violation of the CFA Institute Standards of Professional
Conduct concerning ‘Conduct as Members and Candidates in the CFA Program’
includes:
A. cheating on an MBA exam.

B. soliciting employer clients prior to departing.
C. not following security measures implemented for the CFA exam.


Correct Answer: C
Reference:
Out of the three options presented, option C corresponds to conduct that violates
the standard in question.
Option A is incorrect. Conduct that constitutes violation includes cheating or

assisting others to cheat on a CFA exam or any other CFA Institute exam; the
standard does not address cheating on exams other than the aforementioned.
Option B highlights conducts that represents a violation of the standard

concerning loyalty to employer.
12. Fredric Hart has shifted to Trust Management from Rightway Investments, both
of which are brokerage firms providing asset advisory services. At Trust
Management Hart prepares a brief introduction letter where he highlights the type
of accounts and asset classes he managed as well as the performance results
achieved at Rightway. Hart’s first client at Trust Management is Denver Sports
Inc. He will be responsible for managing the client’s pension plan. After
conducting a suitability analysis, Hart determines that direct real estate is a
suitable asset class and makes an allocation basing his decision on the following
three reasons: 1) Denver has low liquidity needs, 2) Denver has a long-time
horizon and 3) Denver is in a low capital gains tax bracket.
According to the Standards of Practice of Handbook, Hart is most likely in

violation of the standard concerning:
A. loyalty to employer; he has divulged confidential past employer

information.
B. loyalty, prudence and care; he has not acted in the best interests of his
clients.
C. client confidentiality; information concerning account types is considered
confidential information.
Correct Answer: B
Reference:


Hart is in violation of the standard concerning loyalty, prudence and care by

failing to consider whether the real estate allocation is suitable for the plan
participants. His ultimate clients are the plan participants and not Denver Sports.
Hart is not in violation of the standard concerning employer loyalty. He can

present his past performance at Rightway Investments to the employees of Trust
Management as long as he clearly discloses that he achieved the performance at
his former employer. Information concerning past performance track record is not
considered confidential.
Hart is not in violation of the standard concerning client confidentiality as

information concerning account type and asset classes is general information
related to the skills of the manager.
13. Marie Thatcher serves the CFA Institute Board of Governors, which is
responsible for the oversight and responsibility for the Professional Conduct
Program. She also manages the investment portfolios of several friends and
family members. In a discussion with one of her clients, Thatcher states, “As a
board member, I will take additional steps to ensure that your interests are looked
after and violations of the Code and Standards are avoided at all costs.
Furthermore, as your portfolio manager I will be kept up-to-date with the latest
developments of and revisions in the Code and Standards.”
Thatcher’s statement is most likely:
A. in violation; she is guaranteeing client account performance.

B. in compliance with the CFA Institute Standards of Professional Conduct.
C. in violation; she is using her association with the CFA Institute to further
professional goals.
Correct Answer: C
Reference:


Thatcher’s statement is in violation of the standard concerning Conduct as

Members and Candidates of the CFA Program as she is implying that as a
member of the CFA Institute Board of governors she in a unique and superior
position when ensuring compliance with ethical standards.
Thatcher is not attempting to guarantee client account performance. In fact, her

position allows her to stay abreast the latest developments in the Code and
Standards, which she can apply when managing client portfolios.
14. Two investment managers engaged in a debate that quickly turned into a conflict
disrupting the working environment of their fellow co-workers.
Which of the following has most likely been violated?
A. Code of Ethics only.

B. Standards of Professional Conduct only.
C. Both Code of Ethics and Standards of Professional Conduct.
Correct Answer: C
Reference:
Both the Code of Ethics and Standards of Professional Conduct are being
violated. The Code of Ethics is being violated as the investment managers are not
acting in a respectful manager towards each other and their colleagues as well as
their employer; disrupting the concentration of the work environment is an act of
disrespect. Furthermore the two managers are in violation of the standard
concerning misconduct as engaging in a conflict and disturbing colleagues will
adversely reflect on their professional reputation.
15. In order to comply with the CFA Institute Code of Ethics, members and
candidates must:
A. promote the integrity of the legal system.

B. maintain their duty of loyalty towards clients, prospects and employers.
C. place the integrity of the investment profession above their own personal
interests.
Correct Answer: C


Reference:
In order to comply with the CFA Institute Code of Ethics, members and
candidates must, amongst other actions:
• place the integrity of the investment profession above their own personal
interests and
• promote the integrity of and uphold the rules governing capital markets.
The duty to maintain loyalty towards clients, prospects and employers falls under
the Standards of Professional Conduct.
16. Which of the following statements least likely highlights a benefit of claiming
compliance with GIPS standards?
A. GIPS standards eliminate the need for the investor to conduct in-depth due
diligence.
B. Investment managers can assure clients that the reported historical track
record is complete.
C. Prospective clients can easily compare the performance of their
investment managers across different firms.
Correct Answer: A
Reference:
Compliance with the GIPS standards does not eliminate the need for the investor
to conduct in-depth due diligence.
The benefits of claiming compliance with the GIPS standards include:
• Investment managers claiming compliance can assure clients that the

reported historical track record is complete and fairly presented.
• Investors have more confidence in the integrity of a performance
presentation as prospective clients can compare the performance
presentations from different investment management firms.


17. Hollard Associates manages two funds, a diversified fund and a fixed-income
fund. The diversified fund is three years old while the fixed-income fund is as old
as the firm (five years old). The performance records of both funds are GIPS-
compliant. The firm is now considering claiming compliance to the GIPS
standards. Which of the following statements most accurately highlights what
Hollard Associates should do in order to claim compliance?
Hollard Associates should:
A. wait for at least two years to claim compliance.

B. only claim compliance for the fixed-income fund.
C. can claim compliance by presenting performance since both composites’
creation dates.
Correct Answer: C
Reference:
Hollard Associates can claim compliance by presenting GIPS compliant

performance since the composites’ inception dates, three years for the diversified
fund and five years for the fixed income fund. The GIPS standards require firms
to initially present five years of annual investment performance that is compliant
with the GIPS standards. Should the firm or composite be in existence for less
than five years, the firm must present performance since the firm’s inception or
composite’s inception date.
Hollard Associates cannot partially claim compliance by claiming compliance for

the fixed-income fund.
18. Which of the following is not a section of the Global Investment Performance
Standards?
A. Hedge funds
B. Private equity
Correct Answer: A


Reference:
Out of the three options listed, ‘hedge funds’ is not one of the sections found
within the provisions of the Global Investment Performance Standards.


19. A limitation most likely associated with IRR is that it:
A. is sensitive to the external discount rate.

B. it does not represent an achievable rate of return on an investment.
C. cannot be calculated for projects with an unconventional cash flow
pattern.
Correct Answer: B
Reference:
A limitation of the IRR method is that it assumes that all project cash flows are
invested at the IRR, which is an unrealistic assumption, given the tendency of
interest rates to change. Therefore the IRR cannot be assumed to represent an
achievable rate of return.
The IRR estimate and IRR rankings are not affected by any external interest or
discount rate because a project’s cash flows determine the internal rate of return.
The IRR can be calculated for a project with an unconventional cash flow pattern
as demonstrated below:
CF0 = - 45,000; CF1 = 12,000; CF2 = - 57,805; CF3 = 61,000; CF4 = 400,000
IRR = 72.12%


20. Tara Gibbons would like to ensure she lives comfortably during her retirement,
which will commence thirty years from now. Her financial manager, Raul
Peterson, advises that she should save a fixed amount each year for the next
twelve years and determines that her savings will grow to $45,155 by the end of
the twelfth year if she does so. Peterson also determines that the present value of
the funds required for retirement will amount to $250,878 at t = 12. Funds are
invested to generates 6% annual rate of return.
For the savings to grow from $45,155 to $250,878, Gibbons will need to make an
annual investment of:
A. $19,000.
B. $19,635.
C. $35,042.
Correct Answer: A
Reference:
We need to determine the amount of savings per year from t = 13 to t = 30.

On t = 12, Gibbons would have saved $45,155. The additional amount of total
savings required for retirement is $205,723 ($250,878 – $45,155).
The annuity payment is determined as follows:

PV = $205,723
r = 6% = 0.06
N = 18
⎡ 1 ⎤ ⎡ 1 ⎤
⎢1 − (1 + r )N ⎥ ⎢1 − (1 + 0.06 )18 ⎥
Present value annuity factor = ⎢ ⎥ = ⎢ ⎥ = 10.8276
⎢ r ⎥ ⎢ 0.06 ⎥
⎢ ⎥ ⎢ ⎥
⎣ ⎦ ⎣ ⎦
A = PV/Present value annuity factor
= $205,723/10.826 =$18,999.8646 or approximately $19,000
21. A desirable property of an estimator includes:
A. consistency.
B. universality.
C. independence.


Correct Answer: A
Reference:
Desirable properties of estimators include unbiasedness, efficiency, and

consistency.
22. Mona Patel has invested a portion of her savings in a fund with a stated annual
rate of 4%, which is compounded quarterly.
If Patel’s fund was continuously compounded, the fund’s stated annual rate of
return would have been closest to:
A. 3.98%.
B. 4.00%.
C. 4.06%.
Correct Answer: A
Reference:
A stated annual rate of 4% is equivalent to an EAR of 4.06%
To convert to continuously compounded rate of return: LN (1+4.06%) = 3.98%
23. Which of the following cycles is most likely a component of the Kondratieff
Wave?
A. 18-year cycle
B. Presidential cycle
C. Decennial pattern
Correct Answer: A
Reference:
Three 18-year cycles make up the longer 54-year Kondratieff Wave.


