CFA PM 1
During the lockout period for a non-amortizing asset-backed security, the principal payment of €100 million on a €1 billion face value issue will result in the security having a total face value of: €0.9 billion. €1.1 billion. €1.0 billion.
1B C is correct. During the lockout period any principal received is reinvested to acquire additional loans with a principal equal to the total principal received from the cash flow keeping the face value of the issue at €1 billion.
A company purchased equipment for $50,000 on 1 January 2011. It is depreciating the equipment over a period of 10 years on a straight-line basis for accounting purposes, but for tax purposes it is using the declining balance method at a rate of 20%. Given a tax rate of 30%, the deferred tax liability at the end of 2013 is closest to: $6,720. $2,820. $420.
2820. https://imgur.com/a/9sW2WMw
A 30-day $10,000 US Treasury bill sells for $9,932.40. The discount basis yield (DBY) is closestto: 8.11%. 8.17%. 8.28%.
8.11 DBY = [(FV-PV)/FV] * (360/day)
The primary goal of both monetary and fiscal policy focuses on balancing economic growth and: income distribution. inflation. employment.
Inflation B is correct. The goal of both monetary and fiscal policy is the creation of an economic environment characterized by positive, stable growth and low, stable inflation. A is incorrect because the distribution of income (and wealth) lies within the purview of fiscal policy involving the government's decisions concerning spending and taxes. By contrast, monetary policy refers to central bank activities directed toward influencing the quantity of money and credit in an economy. Income distribution is not a policy domain of monetary policy. C is incorrect because the overarching goal of monetary and fiscal policy is to create economic conditions characterized by positive, stable economic growth and low, stable inflation. Achieving this goal promotes stability (rather than cyclicality) in employment, consumption, and saving/investment outcomes.
https://imgur.com/a/9HOmIyS
MONDUR= ANNMODDUR X PV(FULL) B
According to put-call parity, if a fiduciary call expires in the money, the payoff is most likely equal to the: difference between the market value of the asset and the face value of the risk-free bond. market value of the asset. face value of the risk-free bond.
MV Asset. B is correct. A fiduciary call, defined as a long position in a call and in a risk-free bond, generates a payoff that is equal to the market value of the asset if it expires in the money. A is incorrect. The difference between the market value of the asset and the face value of the risk-free bond is the payoff of the long call if exercised. This ignores the fact that the face value of the bond needs to be added to the payoff. C is incorrect. The face value of the risk-free bond is the payoff of the fiduciary call if the call expires out of the money,
https://imgur.com/a/Ewq8aqu
PTO = Purch/AP A is corect
A security market index that reports returns based on the reinvestment of income and the change in price of its constituent securities is best described as which type of index? Total return Float-adjusted Price return
A is correct. A total return index reflects not only the constituent securities' prices but also the reinvestment of all income since inception. B is incorrect. Float-adjustment is related to the weighting of constituent securities within the index and is not related to whether the index is reported based on price return or total return. C is incorrect. A price index reflects only the prices of the constituent securities within the index and excludes the reinvestment of income.
A private equity firm sells a portfolio company to a buyer that is active in the same industry as the portfolio company. This transaction is best described as a(n): trade sale. secondary sale. initial public offering.
A is correct. A trade sale is the sale of a portfolio company to a strategic buyer, such as a company that is active in the same industry. B is incorrect. A secondary sale is a sale to another private equity firm. C is incorrect. An initial public offering involves the sale of shares to public investors.
If the domestic country desires to reduce a current account surplus, the most likely outcome is that it will: lend to foreign countries. encourage foreign direct investment. have a lower gross domestic product (GDP) than if it were a closed economy.