24. The National Fund is managed by Douglas Webb and is used to finance equity
purchases on behalf of firm client accounts. The exhibit below demonstrates the
movement in the fund over a four year period:
1 ($) 2 ($) 3 ($) 4($)

Beginning value 5,000,000 6,250,000 8,120,000 11,050,000
Investment 1,000,000 2,250,000 1,050,000 (2,000,000)
Ending value 6,250,000 8,120,000 11,050,000 9,230,000
The annualized time-weighted rate of return for the National Fund is closest to:
A. 16.56%.
B. 23.74%.
C. 38.15%.
Correct Answer: B
Reference:
Y1 HPR: ($6,250,000 + $1,000,000 – $5,000,000)/$5,000,000 = 0.450

Y2 HPR: ($8,120,000 + $2,250,000 – $6,250,000)/$6,250,000 = 0.659
Y3 HPR: ($11,050,000 + $1,050,000 – $8,120,000)/$8,120,000 = 0.490
Y4 HPR: [$9,230,000 + (- $2,000,000)] – $11,050,000]/$11,050,000 = - 0.346
Time-weighted return = [(1.450)(1.659)(1.490)(0.654)]1/4 – 1 = 0.2374 or 23.74%
25. Howard Briggs is conducting a hypothesis test to determine whether the

difference in mean returns between two asset classes is statistically significant.
Briggs is using a 95% confidence interval. A decision to decrease the level of
confidence to 90% will most likely:
A. increase the probability of a Type I error.

B. increase the probability of a Type II error.
C. decrease the probability of a Type I and Type II error.
Correct Answer: B


Reference:
Since the confidence interval is measured as 1 – significance level, decreasing the

level of confidence will increase the level of significance. The significance level
measures the probability of incorrectly rejecting the null (Type I error); therefore,
increasing this level will increase the probability of a Type-I error. Put
differently, the probability of a Type-II error decreases (the probability of
incorrectly failing to reject the null).
26. A portfolio is fully invested in an index fund tracking the S&P500. The returns
earned by the index over the past three years are highlighted in the exhibit below:
S&P 500 Equity Index (%)

Year 1: Return 18.5
Year 2: Return 15.1
Year 3: Return 22.2
Mean Return 18.6
Sample variance 3.6
The portfolio’s coefficient of variation is closest to:
A. 0.10.
B. 0.19.
C. 5.17.
Correct Answer: A
Reference:
Coefficient of variation = s R = 1.897 / 18.6 = 0.101989
27. When a short term moving average crosses from above the longer term moving
average it is called a:
A. dead cross.
B. golden cross.
C. neutral cross.


Correct Answer: A
Reference:
When a short term moving average crosses from above the longer term moving
average the movement is considered to be bearish and is called a dead cross.
When a short-term moving average line crosses from underneath a longer-term

average, the movement is considered bullish and is called a golden cross.
28. Lindsay Thomas, an independent investor, has been following the price of a stock
for the previous eight months observing a head and shoulders pattern. After
peaking at $67, Thomas forecasts a decline in share price. She estimates the
neckline at $50. The closing price of the stock at the end of the current trading
day is $59.
If Thomas undertakes a short sale, her expected profit on the transaction will be
closest to:
A. $9 per share.
B. $26 per share.
C. $33 per share.
Correct Answer: B
Reference:
Based on the observed head and shoulders pattern, the price target is $33
(calculated below):
Price target = Neckline – (Head – Neckline) = $50 – ($67 – $50) = $33
If Thomas sells the stock short at the closing price of $59 and closes the short
position at $33, she can earn a profit of $26.
29. Priori probabilities are based on:
A. logical analysis.
B. data from prior periods.
C. relative frequencies of occurrence.


Correct Answer: A
Reference:
Priori probabilities are based on logical analysis rather than on observations or

personal judgment. Empirical probabilities are estimated as a relative frequency
of occurrence based on historical data.
30. Walsh Enterprises, a web based books delivery system, has been in existence for
30 years and always maintained an inventory turnover ratio of 140 times. Using
inventory information from the firm’s inception, Celia Young estimates Walsh
Enterprises’ annual mean inventory turnover ratio as 130 times with an annual
population standard deviation of 50 times. Young is attempting to determine
whether the slowdown in inventory movement is statistically significant. She is
using a 90% confidence interval for her analysis.
Young will most likely conclude that the slowdown in inventory movement
(assuming normal distribution) is:
A. statistically insignificant.
B. statistically significant; the mean ratio exceeds the higher critical value.
C. statistically significant; the mean ratio falls below the lower critical value.
Correct Answer: A
Reference:


Since the population mean and standard deviation are known, a z-test will be used
to conduct hypothesis testing.
Using a 10% significance level, the upper and lower rejection points are + 1.645
and – 1.645. The null hypothesis is rejected if it declines below – 1.645 and
Thomas will conclude that the inventory slowdown is statistically significant.
The z-test statistic is calculated as follows:

X − µ0 130 − 140
z= = = −0.0365
σ/ n 50 30
Since – 0.0365 is greater than – 1.645, the null hypothesis is not rejected and
Thomas will conclude that the slowdown in inventory turnover is not statistically
significant.
31. A financial analyst is evaluating the liquidity position of a manufacturing concern.

For the purposes of analysis, he has compiled various financial measures such as
the cash, quick and current ratios and cash operating cycles over a ten-year
period. The data used by the analyst can most likely be classified as:
A. panel.
B. time-series.
C. longitudinal.
Correct Answer: C
Reference:
The analyst is using longitudinal data; all his observations are measures of
liquidity and are related to the same manufacturing concern. Longitudinal data
consist of observation (s) of the same observational unit through time.
Panel data consist of observations through time on a single characteristic of

multiple observational units.


32. Which of the following is most likely a step in hypothesis testing?
A. Stating the confidence level

B. Identifying the sampling error
C. Identifying potential sampling biases
Correct Answer: A
Reference:
Out of the three options presented, hypothesis testing does not include identifying
potential sampling biases and sampling errors.
Stating the confidence interval (or put differently, stating the significance level) is
one of the steps executed during hypothesis testing.


33. Grace Corp. is seeking to expand its existing production facilities. Its
management is debating on whether to automate production or maintain manual
procedures. Automation will require purchasing machinery units while manual
procedures will require employing additional labor. The projected marginal
product per day and price of each factor for the first four months following
expansion is illustrated in the exhibit below:
Exhibit
Month Marginal Product Price of Input
per Day ($ per unit of input)
Labor Machinery Labor Machinery
1 200 600 100 245
2 320 760 100 245
3 400 820 120 250
4 480 1,080 110 255
Given the independence of the two decisions, during which month will Grace
favor manual over automated procedures?
A. 2
B. 3
C. 4
Correct Answer: A
Reference:
Grace Manufacturing will favor a manual over automated production process

when the marginal product per monetary unit of input cost of labor exceeds that of
machinery. This occurs during the second month as calculated in the table below.
Month MPInput/PriceInput
Labor Machinery
1 2.00 2.45
2 3.20 3.10
3 3.33 3.28
4 4.36 4.24


34. Excess demand and supply in the automobile industry is given by the following
respective equations:
Qxd = 15,000 – 300Px

Qxs = - 2,000 + 400Px
There will be excess demand if the unit price of each automobile is:
A. less than $24.29.

B. less than $130.00.
C. greater than $24.29
Correct Answer: A
Reference:
Equilibrium is reached when the demand and supply functions intersect; this
occurs at a price of $24.29.
15,000 – 300Px = - 2,000 + 400Px
Px = 17,000/700 = $24.29
Demand will exceed supply if the unit price of an automobile is lower than the
equilibrium price of $24.29. For instance, when the unit price is $24.00 demand
and supply is 7,800 and 7,600 units, respectively; i.e. there is an excess demand of
200 units.
35. Which of the following competitive market structures is most likely characterized
by a large number of potential buyers and sellers, low barriers to entry, and firms
with pricing power?
A. Oligopoly
B. Perfectly competitive
C. Monopolistically competitive
Correct Answer: C
Reference:


When markets are monopolistically competitive, there are a large number of

potential sellers and buyers, the market has low barriers to entry, and all firms
have some pricing power. In perfectly competitive markets sellers have no pricing
power. Oligopoly market structures are characterized by high barriers to entry and
exit.
36. The economic activity in a developing country has started to accelerate resulting
in higher domestic inflation. In order to maintain its exchange rate target, the
government’s actions will most likely lead to a (n):
A. increase in domestic money supply.

B. decrease in foreign currency reserves.
C. decrease in the cost of short-term borrowing.
Correct Answer: B
Reference:
In trying to maintain the exchange rate target, the government will need to sell
foreign currency reserves, thereby decreasing reserves, and buy domestic
currency. This will have the effect of reducing domestic money supply and raising
short-term interest rates (cost of borrowing).


37. A South African company undertook the following transactions, translated into
the South African Rand (ZAR), in the financial year 2013:
• Borrowed ZAR 50 million from a U.S. bank

• Purchased machinery worth ZAR 1.4 million from Japan
• Received ZAR 2.5 million interest income on Dutch fixed income
investments
• Issued ZAR 0.5 million worth of its corporate bonds to an investor in
Brazil.
• Acquired financial leases worth ZAR 1.1 million during the year.
• Total sales proceeds received on foreign sales amounted to ZAR 48.8
million.
The total value of the transactions reflected in the current account is closest to (in
ZAR millions):
A. 51.3.
B. 51.8.
C. 99.3.
Correct Answer: A
Reference:
The value of the transactions reflected in the current account balance is ZAR 51.8
million ZAR (2.5 + 48.8) million.
Foreign borrowing, debt issues, and purchase of machinery are all transactions
reflected in the financial account while the acquisition of leases is reflected in the
capital account.


38. Grace Singh is a research analyst based in Australia. She is attempting to forecast
exchange rate movements using data collected in the exhibit:
Expected Spot Rate

Spot rate in One Year
AUD/GBP 1.8255 1.8010
GBP/EUR 0.8141 0.8350
GBP/MXN 0.0460 0.0602
Based on the data in the exhibit, the expected appreciation in the EUR against the
MXN over the next year is closest to:
A. – 21.63%.
B. + 2.57%.
C. + 34.23%.
Correct Answer: A
Reference:
MXN/EUR (Spot) = 0.8141 × (1/0.0460) = 17.6978

MXN/EUR (Expected) = 0.8350 × (1/0.0602) = 13.8704
Percentage change in MXN/EUR = (13.8704/17.6978 – 1) = - 21.63%
39. Firms operating in perfectly competitive markets will maximize profits if:
A. total revenues at least cover total costs.

B. marginal revenues exceed marginal costs.
C. total revenues at least cover variable costs.
Correct Answer: A
Reference:
A firm operating in a perfectly competitive market will maximize profits if total

revenue is greater or equal to total costs, that is, both fixed and variable costs are
covered and marginal revenues equal to marginal costs.


40. A-Tech is the sole software developer in its country’s market. The total revenue,
marginal revenue and cost functions of the developer are as follows:
Total revenue = 1,500QD – 12.5Q2D

Marginal revenue = 1,500 – 25QD
Marginal cost = 650 + 10QD
A-Tech’s profit will be maximized if its level of output equals:
A. 2 units.
B. 24 units.
C. 57 units.
Correct Answer: B
Reference:
Profit will be maximized when marginal revenue equals marginal cost. This will
occur when the level of output is equal to 24 units (see below).
1,500 – 25QD = 650 + 10QD

850 = 35QD
QD = 24.2857 units or approximately 24 units
41. Green Alliance operates in an industry in which an increase in product demand

has led to an increase in short-run economic profits. Cost of production has
increased as a consequence of an increased demand for resources by companies
entering the industry. The recent industry changes have forced industry
participants to revise product prices upwards in light of output expansion.
The slope of Green Alliance’s supply curve in the long run is most likely:
A. flat.
B. positive.
C. negative.
Correct Answer: B


Reference:
The slope of Green Alliance’s long run supply curve is upward sloping. Higher
production costs due to larger number of competitors entering the industry imply
that market prices must rise to cover input costs producing a positive slope.
42. Which of the following factors will most likely influence the success of a
collusive agreement?
A. Degree of regulation
B. Severity of retaliation
C. Availability of substitutes
Correct Answer: B
Reference:
Among the listed factors, only the strength of retaliation has the potential to
influence the success of a collusive agreement; oligopolists will be less likely to
break the agreement if the threat of retaliation by other firms in the market is
severe.
43. The sustainable growth rate of potential GDP is calculated as the sum of the
growth rates in labor, capital and:
A. real GDP.
B. technology.
C. natural resources.
Correct Answer: B
Reference:
The sustainable growth rate of potential GDP is equal to the sum of growth rates
in technology, labor, and capital.


44. In December 2011 the value of the Fisher and Paasche index was 115.6 and 125.1
respectively. The value of the price index when the consumption basket is held
constant was closest to:
A. 106.82.
B. 120.26.
C. 135.38.
Correct Answer: A
Reference:
The price index when the components of the consumption basket are held
constant is known as the Laspeyres’ index (IL).
Fisher index = I p × IL
2
IL = (115.6) ÷ 125.1 = 106.82


45. An equity investor is utilizing the following metrics to screen stock investments:
• P/BV < 0.69.

• Dividend yield ≥ 3.5%
• NI/Sales ≥15%
Given the screening criteria, the equity investor is most likely a:
A. Value investor.
B. Growth investor.
C. Market-oriented investor.
Correct Answer: A
Reference:
A low P/BV ratio and a high dividend yield is an indication of value investing.
46. TS Associates issues $1,000,000 face value of ten-year bonds dated January 1,
2010. The total interest expense on the bonds for the ten-year period is $653,123
while the annual coupon rate is 6%. Using the straight-line method, the interest
expense for the fiscal year 2012 is closest to:
A. $54,877.
B. $60,000.
C. $65,312.
Correct Answer: C
Reference:


Total interest payments = $1,000,000 × 6% × 10 = $600,000
Given that total interest expense exceeds interest payments, the bonds are issued
at a discount of $53,123 ($653,123 – $600,000). The discount would be amortized
by $5,312 ($53,123/10) each year under the straight line method. Annual interest
expense is thus equal to $65,312 ($60,000 + $5,312).
47. Which of the following ratios will least likely be affected by a company’s choice
of the fair value over cost model for reporting long-lived assets (assuming fair
value is always higher than carrying value) over the long-term?
A. Debt-to-equity
B. Interest coverage
C. Cash flow to revenue
Correct Answer: C
Reference:
A company’s decision to choose one reporting model over the other in the case of
long-lived assets will affect the debt-to-equity ratio and return on assets ratio but
not the cash flow to revenue ratio. Revaluation gains or losses and the associated
depreciation charges do not impact cash flows or revenues.
Interest coverage ratio will be higher if the cost model is used provided fair value
always exceeds carrying value and consecutively increases; this is because
depreciation charges will be lower for the latter. A lower depreciation charge
translates into higher operating profit and interest coverage ratio. The debt-to-
equity ratio will be affected as all revaluations will be recorded as part of the
revaluation surplus in equity.


48. On January 1, 2012 TRX Associates purchased a component. Tim Rubin, TRX
Associates’ chief financial analyst, is of the option that the component’s balance
sheet value may need to be reduced. Rubin collects relevant financial information
Exhibit: Relevant Financial Information for the Component

Carrying amount £423,000
Undiscounted expected future cash flows £420,000
Present value of expected future cash flows £415,000
Fair value £455,000
Costs to sell £28,000
If TRX prepares and presents its financial statements in accordance with IFRS,
Rubin is most likely:
A. Incorrect.
B. correct; the component will be valued at £415,000.
C. correct; the component will be valued at £420,000.
Correct Answer: A
Reference:
Under IFRS, an asset is impaired if the carrying amount of the asset exceeds its
recoverable amount with the latter equal to the higher of fair value less costs to
sell and value in use (present value of expected future cash flows).
Fair value less costs to sell = £455,000 – £28,000 = £427,000
Given that fair value less costs to sell is higher than present value of expected
future cash flows, value in use will equal to £427,000. The component is not
considered impaired because the value in use is greater than the carrying amount
of £423,000. Therefore, the component’s value will not be reduced.


49. The notes to a company’s financial statements disclose the present value of lease
payments relating to the next five years as $35,000. These payments concern an
operating lease,which the company had entered into two years ago. If the
company’s total assets and equity are $450,000 and $300,000, respectively, the
debt-to-equity ratio after capitalizing the effect of the lease transaction equals:
A. 50.0%.
B. 61.7%.
C. 74.4%.
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 32, LOS i & l
Total debt (before including lease payments) = $450,000 – $300,000 = $150,000

Debt-to-equity ratio (including lease payments) = ($150,000 + $35,000)/$300,000
= 61.67%
50. One of Silvex Corp.’s assembly machines was revalued upwards giving rise to
deferred tax effects. The company will most likely classify the associated tax
effects as an adjustment to total:
A. assets.
B. equity.
C. liabilities.
Correct Answer: B
Reference:
Since the revaluation is classified in equity (as part of revaluation surplus) the
associated deferred taxes will be recognized as direct adjustments to total equity.


51. An analyst has collected information for two companies in the paint
manufacturing industry, Violet and Technard.

Violet and Technard
Violet Technard
ROE 14.5% 13.3%
Asset turnover 1.6 1.8
Which of the following reasons most likely justifies why Violet has a higher
ROE? Higher:
A. efficiency.
B. return on assets.
C. financial leverage.
Correct Answer: C
Reference:
Technard reports higher financial leverage (see below) and so Violet’s higher
ROE cannot be attributed to this measure.
ROE = ROA × Financial leverage

Financial leverage (Violet) = 14.5%/12.32%* = 1.18
Financial leverage (Technard) = 13.3%/10.98%* = 1.21
Relative to Technard, Violet reports lower efficiency (as measured asset

turnover); therefore, higher return on equity cannot be attributed to this factor.
Violet’s higher return on equity can be attributed to higher return on assets (see
below).
*Return on assets = Asset turnover × EBIT margin
Return on assets (Violet) = 1.6 × 7.7% = 12.32%
Return on assets (Technard) = 1.8 × 6.1% = 10.98%


52. The write-off of a particular account receivable is reflected by reducing:
A. bad debt expense.

B. sales returns and allowances.
C. allowance for doubtful accounts.
Correct Answer: C
Reference:
The write-off of an accounts receivable is reflected by reducing allowance for

doubtful accounts and accounts receivable by the same amount. The other two
accounts, bad debt expense and sales returns and allowances, are not affected.
53. TSO Limited reported the following information for the fiscal year 2013:
Exhibit
Beginning retained earnings $45,550
Cash dividends paid $1,200
Equity $85,350
Contributed capital $36,155
Operating income $7,520
Taxes paid $2,140
Based on the information presented, reported net income for 2013 is closest to:
A. $2,445.
B. $4,845.
C. $5,380.
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Sessions 7 & 8, Readings 23 & 27, LOS b & d


Ending retained earnings = Assets – Liabilities – Contributed capital or,

Ending retained earnings = Equity – Contributed capital = $85,350 – $36,155 =
$49,195
Cash dividends paid = Beginning retained earnings + Net income – Ending

retained earnings
Net income = $1,200 – $45,550 + $49,195 = $4,845
54. According to the Conceptual Framework’s qualitative characteristics of financial

reports, information that is materially misstated is not:
A. relevant.
B. consistent.
C. faithfully represented.
Correct Answer: A
Reference:
According to the Conceptual Framework’s qualitative characteristics, information

that is materially misstated is not relevant; this is because such information can
affect a user’s decisions.
Faithful representation is another qualitative characteristic but does not discuss

the concept of materiality. Information that faithfully represents an economic
phenomenon that it purports to represent is ideally complete, neutral, and free
from error.