A is correct. Because there is a current account surplus, the domestic country will need to lend to foreign countries—most likely, those with current account deficits. B is incorrect. Foreign direct investment into the domestic country will increase the current account surplus. C is incorrect. A current account surplus means GDP [GDP = Current account surplus + Private consumption (C) + Investment (I) + Government purchases of goods and services (G)] is higher than the closed economy version of GDP (i.e., GDP-closed = C + I + G). The difference between the two versions of GDP is positive and equals the current account surplus.
Other comprehensive income is least likely to include gains or losses on: the sale or disposal of discontinued operations. derivative contracts accounted for as hedges. the translation of foreign currency-denominated subsidiary financial statements
A is correct. Gains or losses on the disposal of discontinued operations are reported separately near the bottom of the income statement and are included in net income, not other comprehensive income.
The role of the International Organization of Securities Commissions (IOSCO) is best described as: promoting cross-border cooperation and uniformity in securities regulation. enforcing financial reporting requirements for entities participating in capital markets. promoting the use of International Financial Reporting Standards (IFRS) and the convergence of national accounting standards.
A is correct. IOSCO provides a forum for regulators from different jurisdictions to work together toward fair, efficient, and transparent markets, promoting cross-border cooperation and uniformity in securities regulation. B is incorrect. This is the role of regulatory authorities such as the Securities Exchange Commission. IOSCO is not a regulator and as such has no authority to regulate. C is incorrect. This is the role of the IFRS Foundation.
Which of the following institutional investors is most likely to have a low tolerance for investment risk and relatively high liquidity needs? Insurance company Defined-benefit pension plan Charitable foundation
A is correct. Insurance companies need to be relatively conservative and liquid, given the necessity of paying claims when due. B is incorrect because defined-benefit pension plans tend to have quite high risk tolerances and quite low liquidity needs. C is incorrect because endowments/foundations typically have high risk tolerances and quite low liquidity needs.
Within a risk management framework, risk tolerance: and risk exposure should be kept in alignment. includes the qualitative assessment and evaluation of risk. is determined as a result of establishing how and where risk is taken.
A is correct. The process of risk monitoring, mitigation, and management is the most obvious facet of the risk management framework and requires recognizing when risk exposure is not aligned with risk tolerance. B is incorrect. Risk identification and measurement include the qualitative assessment and evaluation of risk. C is incorrect. Risk tolerance can provide guidance on risk budgeting, which is how and where risk is taken. Risk budgeting is a result of determining risk tolerance.
Based on best practices in corporate governance procedures, it is most appropriate for a company's compensation committee to: link compensation with long-term objectives. include a retired executive from the firm. include a representative from the firm's external auditor.
A is correct. Under appropriate corporate governance procedures, the compensation committee should link compensation with long-term objectives. B is incorrect because the committee should be composed of independent members only. Good corporate governance procedures would require that executive (internal) directors not rule on matters underlying conflicts of interest or on matters requiring an unbiased judgment (such as audit, remuneration, or related-party transaction matters). Retired executives and external auditors are not independent and should not be a part of the compensation committee. C is incorrect because the committee should be composed of independent board members only. Good corporate governance procedures would require that executive (internal) directors not rule on matters underlying conflicts of interest or on matters requiring an unbiased judgment (such as audit, remuneration, or related-party transaction matters). Retired executives and external auditors are not independent and should not be a part of the compensation committee.
https://imgur.com/a/Cwkb48G
A, -2.05 https://imgur.com/a/cFYc1Ws real means inflation adj. Real d/f= Norminal d/f*(Pf/Pd) 1/1: Real d/f= 1.2844*(117.8/1.137)=133.072 31/12: Real d/f=1.2589*(119.9/1.158)=130.347 130.347/133.072-1=-0.0205
Reiko Kimisaki, CFA, is an investment advisor for a national social security fund in a frontier market with a very limited and illiquid capital market. The labor force is young with an investment time horizon of 25 to 30 years. She has been asked to suggest ways to increase the investment return of the overall portfolio. After careful assessment of the fund's previous investment history and available asset classes, she considers investment in private equity. What is Kimisaki's lowest priority to avoid any Code of Ethics and Standards of Professional Conduct violations prior to making this investment recommendation? Assess the risk tolerance of the fund. Analyze the expected returns of private equity in the market. Determine if the Investment Policy Statement allows for alternative investments.