55. Arc Inc. has entered into a five-year contract to construct a new production plant
on January 1, 2013 at a contract price of £63,500. The estimated costs to complete
the project are £55,000. The exhibit below illustrates the estimated project
completion percentage over the life of the project. Arc Inc. complies with IFRS
with respect to financial reporting.
Exhibit:
Estimated Completion
Year Percentages (%)
1 20
2 15
3 5
4 40
5 20
Total 100
If the estimated loss in the second year of the project is $500, the profit reported
in the second year of the project using the percentage-of-completion method is
closest to:
A. £775.
B. £1,275.
C. £2,475.
Correct Answer: A
Reference:


A loss is reported in the same year it is expected regardless of whether the IFRS
or U.S. GAAP are being followed.
At the end of year 1, project revenues and costs total £12,700 (£63,500 × 0.20)
and £11,000 (£55,000 × 0.20) respectively. By the end of the second year, 35% of
the project is complete and total project revenues and costs to date are £22,225
(£63,500 × 0.35) and £19,250 (£55,000 × 0.35), respectively. Given that 20% is
already recognized, £9,525 (£22,225 – £12,700) of project revenues and £8,250
(£19,250 – £11,000) is respectively recognized in the second year.
After accounting for losses, net income generated in the second year equals £775
(£9,525 – £8,250 – £500).
56. Standard-setting bodies:
A. are self-regulated organizations.

B. can recognize the standards they set.
C. exert control over entities that participate in the capital markets of their
jurisdiction.
Correct Answer: A
Reference:
Standard-setting bodies are typically self-regulated organizations and are

responsible for setting standards only. These bodies cannot enforce standards nor
can they recognize the standards they set; Option B and C represent the
responsibilities of standard-setting bodies.
Regulatory authorities have the legal authority to exert control over the entities
that participate in capital market within their jurisdiction.


57. Xilta, a surgical equipment manufacturer, is constructing a new building for its
administrative staff. Total construction costs amount to $450,000. Xilta has
acquired a three-year loan at an interest rate of 6% to finance the construction.
Only 5% of the loan proceeds are required for the first few months and so the
company invests the remaining proceeds at an annual interest rate of 5% for eight
months.
Ignoring any compounding effects, the total amount of interest to be capitalized

under:
IFRS? U.S. GAAP?

A. $12,750 $27,000
B. $66,750 $81,000.
C. $81,000 $81,000.
Correct Answer: B
Reference:
Under IFRS any income earned on temporarily investing the borrowed funds is
deducted from the amount eligible for capitalization. This is not the case for U.S.
GAAP where the full amount of interest expense is capitalized.
Interest income = $450,000 × 0.95 × 5% × 8/12 = $14,250

Amount of interest eligible for capitalization (IFRS) = ($450,000 × 6% × 3) –
$14,250 = $66,750
Amount of interest eligible for capitalization (U.S. GAAP) = ($450,000 × 6% × 3)

= $81,000
58. Which of the following items will most likely be higher if a lease is operating as
opposed to financing in nature under U.S. GAAP?
A. Total asset turnover

B. Financing cash outflows
C. Net income in the later years
Correct Answer: A


Reference:
Total asset turnover will be higher if a lease is reported as operating. This is

because, unlike finance leases, the associated leased asset is not reported on the
balance sheet. With a lower total assets balance, this reported measure is higher
when leases are operating in nature.
The net income reported in the later years of a lease term is higher when leases
are financing in nature; this is because the sum of depreciation charges and
interest expenses is lower relative to the rental under operating leases. A major
part of the asset has been depreciated as well as the lease liability reduced due to
lease payments reducing the lease liability reported under finance leases.
Financing cash outflows are higher under finance lease because the portion of the
lease payment that reduces the carrying amount of the lease liability will be
reflected as a financing cash outflow rather than an operating cash outflow. Lease
rentals are reported as operating cash outflows under operating leases.
59. The exhibit below illustrates selective financial information for Hoarce Inc. for
the fiscal years 2012 and 2013.
Exhibit
2013 2012
Total assets $500,000 $615,000
Revenue $45,850 $51,200
Total equity $325,000 $300,000
Based on the information presented above, which of the following statements is

most likely correct? Hoarce Inc.’s:
A. efficiency has improved.

B. solvency position has deteriorated.
C. need for capital to fund current assets has increased.
Correct Answer: A


Reference:
Measure Ratio 2013 2012

Total asset $45,850/$500,000 $51,200/$615,000
Efficiency turnover = 9.17% = 8.33%
Total debt- ($500,000 – ($615,000 –
Solvency to-equity $325,000)/$325,000 $300,000)/$300,000
= 53.8% = 105.0%
Haorce Inc.’s efficiency and solvency positions have improved as evidenced by

the respective increase in total asset turnover and decline in total debt-to-equity.
A company’s need for capital to fund current assets is measured by the net
operating cycle. There is insufficient data to determine this measure.
60. The use of periodic versus perpetual inventory systems will result in the same
value for cost of sales and ending inventory using the:
A. FIFO and LIFO method.

B. FIFO and specific identification method.
C. FIFO and weighted average cost method.
Correct Answer: B
Reference:
The use of the periodic versus perpetual inventory systems will result in the same
value for cost of sales and ending inventory using the specific identification and
FIFO method of inventory valuation.
The choice of system will affect the ending inventory and cost of sales when
either the LIFO or weighted average cost method is used.


61. The exhibit below illustrates selective financial information for Thompson Walsh
for the financial years 2013 and 2014.
Exhibit
Current assets 48 45
Revenue 85 80
Based on the information presented in the exhibit, Thompson Walsh’s efficiency:
A. has improved.
B. has deteriorated.
C. cannot be interpreted based on the information presented.
Correct Answer: C
Reference:
The company’s working capital has declined to a negative value, ($48 million –
$50 million = - $2 million), in the year 2014. A negative working capital produces
a working capital ratio that cannot be interpreted.


62. ARDA Associates has reported two transactions for the financial year ending
2013. The applicable tax rate is 30%.
Transaction 1: Payment of $300,000 as advanced rent at the end of the year. Tax
authorities require advanced rent to be taxed on a cash basis.
Transaction 2: A company purchased machinery worth $100,000 on January 1,

2013. The useful life of the machine is 25 years and the machine is depreciated
using the straight-line method for accounting purposes. Tax authorities require the
double declining method be used for depreciation purposes. The machine has a
zero salvage value.
transactions?
A. Transaction 2 will give rise a deferred tax liability of $1,200.

B. Transaction 2 will give rise a deferred tax liability of $4,000
C. Transaction 1 will give rise a deferred tax liability of $300,000.
Correct Answer: A
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 31, LOS b & c
Transaction 1 will give rise to an asset account (prepaid rent) with a carrying
amount of $300,000 and a tax base of $0; a temporary taxable difference will
arise which will equal $300,000. Since the carrying amount of the asset is greater
than its tax base, a deferred tax liability equal to $90,000 ($300,000 × 30%) will
be recognized on the balance sheet.
With respect to Transaction 2, the carrying amount of the asset at the end of the
fiscal year 2014 is $96,000 [$100,000 – ($100,000 – $25,000)/4] while the tax
base is $92,000 [$100,000 – (1/25 × 2 × $100,000)]; this will give rise to a
deferred tax liability of $1,200 [($96,000 – $92,000) × 30%].


63. Dale Buchanan is a credit analyst evaluating the debt repaying ability of two
companies in the same industry, Rax Limited and Halt. The exhibit below
includes selective financial information with respect to the two companies.
Exhibit
Rax Limited Halt
Operating earnings 45 30
Interest payments 12 13
Total debt 35 25
Which company demonstrates a greater ability to service debt?
A. Halt Limited due to lower financial leverage.

B. Rax Limited due to lower interest payments.
C. Rax Limited due to a higher interest coverage ratio.
Correct Answer: C
Reference:
All $ figures are in millions
Based on the information presented, the ability of either company to service its
debt is measured by the interest coverage ratio (Operating earnings or
EBIT/interest payments).
Rax Limited (Interest coverage ratio) = $45/$12 = 3.75
Halt (Interest coverage ratio) = $30/$13 = 2.31
Although lower interest payments serve to reduce a company’s interest coverage

ratio, it is not a direct measure of debt repayment capability.
The leverage ratio measures the degree of financial risk in a company’s capital
structure and is not relevant in measuring debt repayment capability.


64. The exhibit below demonstrates inventory value assessments for Targer Limited
for the fiscal year ended December 31, 2012. On January 2, 2013 the inventory
was revalued.
Exhibit: Inventory Value Assessments (2012-2013)
Carrying value – January 1, 2012 £100,000

Market value – July 13, 2012* £85,000
Carrying value – December 31, 2012 £80,000
Revaluation – January 2, 2013 £110,000
*Market value is equal to the net realizable value
On the date of revaluation, the inventory will be valued at an amount equal to:
A. £80,000.
B. £105,000.
C. £110,000.
Correct Answer: B
Reference:
On July 13, 2012 the inventory was written down to its market value of £85,000
and an impairment loss of £25,000 would have been recorded on the income
statement. On the date of revaluation, the inventory increased by £30,000
(£110,000 – £80,000) in value. However, the upwards revaluation will be limited
to the impairment loss; thus inventory will be valued at £105,000 (£80,000 +
£25,000) on January 2, 2013.


65. On its balance sheet, ARC Limited reports a deferred tax asset arising from the
different depreciation methods being used for financial reporting and tax
purposes. After further assessment concerning future recoverability, ARC Limited
reduces the carrying amount of the asset using a valuation allowance.
At the end of the financial year Lindsay Smart reassesses the valuation allowance
and determines that any uncertainty concerning future recoverability has been
alleviated. Smart will most likely reverse the valuation if the firm complies with:
A. IFRS but not U.S. GAAP.

B. U.S. GAAP but not IFRS.
C. neither U.S. GAAP nor IFRS.
Correct Answer: B
Reference:
CFA Level I, Volume 3, Study Session 9, Reading 31, LOS g & j
The recognition of a valuation allowance is only applicable under U.S. GAAP

whereby a deferred tax asset is recognized in full but reduced by a valuation
allowance if all or some of the deferred tax asset will not be realized. Subsequent
to initial recognition, should circumstances change such that the valuation
allowance is reduced, the reversal will increase deferred tax asset and operating
income.
Under IFRS, a deferred tax asset is recognized only if it is probable the sufficient
taxable profit will be available against which the temporary difference can be
utilized; this suggests that a deferred tax asset will be recognized to the extent it is
recoverable.
66. Revenue from barter transactions will be measured under:
A. U.S. GAAP at the carrying amount of the asset surrendered.

B. IFRS on the basis of fair value of revenues from similar non-barter
transactions with unrelated parties.
C. U.S. GAAP on the basis of fair value if a company has not received cash
payments for such services in the past.
Correct Answer: B


Reference:
Under IFRS, revenue from barter transactions will be measured based on the fair
value of revenues from similar non-barter transactions with unrelated parties.
Under U.S. GAAP, revenue can only be recognized at fair value if a company has
received cash payments for such services in the past and can use its past
experience to determine fair value; otherwise revenue from barter transactions
will recognized at the carrying amount of the asset surrendered.
67. Qualitative characteristics that enhance the usefulness of relevant and faithfully
represented information include information:
A. not presented in a manner so as to bias a users’ decisions.

B. presented in a consistent manner across time and between entities.
C. which is understandable to a wide range of users including those with
minimal business knowledge.
Correct Answer: B
Reference:
Qualitative characteristics that enhance the usefulness of relevant and faithfully

represented information include information that is comparable; this implies that
information is consistent across time and between entities enabling users to make
comparisons more easily.
Financial reports, which are presented in such a manner so as not to bias a user’s
decisions are said to be faithful represented; this represents a qualitative (as
opposed to an enhancing) characteristic of financial reports.
Enhancing qualitative characteristics also include understandability; this implies

that information is prepared for and should be understandable by users who have
a reasonable knowledge of business and economic activities.


68. Unrealized gains or losses on available for sale securities are most likely excluded
from:
A. equity.
B. net income.
C. other comprehensive income.
Correct Answer: B
Reference:
Unrealized gains or losses on available for sale securities are excluded from net
income; however they are included in equity as a component of other
comprehensive income.


69. Natalie Brooks is contemplating an investment in the GR stock. She would like to
ensure that she is entitled to the first dividend payment upon purchase. The
corporation has declares a dividend of $2.50 on December 1. On December 3 the
share price will be reduced by the dividend per share and the stock will trade at
the reduced price. The dividend will be paid on December 15.
In order to receive dividends, Brooks should purchase shares of GR stock on:
A. December 2.
B. December 3.
C. December 15.
Correct Answer: A
Reference:
The ex-dividend date is the date on which shares first trade without the dividend.
This date corresponds to December 3. In order to be entitled to the declared
dividend, Brooks should own shares on or purchase shares before the ex-dividend
date; that is, she should have made her purchases by December 2.
70. The exhibit below summarizes key financial results for IAO Inc. for the years
2012 and 2013:
Exhibit
2012 2013
Degree of financial leverage 2.5 1.8
Operating income (in millions) $10.6 $11.2
Net revenues (in millions) $25.5 $20.2
Based on the information presented, the percentage change in net income is

closest to:
A. – 28.0%
B. – 9.6%.
C. + 10.2%.


Correct Answer: C
Reference:
Degree of financial leverage is measured as the percentage change in net income

relative to the percentage change in operating income.
Percentage change in net income

= DFL × Percentage change in operating income
= 1.8 × (11.2/10.6 – 1)
= 0.101889 or 10.2%
71. A company’s suppliers have modified its credit terms from 2/10 net 30 to 3/10 net
30. The impact of the change in credit policy will most likely:
A. increase the available cash flow.

B. lengthen the net operating cycle.
C. increase the number of days of payables.
Correct Answer: A
Reference:
A higher discount offered will prompt the company to pay off its accounts
payable more quickly. This will lengthen the net operating cycle (number of days
of inventory + number of days of receivables – Number of days of payables),
decrease the number of days of payables, as well as decrease the available cash;
the latter holds true because the company will be making payments to its suppliers
on an earlier date.


72. The exhibit below illustrates selective financial information for a manufacturing
concern for the years 2012 and 2013.
2013 2012
Current ratio 0.8 1.2
Quick ratio* 0.5 0.8
Current liabilities (in millions) $30.5 $32.7
Cost of goods sold (in millions) $15.6 $18.4
*Differs from the current ratio by excluding the inventory balance only.
The company’s number of days of inventory has most likely:
A. shortened by 4 days.
B. shortened by 55 days.
C. lengthened by 45 days.
Correct Answer: C
Reference:
The difference between the current ratio and quick ratio is equal to the inventory
divided by liabilities.
2013:
Inventory/current liabilities = 0.8 – 0.5 = 0.3
Inventory = 0.3 × $30.5 million = $9.15 million
Days of inventory on hand = Inventory/(Cost of goods sold/365) =

$9.15/($15.6/365) = 214.09 days
2012:
Inventory/current liabilities = 1.2 – 0.8 = 0.4
Inventory = 0.4 × $32.7 million = $13.08 million
Days of inventory on hand = $13.08 million/($18.4 million/365) = 259.47 days
The number of days of inventory on hand has increased by approximately 45 days

(259 – 214).


73. Karl Salone is the chief financial officer at T.R. Enterprises. While evaluating the
company’s liquidity position, Salone makes the following observations:
Observation 1: The company routinely pays its vendors prior to the stated due
dates.
Observation 2: Following the recent deterioration in economic conditions,

arranging short-term borrowing is more restrictive in terms of
both availability and cost.
Observation 3: Due to technological advances in the industry, a significant

proportion of T.R. Enterprises’ inventory has become obsolete.
How many of the above observations reflect a drag on liquidity?
A. 1
B. 2
C. 3
Correct Answer: B
Reference:
Observation 1 reflects a pull on liquidity while observations 2 and 3 reflect a drag

on liquidity.
By paying vendors prior to the stated due date, T.R. Enterprises will forgo the use
of funds representing a pull on liquidity.
When access to capital becomes scarce, this reflects a drag on liquidity.

Obsolete inventory ties up a company’s funds by increasing storage and other
interest costs; this represents a drag on liquidity.
74. Relative to a stock dividend, a cash dividend:
A. decreases the current ratio.

B. does not affect financial leverage ratios.
C. has no economic impact on company value.
Correct Answer: A


Reference:
Cash dividends affect a company’s capital structure while stock dividends have
no economic impact on a company. Unlike cash dividends, a company does not
have to pay additional money when issuing stock dividends.
Cash dividends affect a company’s financial leverage ratios as retained earnings

(component of equity) is reduced. This increases the degree of leverage.
Cash dividends decrease the current ratio as the company needs to pay cash for
issuing this dividend. An outflow of cash reduces total current assets and the
numerator of the current ratio.
75. Bill Somers, an equity analyst, is evaluating the stock of Westmore Associates.
Somers has collected the following data with respect to the Westmore stock and
equity market:
Exhibit:
Data Concerning the Market and Westmore Associates’ Stock
Return on equity 5%
Earnings per share $7.50
Market required rate of return 8%
Risk-free rate 3%
Forecasted next period’s price per share $25.50
Current price per share $22.35
The cost of equity (re) using the discounted dividend model (DDM) is closest to:
A. 16.76%.
B. 18.36%.
C. 18.74%.
Correct Answer: C
Reference:


The cost of retained earnings (re) is equal to the sum of the dividend yield and
sustainable growth rate.
re = D1/P0 + g
g = ROE × (1 – D/EPS) = 5% × (1 – $3.50/$7.50) = 2.6667%
re = ($3.50 × 1.026667)/$22.35 + 0.026667 = 0.18744 or 18.74%
76. The code of ethics covered by the codes of corporate governance least likely
prohibits:
A. donating cash to management.

B. management from holding company shares.
C. a compensation package dominated by the basic salary.
Correct Answer: B
Reference:
A strong code of ethics should encourage management to hold company shares.

This will help align the interests of management with shareholders and will more
than likely result in decisions being made which are in the best interests of the
latter.
A strong code of ethics will prohibit the use of corporate assets by insiders for
personal reasons. This includes lending cash to insiders.
A strong code of ethics will also prohibit compensation packages dominated by

the fixed basic salary. In order to incentivize management, a greater proportion of
the compensation package should be variable and performance based with a focus
on maximizing shareholder wealth.


77. The market price of Yacto’s stock decreased by $2 over the financial year 2013. If
the share price at the beginning of the year was $52.50, what dividend yield must
the company maintain to ensure total return is equal to 15%?
A. 3.81%.
B. 11.19%.
C. 18.81%.
Correct Answer: C
Reference:
Total return = (Pt – Pt – 1 + Dt)/Pt – 1

The total return can be separated into the price return and dividend yield.
Price return = – $2/$52.50 = – 0.03810 or – 3.8095%
Dividend yield = Dt/Pt – 1
Dividend yield = 15.000% – (– 3.8095%) = + 18.8095%
78. A trader who purchases a global registered share will most likely:
A. not need to be concerned with currency conversions.