Analyze the expected returns of private equity in the market. B is correct because prior to undertaking analysis with regard to expected returns, an advisor must determine suitability of an investment class including whether it fits within the client's risk tolerance and if it is an allowable asset class as per the client's Investment Policy Statement. Only once these factors have been determined should she proceed if appropriate to analyze expected returns to determine a particular investment recommendation.
Which of the following statements describes the most appropriate treatment of cash flows in capital budgeting? Interest costs are included in the project's cash flows to reflect financing costs. A project is evaluated using its incremental cash flows on an after-tax basis. Sunk costs and externalities should not be included in the cash flow estimates.
B is correct. All of the incremental cash flows arising from a project should be analyzed on an after-tax basis.
Which of the following is least likely to reduce the likelihood of being defrauded by a dishonest money manager? Third-party custody of assets under management Strong and consistent reported investment performance Independent verification of investment results
B is correct. To prevent fraud, involvement of third parties in the reporting and asset management process is helpful. A strong and consistent reported investment performance that lacks outside verification may actually be a warning sign. A is incorrect. Third-party custody of assets under management helps to reduce the possibility of fraud. C is incorrect. Independent verification of investment results helps to reduce the possibility of fraud.
Manuel Tacqueria, CFA, is a sole proprietor investment adviser managing accounts for a diversified group of clients. Tacqueria obtains his investment research through a subscription service with Alpha Services, a large financial services organization. Tacqueria notes that the research reports are sound because they are extremely detailed and comprehensive. As a result, Tacqueria feels comfortable relying solely upon this research when making recommendations to clients. Tacqueria should most likely do which of the following in order to conform to the CFA Institute Code of Ethics and Standards of Professional Conduct? Utilize additional sources of third-party research Undertake and add his own research to the existing reports Conduct additional due diligence on Alpha Services
C is correct because Tacqueria is in violation of Standard V(A)-Diligence and Reasonable Basis as he is required to undertake due diligence efforts on the third-party research provider on a regular basis to ensure that the quality of this research continues to meet his necessary standards. A is incorrect because the Code and Standards would not require this action. Tacqueria is in violation of Standard V(A)-Diligence and Reasonable Basis as he is required to undertake due diligence efforts on the third-party research provider on a regular basis to ensure that the quality of this research continues to meet his necessary standards. B is incorrect because the Code and Standards would not require this action. Tacqueria is in violation of Standard V(A)-Diligence and Reasonable Basis as he is required to undertake due diligence efforts on the third-party research provider on a regular basis to ensure that the quality of this research continues to meet his necessary standards.
The weighted average number of years to receipt of the principal and interest payments that will result in realization of the initial market discount rate on a bond is best described as: effective duration. modified duration. Macaulay duration.
C is correct. Macaulay duration is a weighted average of the time to receipt (expressed in years) of a bond's promised payments where the weights are the shares of the full price that correspond to each of the bond's promised future payments. This weighted average results in the realization of the bond's initial market discount rate. A is incorrect because effective duration is a measure of the sensitivity of the bond's price (expressed as a percentage change) to a change in the benchmark yield curve. B is incorrect because modified duration provides an estimate of a bond's percentage price change given a change in its yield to maturity (rather than a measure expressed as a weighted average period of years).
Which statement best describes the early exercise of non-dividend paying American options? Early exercise may be advantageous for: both deep-in-the-money calls and deep-in-the-money puts. deep-in-the-money calls. deep-in-the-money puts.
C is correct. Only deep-in-the-money put options may be exercised early. The price cannot fall below zero, so the additional upside of such an option is limited. A is incorrect. Being deep in the money is no reason for an early exercise of call options because there are no theoretical limits to further price increases. B is incorrect. Being deep in the money is no reason for an early exercise of call options because there are no theoretical limits to further price increases.