B. be able to track the performance of the underlying index.
C. have an indirect, economic interest in a foreign company.
Correct Answer: A
Reference:
A trader who purchases a global registered share need not be concerned with
currency conversions as the same share is quoted and traded in different
currencies.
An ETF represents a portfolio of depository receipts that tracks an index while a

global registered share represents an actual (and not indirect) ownership interest
in a company.


79. ABC Limited has reported a return on equity, net profit margin and financial
leverage ratio of 15.0%; 0.32; and 2.5 respectively. Asset turnover of ABC
Limited is closest to:
A. 0.12.
B. 0.19.
C. 18.75%
Correct Answer: B
Reference:
CFA Level 1, Volume 4, Study Session 14, Readings 50, LOS a.
ROE = Net profit margin × Asset turnover × Financial leverage
Asset turnover = ROE ÷ (Net profit margin × Financial leverage)

= 0.15 ÷ (0.32 × 2.5) = 0.18750
80. Blake Associates is a financial services firm operating in a fragmented industry.

Lucas Mathews, a market analyst, determines that the structure of the industry
will have implications for the company’s market share, coordination among
industry players, and price competition in the industry.
Which of the following conclusions is most likely valid concerning industry

structure?
A. Price competition is fierce.

B. The relationship among industry players is cooperative.
C. A small increase in Blake’s market share can significantly increase its
profitability.
Correct Answer: A
Reference:


A fragmented industry is highly competitive due to several reasons. Firstly, the

large number of players makes coordination difficult because there are too many
competitors for industry members to monitor effectively. Secondly, each player
has a small piece of the market’s share and any attempt to increase market share,
even by a small amount, will not bring a significant change to a company’s
fortunes.
81. An analyst has collected the following information concerning a value weighted
index:
Beginning of End of Period

Period
Security Price ($) Shares Price ($) Shares
A 45.56 100 51.87 100
B 61.05 200 67.00 200
C 88.07 300 91.35 300
The return on the index is closest to:
A. 6.50%.
B. 7.42%.
C. 18.51%.
Correct Answer: A
Reference:
The value of the index is the change in market capitalization over the period:
Beginning market capitalization = ($45.56 × 100) + ($61.05 × 200) + ($88.07 ×
300) = $43,187.00
Ending market capitalization = ($51.87 × 100) + ($67.00 × 200) + ($91.35 × 300)

= $45,992.00
Return = ($45,992.00/$43,187.00) – 1 = 6.50%


82. A brokered market:
A. is organized as an order-driven market.

B. uses a crossing network to organize market trades.
C. is the platform for trading unique and infrequently traded instruments.
Correct Answer: C
Reference:
A brokered market is one in which brokers arrange trades among their clients.
They organize markets for which organizing a trade is difficult because
instruments are unique, infrequently traded and/or expensive.
An order-driven market is not organized for these instruments because few traders
would submit orders to brokers operating in such markets.
83. Sylvia Perez has purchased a 3-month put option with an exercise price of $35.00
by paying $5.50. The purpose behind the option purchase is to protect her
investment from adverse price movements. Perez will exercise the option if the
share price:
A. rises above $35.00.

B. declines below $35.00.
C. declines below $40.50.
Correct Answer: B
Reference:
A put option is exercised when the market price of the stock declines below the
exercise price. In Perez’s case, she will exercise her put option when the share
price declines below $35.00.


84. The exhibit below illustrates the limit order book for the Japanese equity market:
Exhibit:
Japanese Equity Market’s Limit Order Book
Bid Size Limit price (¥) Offer Size
172.68 10
168.90 12
163.57 8
160.00 5
14 158.42
16 151.75
7 146.89
9 145.63
The market bid-ask spread is closest to:
A. 1.58.
B. 16.68.
C. 27.05.
Correct Answer: A
Reference:
The market bid-ask spread is equal to the difference between the best bid (highest
bid price) and best offer (lowest offer or ask price). The market bid-ask spread in
the Japanese equity market is 1.58 (160.00 – 158.42).
85. In contrast to public equity firms, the private equity firm:
A. operates in larger, unregulated markets.

B. management tend to focus on maximizing short-term results.
C. has less effective corporate governance policies and procedures.
Correct Answer: C
Reference:


Private equity firms score lower in terms of corporate governance effectiveness.
Since private equity firms hold investments of relatively longer holding periods,
management are better able to better manage their company for long-term value
creation. Thus, management is able to focus on the long-term. In the case of
public equity firms management is pressurized to focus on short-term results.
In contrast to public equity firms, private equity firms are not subject to the
stringent regulatory requirements often imposed on the former. Furthermore,
public equity markets are much larger than private equity markets.
86. In contrast to the method of fundamentals, the method of comparables:
A. does not consider the future.

B. is based on the law of one price.
C. is more sensitive to assumptions.
Correct Answer: B
Reference:
The method of comparables is based on the law of one price; identical assets
should sell for the same price.
A failure to consider the future is a criticism aimed at price multiples in general.

Multiples calculated from trailing or current values of the divisor do not consider
the future whereas forward price multiples do.
The method of fundamentals is sensitive to the assumptions used as it depends on

cash flow forecasts or discounting to present value. However, the method of
comparables involves comparing the price multiple of the subject company to a
benchmark and so is not sensitive to assumptions used.


87. Gem Inc. has paid a dividend of $4.55 in the current year. From next year
onwards, annual dividend will grow at an indefinite rate of 2%. The company’s
shareholders require an 8% return to compensate for the risk associated with
equity shares. The intrinsic value of the stock is closest to:
A. $75.83.
B. $77.35.
C. $78.90.
Correct Answer: B
Reference:
𝐷! 1 + 𝑔 $4.55(1 + 0.02)
𝑉! = = = $77.35
𝑟−𝑔 0.08 − 0.02
88. Lockwood Associates is a recently established financial services firm. The

company will not be paying its shareholders dividends in the near future due to
insufficient profits. The date for initiating dividend payments is highly uncertain.
Which model will be most suitable for valuing the intrinsic value of company
stock?
A. Free cash flow model

B. Gordon growth model
C. Dividend discount model
Correct Answer: A
Reference:
CFA Level 1, Volume 4, Study Session 14, Reading 51 , LOS f


Given that the company is not currently paying dividends and is not expected to in
the near future, a free cash flow model is the most optimal model to use for
valuing the intrinsic value of Lockwood’s stock.
The Gordon growth model is unsuitable because it generally assumes a perpetual

dividend growth rate. Lockwood Associates does not pay dividends and so this
model is unsuitable for valuing the company’s stock. The dividend discount
model assumes that the company is paying dividends and so is also unsuitable for
valuation purposes.


89. Which of the following derivative instruments entails default risk which is from
the short to the long only?
A. Swaps
B. Options
C. Forwards
Correct Answer: B
Reference:
In contrast to forwards and swaps, where either party could default to the other,
default risk in options is one-sided. The option buyer has no further obligations
beyond the payment of the premium upon contact initiation. However, the seller is
obligated to deliver if the buyer exercises the option. Therefore, the seller could
default to the buyer.
90. Which of the following statements most accurately describes margin in securities
and futures markets?
Margins in:
A. futures markets are set by federal regulators.

B. securities markets magnify the gains and losses on an investment.
C. securities and futures markets serve to reduce the amount required for
investment.
Correct Answer: B
Reference:
CFA Level 1, Volume 6, Study Session 17, Reading 60 LOS c


Margin in securities markets is viewed as a loan and is used to reduce the amount
of funds required for investment. Margin is also viewed as gearing and maximizes
the percentage gains and losses to an investor.
Margin requirements are set by clearinghouses in futures markets and by federal

regulators in securities markets.
Margin in the futures markets is viewed as a form of collateral. When a trader

enters into a futures market, (s) he must deposit margin; however the remaining
amount is not borrowed.
91. Which of the following factors will have the most significant and positive impact
on call option prices where the underlying is non-financial in nature?
Increase in:
A. volatility.
B. interest rates.
C. underlying cash flows.
Correct Answer: A
Reference:
Volatility has a significant impact on option prices. An increase in volatility will

increase call option prices because it increases both possible upside and downside
values of the underlying (a positive impact).
Interest rates do not have a significant impact on option prices when the
underlying is non-financial in nature (for example, the underlying is not a bond or
interest rate).
Since the underlying price is reduced by the present value of cash flows, an
increase in cash flows will reduce the lower bound of European call option prices.


92. Jacqueline Rogers holds shares with a current market price of $25 and would like
to protect her investment from a decline in value. She undertakes a protective put
strategy by purchasing 6-month options selling for $2.55 each with an exercise
price of $22. On the expiration date of the options, the market price declines to
$20.
The breakeven price of the share at expiration is closest to:
A. $22.55.
B. $24.55.
C. $27.55.
Correct Answer: C
Reference:
Breakeven price = (St*) = S0 + p0 = $25 + $2.55 = $27.55
93. Consider a put option selling for $4 in which the exercise price is $34 and the
price of the underlying is $36. If the price of the underlying at expiration is $37,
the profit for the option seller is closest to:
A. 0
B. $4
C. $7
Correct Answer: B
Reference:
Put value at expiration: − pT = −max(0, X − ST) = −(0, 34 − 37) = 0

Profit for put seller = − pT + po = −0 + 4 = $4
94. Over the counter derivatives are:
A. subject to the risk of default.

B. are guaranteed against default through the clearinghouse.
C. are guaranteed against decrease in value through the clearinghouse.


Correct Answer: A
Reference:
Option A is correct. Over the counter derivatives are subject to a greater risk of
default while exchange traded derivatives are guaranteed against default through
the clearinghouse.