The relative strength index for a stock stands at 75. This reading is best described as an indication that the stock is neutral. oversold. overbought.
C is correct. The relative strength index (RSI) is a momentum oscillator and provides information on whether or not an asset is overbought or oversold. An RSI greater than 70 indicates that a stock is overbought; an RSI lower than 30 suggests that a stock is oversold.
If you are seeking guidance from the firm's code of ethics or written policies, your actions most likely reflect which phase of an ethical decision-making framework? Decide Reflect Consider
Consider C is correct. If you are seeking guidance from the firm's code of ethics or written policies, you are in the Consider phase of the ethical decision-making framework. This phase involves taking time to consider the situation influences as well as personal behavioral biases that could affect your thinking and decision making. During this phase, you may also seek guidance from such trusted sources as the firm's compliance department or outside counsel. A is incorrect. The Decide phase of the ethical decision-making framework does not involve seeking guidance from the firm's code of ethics or written policies. B is incorrect. The Reflect phase of the ethical decision-making framework does not involve seeking guidance from the firm's code of ethics or written policies but rather reflecting on and assessing your decision and its outcome.
Which of the following is least likely sufficient to meet recommended or required procedures for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care? Disclose any existing conflicts of interest. Establish a regular client meeting schedule. Seek best execution when trading on behalf of clients.
Disclose any existing conflicts of interest. A is correct. Disclosing any existing conflict of interest is least likely adequate to comply with the recommended or required procedure for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care. The recommended procedure for compliance states that members and candidates must disclose all actual and potential conflicts of interest so that clients can evaluate those conflicts. B is incorrect. Establishing a regular client meeting schedule is a recommended or required procedure for compliance with Standard III(A): Loyalty, Prudence, and Care. Members and candidates should establish regularly scheduled client reviews to ensure the investments held adhere to the terms of the clients' governing documents. C is incorrect. Seeking best execution when trading on behalf of clients, unless directed by the client to do otherwise, is a recommended or required procedure for compliance with Standard III(A): Loyalty, Prudence, and Care.
An investor wants to determine the intrinsic value of the common stock for a company with the following characteristics: The firm maintains a constant dividend payout ratio. Goodwill and patents account for a high proportion of the firm's assets. The firm's revenues and earnings are highly correlated with the business cycle. Furthermore, the investor focuses on the firm's capacity to pay dividends rather than expected dividends. Considering the characteristics, the investor will most likely use which of the following valuation models? Free cash flow to equity model Gordon dividend growth model Asset-based valuation model
FCFE model A is correct. The free cash flow to equity (FCFE) model is a measure of the firm's dividend-paying capacity, which should be reflected in the cash flow estimates rather than expected dividends. Analysts must make projections of financials to forecast future FCFE, and thus the constant growth assumption, as in the Gordon growth model, is not an issue. An asset-based valuation model is not appropriate because of the high proportion of intangibles (goodwill and patents) in the firm's assets. B is incorrect. The Gordon model is not appropriate because the investor focuses on the firm's capacity to pay dividends rather than expected dividends. Further, the cyclical nature of the firm's earnings and the constant payout ratio are not consistent with the constant growth rate of dividends assumed under the Gordon model. C is incorrect. An asset-based valuation model is not appropriate considering the high proportion of intangibles (goodwill and patents) in the firm's assets.