95. Alex Cunningham is comparing three fixed-income securities held in his

investment portfolio. He would like to determine the issue offering the highest
interest yield. Details regarding the three issues are summarized in the exhibit
below:
Exhibit:
Details Concerning Fixed Income Issues
A B C
Full price per 100 of par value $98.85 $99.70 $103.30
Accrued interest $5.40 $3.10 $2.85
Coupon rate 3% 2% 3%
Coupon payment frequency Annually Quarterly Semi-annually
Which issue offers the highest interest yield?
A. A
B. B
C. C
Correct Answer: A
Reference:
Interest yield = Coupon payments/Flat price
Flat price = Full price – accrued interest
Interest yield (A) = $3/($98.85 – $5.40) = 0.032103 or 3.2103%

Interest yield (B) = $2/($99.70 – $3.10) = 0.020704 or 2.07040%
Interest yield (C) = $3/($103.30 – $2.85) = 0.0298656 or 2.98656%


96. A 5%, fifteen-year callable bond issue is priced at 98.56 per 100 of par value at
the time of issue. The par value of each bond is $1,000. The bond is first callable
on December 31, 2018 at a price of 105.34 of par value. Thereafter, call prices
will steadily decline being equal to 103.45 in the year 2019 and finally declining
to 100 in 2020, the year of maturity.
The call premium in 2018 is closest to:
A. $1.44.
B. $34.50.
C. $53.40.
Correct Answer: C
Reference:
Call premium = Price paid above par when the bond is first called
Call premium (2018) = ($105.34 – $100)/100 × 1,000 = $53.40
97. A deferred coupon bond:
A. is issued at a premium to par.

B. permits in kind interest payments.
C. provides tax advantages to the issuer.
Correct Answer: C
Reference:
Deferred coupon bonds are issued at a discount to par. They provide tax
advantages if the issuer is able to delay the taxes due on interest income, which is
typically first paid a few years after bond issuance.
A payment in kind bond gives the issuer the option to pay interest in kind or in
cash or a mixture of the two.


98. Karl Tatsimo invests in two bond issues; a two-year, 5.00% semi-annual coupon
payment corporate bond priced at 95.67 per 100 of par value and a three-year,
3.00% semi-annual coupon payment government bond priced at 93.45 per 100 of
par value.
The corporate bond’s annual yield-to-maturity stated on a semi-annual basis is:
A. equal to 7.37%.
B. equal to that of the government bond.
C. lower than that of the government bond.
Correct Answer: A
Reference:
The corporate government bond’s yield stated on a semi-annual basis is higher.

Corporate bond’s annual yield-to-maturity quoted on a semi-annual basis is
7.368% (3.684% × 2) or 7.37%:
2.5 2.5 2.5 102.50

95.67 = 1
+ 2
+ 3
+ , r = 3.684%
(1 + r ) (1 + r ) (1 + r ) (1 + r )4
The government bond’s annual yield-to-maturity quoted on a semi-annual basis is

5.394% (2.697% × 2):
1.5 1.5 1.5 1.50 1.50 101.50

93.45 = 1
+ 2
+ 3
+ 4
+ 5
+ , r = 2.697%
(1 + r ) (1 + r ) (1 + r ) (1 + r ) (1 + r ) (1 + r )6
99. Fixed-income securities that are issued with a maturity of less than one year are
most likely known as:
A. Eurobonds.
B. money market securities.
C. capital market securities.
Correct Answer: B
Reference:


Fixed-income securities with a maturity of less than one year are known as money
market securities. Fixed income securities with a maturity exceeding one year are
known as capital market securities.
Eurobonds are used to classify bonds by currency denomination as opposed to by

maturity.
100. In the event of company default, the debt category that will rank the highest is:
A. first lien debt.

B. second lien debt.
C. senior unsecured debt.
Correct Answer: A
Reference:
In the event of default, senior debt will rank higher than subordinated debt.
Within senior debt first lien debt holds a higher ranking relative to second lien
debt.
101. A risk of relying on credit agency ratings least likely include that they:
A. may be fallible.
B. overestimate event risk.
C. tend to lag bond prices and credit spread movements.
Correct Answer: B
Reference:


Risks in relying on agency ratings include:
• they may be fallible; historical events have confirmed that ratings agencies
did not see the accounting fraud being committed by companies.
• Idiosyncratic or event risk is difficult to anticipate and capture.
• Ratings tend to lag market pricing of credit. Bond prices and credit
spreads tend to move more quickly due to changes in perceived
creditworthiness than changes in the credit ratings.
102. The Jameson Foundation has a fixed income portfolio comprising of three
corporate bonds, A, B and C. The exhibit below summarizes details concerning
the fixed income portfolio:
Exhibit
A B C
Annual modified duration 3.4 7.8 12.3
Annual modified convexity 12.2 16.9 23.8
Price per par value 92.34 95.78 99.35
If the yield changes by 50 basis points, the security that will exhibit the greatest
percentage price change is:
A. A.
B. B.
C. C.
Correct Answer: C
Reference:


Bond C exhibits the greatest absolute percentage price change of 6.1203%.

⎡ 1 2 ⎤
%ΔPV Full = (− AnnModDur × ΔYield ) + ⎢ × AnnConvexity × (ΔYield ) ⎥
⎣ 2 ⎦
Full ⎡ 1 2 ⎤
%ΔPV A = (− 3.4 × 0.0050) + ⎢ × 12.2 × (0.0050) ⎥ = −0.016848
⎣ 2 ⎦
Full ⎡ 1 2 ⎤
%ΔPV B = (− 7.8 × 0.0050) + ⎢ × 16.9 × (0.0050) ⎥ = −0.03879
⎣ 2 ⎦
Full ⎡ 1 2 ⎤
%ΔPVC = (− 12.3 × 0.0050) + ⎢ × 23.8 × (0.0050) ⎥ = −0.061203
⎣ 2 ⎦
103. Which of the following prices is most likely quoted by dealers?
A. Clean price
B. Matrix price
C. Invoice price
Correct Answer: A
Reference:
The clean price is quoted by dealers. This price is also known as the flat price or
quoted price.
The full price or invoice price is the price paid by the buyer and received by the
seller on the settlement date.


104. Based on the information provided in the exhibit below, Tower Two Inc.’s
interest coverage is closest to:
Exhibit
$ ‘000s
Gross profit 2,450
Operating expenses 950
Operating income 1,500
Interest expense 85
Interest income 20
A. 17.65x.
B. 21.41x.
C. 28.00x.
Correct Answer: B
Reference:
All $ calculations are in thousands.

Interest coverage ratio = EBITDA/Interest expense
EBITDA = Operating profit + Depreciation and amortization
Interest coverage ratio = ($1,500 + $320)/$85 = 21.41x
105. Relative to an option-free, a putable bond will most likely:
A. trade at a higher yield.

B. trade at a higher price.
C. is associated with a higher reinvestment risk.
Correct Answer: B
Reference:


Putable bonds can be exercised if interest rates rise after the issue date, thus
depressing the bond price. Bondholders can put the bond back to the issuer and
get cash. This cash can be reinvested to earn a rate of interest in line with the
higher market interest rates; this will also serve to lower reinvestment risk.
Since the put provision has value to bondholders, the price of a putable bond will
be higher than the price of an otherwise similar bond issued without the put
provision. Similarly, the yield on a bond with a put provision will be lower than
the yield on an otherwise similar non-putable bond.
Putable bonds have lower reinvestment risk relative to option-free bonds (see
above).
106. An investor purchases a 2-year, 10% annual coupon payment corporate bond at a
market discount rate of 5%. The forward curve for one-year rates is demonstrated
Exhibit
Time period Forward rate
0y1y 1.0535%
1y1y 2.7984%
2y1y 3.0367%
3y1y 4.7842%
Using the forward rates, the price of the corporate bond per 100 of par value is
closest to:
A. $109.30.
B. $113.32.
C. $115.78.
Correct Answer: C
Reference:


Firstly, spot rates for the first three years need to be determined.
The implied one-year spot rate (z1) is 1.0535%
The two-year implied rate (z2) is 1.9222%:
(1 + z2)2 = [(1+ 1.0535%) × (1 + 2.7984%)] = [(1.0105) × (1.0280)]

(1 + z2)2 = 1.0388
(1 + z2) = 1.0192
z2 = 0.019222 or 1.9222%
10 110
Price of the bond = 1
+ 2
= 115.7858
(1.010535) (1.019222)


107. The exhibit below illustrates real estate valuation data collected by Simone Irk, an
investment analyst. The data collected by Irk concerns real estate investment
trusts (REITs). The analyst would like to employ a direct capitalization approach
when comparing the relative valuations of the three REITs (A, B and C).
Exhibit:
Valuation Data Concerning REIT A, B, and C
Net Gains Recurring
REIT Funds from from Sales Capital Capitalization
operations of Real Estate Expenditures Rate
A $35,000 $4,200 $12,000 5%
B $80,000 $12,400 $28,000 8%
C $75,000 $9,900 $33,500 6%
Using adjusted funds from operations (AFFO), the REIT with the highest
valuation is:
A. A.
B. B.
C. C.
Correct Answer: C
Reference:
AFFO = Funds from operations + recurring capital expenditures
Value = AFFO/Capitalization rate
Value (REIT A) = ($35,000 – $12,000)/0.05 = $460,000
Value (REIT B) = ($80,000 – $28,000)/0.08 = $650,000
Value (REIT C) = ($75,000 – $33,500)/0.06 = $691,667


108. The most suitable measure for evaluating the performance of alternative
investments, in general, is the:
A. Sharpe ratio.
B. Sortino ratio.
C. value added risk (VAR).
Correct Answer: B
Reference:
There are several performance evaluation issues associated with alternative

investments with one being that they do not exhibit normal distribution of returns
and so standard deviation cannot be used as a risk measure. Investment returns
can be leptokurtic and negatively skewed which requires downside risk measures
to be used such as the Sortino ratio. This ratio uses downside deviation rather than
standard deviation to measure the probability that the portfolio return will fall
below some minimum acceptable return.
The Sharpe ratio is an inappropriate risk-return measure for the reason that it uses
standard deviation in its denominator. Similarly, VAR when calculated using
standard deviation will underestimate the VAR for a negatively skewed return
distribution.
109. When commodity futures prices are higher than spot prices, the futures market is
said to be in a state of:
A. contango and the convenience yield is low.

B. contango and the convenience yield is high.
C. backwardation and the convenience yield is low.
Correct Answer: A
Reference:
When commodity futures prices are higher (lower) than spot prices, the futures
market is said to be in a state of contango (backwardation) and convenience yields
are low or negligible (high).


110. The characteristics that make a company particularly attractive as an LBO target
least likely include a firm:
A. with depressed stock price.

B. that is inefficiently managed.
C. with weak & unsustainable cash flows.
Correct Answer: C
Reference:
The characteristics that make a company particularly attractive as an LBO target

include:
• undervalued/depressed stock price

• willing management
• inefficiently managed companies
• strong and sustainable cash flows
111. A hedge fund with $120 million of initial investment, 2-20 fee structure and a
hurdle rate of 5%, earned 35% return at year end. Assuming management fee is
based on assets under management at year end and incentive fee is calculated net
of management fee and is based on return in excess of the hurdle rate, an
investor’s net return in $ terms is closest to:
A. $15.12 million
B. $27.40 million
C. $32.88 million
Correct Answer: C
Reference:


Management Fees = $120 million × 2% = $2.4 million

Hurdle rate = $120 million × 5% = $6 million
Incentive Fees = ($162 − $120 – $6 − $2.4)million × 20% = $6.72 million
Total Fees = $2.4 million + $6.72 million = $9.12 million
Investment Return in $ terms = ($162 −$120 −$9.12)million = $32.88 million
($"#$ !$"#$ !$".!")!"##"$%

Investment Return in % terms = $"#$ !"##"$%
= 27.40%
112. An analyst listed the following characteristics of alternative investments as an

asset class in general.
1. Less transparency
2. High level of regulation
3. Narrow manager specialization
4. Potentially problematic historical risk and return data
How many characteristics he identified correctly?
A. 2
B. 3
C. 4
Correct Answer: B
Reference:
CFA Level 1, Volume 6, Study Session 18, Reading 61, LOS
The characteristics common to nay alternative investments include:
• Illiquidity of underlying investments

• Narrow manager specialization
• Low correlation with traditional investments
• Low level of regulation and less transparency
• Limited and potentially problematic historical risk and return data
• Unique legal and tax considerations


113. Maxine Carrell, a university professor, made the following statements during a
lecture:
Statement 1:“The capital allocation line joins the optimal risky portfolio and the
risk-free asset.”
Statement 2:“The portfolio of an optimal investor must lie on the capital

allocation line.”
Carrell is most likely correct with respect to:
Correct Answer: C
Reference:
Carrell’s both statements are correct.
The capital allocation line joins the optimal risky portfolio and the risk-free asset.
The portfolio of an optimal investor must lie on the capital allocation line.
114. Risk infrastructure most likely refers to:
A. The people and systems required to track risk exposures.

B. The top level system of structures, rights and obligations by which
organizations are controlled.
C. The extensions of risk governance into both the day-to-day operation and
decision making processes of the organization.
Correct Answer: A


Reference:
Risk infrastructure refers to the people and systems required to track risk
exposures and perform most of the quantitative risk analysis to allow an
assessment of the organization’s risk profile.
115. In contrast to open-end funds, a disadvantage of investing in closed-end funds is

that they:
A. have a limited ability to grow.

B. charge fees for investing in and redeeming from the fund.
C. may require the manager to liquidate assets for meeting redemptions at a
point in time when least desirable.
Correct Answer: A
Reference:
Closed-end funds have a limited ability to grow. This is because these funds do
not accept money for investment into the fund. New investors invest in the fund
by buying existing shares and investors liquidate by selling existing shares. Thus,
the number of outstanding shares does not change.
Load funds, another classification for mutual funds, charge investors fees for fund
investment and redemption.
A disadvantage of open-end funds is that the asset manager will need to sell assets
to meet fund redemptions. However, this may come at a time when the investor
may not want to redeem from the fund.


116. The exhibit below summarizes data concerning annual returns, annual standard
deviation and betas for an investor’s two asset portfolio. The portfolio’s expected
return is equal to 15%.
Exhibit:
Annual Annual Standard
Asset Return (%) Deviation (%) Beta
A 14 10 1.5
B 18 16 0.9
The amount invested in both assets is respectively closest to:
Asset A: Asset B:
A. 17% 83%
B. 42% 58%.
C. 75% 25%.
Correct Answer: C
Reference:
75% is invested in Asset A and 25% in Asset B where wA = weight of Asset A

and wB = weight of Asset B in the portfolio.
15 = (14) (wA) + (18)(1 – wA)

wA = 0.75
wB = 1 – 0.75 = 0.25


117. Mitchell Young holds an investment portfolio comprising two equity securities, A
and B. The portfolio is equally invested in the two securities. The exhibit below
summarizes annual risk and return data concerning Young’s portfolio:
Exhibit
Security Annual Annual Standard
A 22 17
B 16 13
If the covariance of returns between the two securities is – 0.0157, the correlation
between the two securities is closest to:
A. – 0.71.
B. – 0.44.
C. + 0.19.
Correct Answer: A
Reference:
Cov RA , RB = p RA , RB σ Aσ B
− 0.0157
p R A , RB = = −0.710407
0.17 × 0.13
118. The slope of the capital allocation line (CAL) is measured using the:
A. Sharpe ratio.
B. Treynor ratio.
C. information ratio.
Correct Answer: A
Reference:
CFA Level 1, Volume 4, Study Session 12, Reading 44, LOS b & h


With total return on its y-axis, the risk-free rate of return as the intercept, and total
risk (standard deviation) on its x-axis, the slope of the CAL is the Sharpe ratio.
119. The exhibit below summarizes risk, return and beta information concerning the
Lightman Foundation’s investment portfolio.
Exhibit:
Annual Standard Weight in
Stock Deviation (%) Beta Portfolio (%)
A 23.5 1.5 25
B 9.4 0.6 30
C 8.5 1.1 10
D 12.5 0.3 35
Total 100
Based on the information presented, portfolio beta is closest to:
A. 0.14.
B. 0.77.
C. 0.87.
Correct Answer: B
Reference:
Portfolio beta = (0.25)(1.5) + (0.30)(0.6) + (0.10)(1.1) + (0.35)(0.3) = 0.77
120. Tactical asset allocation:
A. focuses on adding portfolio value in the short-run.

B. deviates from policy exposures to nonsystematic risk factors.
C. selects securities with an expected return higher than the asset class
benchmark.
Correct Answer: A
Reference:


Tactical asset allocation involves a deliberate deviation from the policy exposures
to systematic risk factors with the objective of adding value from forecasts of
near-term returns of those asset classes.
Security selection involves selecting securities, which have a higher expected

return than the benchmark for the purposes of enhancing portfolio return.

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FinQuiz.com – 1st Mock Exam 2016 (AM Session)

Questions Topic Minutes

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Questions 1 through 18 relate to Ethical and Professional Standards

1. According to Standard I-A ‘Knowledge of Law’, members and candidates are

A. maintain readily accessible current reference copies of applicable statutes,

A. violate Standard I-C ‘Misrepresentation’ by relying on work not prepared

FinQuiz.com © 2016 - All rights reserved. 3

4. By complying with GIPS standards firms cannot:

5. In conversation with a prospective client, a portfolio manager stated

A. did not violate any standard.

6. Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is

A. Yes, she is in compliance with codes and standards.

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7. Gilbert Love worked as financial analyst at Milton Securities. During his

A. No, he is in compliance with the Code and Standards.

8. According to Standard II-A ‘Material Non-Public Information’, if a member or

A. achieve public dissemination of the information.

9. Lauren Sims, marketing director of Karma Advisors, planned a brief performance

A. violated Standard III-B ‘Fair Dealing’

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A. Standard VI-B ‘Priority of Transactions’.

A. ‘Market Manipulation’ only.

A. is in compliance with standards regarding timely notification and using his

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A. Only Enrique is in violation.

15. Reginald Fuller manages institutional portfolios on behalf of BDY Advisors.

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A. According to Section 4 ‘Disclosures’, firms are required to make negative

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Questions 19 through 32 relate to Quantitative Methods

The present value of whose investment would be the lowest?

A. Correlation only deals with linear relationships.

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22. The efficiency of an unbiased estimator is measured by its:

The time-weighted return computed by the manager is closest to:

Probability distribution for Howe’s EPS

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df. p = 0.05 p = 0.10

A. Portfolio A is more peaked than normal distribution.

A. one standard deviation of the mean.

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A. NPV rankings are affected by external interest rates or discount rates.

30. A lognormal distribution:

A. is bounded below by 1 and has a long right tail.

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A. Parametric tests are relatively unaffected by violations of assumptions.

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Questions 33 through 44 relate to Economics

A. Labor is a variable factor of production.

A. individuals substitute future consumption for present consumption.

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37. Aggregate demand (AD) curve will be flatter if:

A. saving is highly sensitive to income.

A. greater and he can give up more of good Y to get an additional unit of

A. effect of changing the relative price of domestic and foreign goods.

Building Equipment Interest

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42. Leading economic indicators (LEI) are variables that:

A. change before nominal GDP of economy changes.

Entry Barriers Sellers Long-run profits