Robin Herring, CFA, is a government bond research analyst at an independent credit rating agency. A competitor credit rating agency just downgraded the bonds of a government Herring follows. Herring notes that all of the information in the competitor's report was covered in his analysis published last week. In the past, Herring has been slow to downgrade bonds, so he starts to doubt his own analysis after seeing the competitor's report. Herring decides to reissue his credit rating of this government bond and match the competitor's downgrade. In his revised report, Herring states that new information has been made available to justify the downgrade. Herring posts the revision on the credit rating agency's website and provides it by e-mail to all clients who received the original. Herring's rating change least likely violated which of the following CFA Institute Code of Ethics and Standards of Professional Conduct? Fair Dealing Communication with Clients Diligence and Reasonable Basis
Fair Dealing A is correct because the analyst has dealt fairly with all clients by sending them an e-mail and posting his rating change on the credit rating agency's website when making material changes to his prior investment recommendation; therefore, he has not violated Standard III(B)-Fair Dealing. Clients should be treated fairly when material changes in a member's or candidate's prior investment recommendations are disseminated, which has been done. B is incorrect because the analyst has used the release of a competitor's report, contrary to his own previously published report, as a reason to revise his recommendation and has not used reasonable judgment in identifying which factors are important to his investment analyses, recommendations, or actions, as required by Standard V(B)-Communication with Clients and Prospective Clients. C is incorrect because the analyst does not have a reasonable or adequate basis for his downgrade, as required by Standard V(A)-Diligence and Reasonable Basis. The analyst has also violated Standard I(C)-Misrepresentation which prohibits making misrepresentations relating to investment analysis, recommendations, actions, or other professional activities.
A man earns $3,000 per month and allocates $300/month for bus travel to visit his children three times per month. The bus company lowers the cost such that he can now take four trips a month for $320, which he decides to do. His decision to visit his children more often is most likely due to which economic effect? Income effect alone Substitution effect alone Income and substitution effects combined
IE and SE fx combined C is correct. The increase in travel is a result of both the income and the substitution effects. His earnings of $3,000/month have not changed, but because the price has fallen, if he continued to take three trips a month, he would have extra income available. This increase in purchasing power, or real income, is the income effect. The substitution effect is when a consumer buys more of a good when the price falls, as this consumer does by taking four trips instead of three and now allocating more of his budget to bus travel. A is incorrect. There has been an income effect from the decrease in the price of bus travel, leaving him more income if he continues to take only three trips, but that alone does not account for the man's behavior. B is incorrect. The substitution effect is when a consumer buys more of a good when the price falls, as this consumer does by taking four trips instead of three and now allocating more of his budget to bus travel. But there is also an income effect from the decrease in the price.
A company uses the straight-line method to depreciate its assets. One of its assets is accounted for under the revaluation model. At the end of Year 1, a revaluation gain is recorded for this asset in other comprehensive income. If there is no further revaluation in Year 2, what is the mostappropriate depreciable base for the asset in Year 2? No depreciation expense will be recorded under the revaluation model The asset's value including the revaluation gain The asset's original cost
The asset's value including the revaluation gain B is correct. The revaluation model essentially resets the asset's carrying value to fair value. Depreciation is then calculated based on the new carrying value, which would include the revaluation gain. A is incorrect. This would be correct under a fair value approach, which is allowed for investment property. No depreciation is recorded under this approach. C is incorrect. This would be correct under the cost approach.
Heidi Halvorson, CFA, is the Chief Investment Officer for Tukwila Investors, an asset management firm specializing in fixed-income investments. Tukwila is in danger of losing one of its largest clients, Quinault Jewelers, which accounts for nearly one third of its revenues. Quinault recently told Halverson that Tukwila would be fired unless the performance of Quinault's portfolio improves significantly. Shortly after this conversation, Halvorson purchases two corporate bonds she believes are suitable for any of her clients based upon third party research from a reliable and diligent source. Immediately after the purchase, one bond increases significantly in price while the other bond declines significantly. At the end of the day, Halvorson allocates the profitable bond trade to Quinault and the other bond to two of her largest institutional accounts. Halvorson most likely violated the CFA Institute Standards of Professional with regards to: client suitability. trade allocations. third party research.
Trade Allocations B is correct because the investment officer failed to deal fairly for her clients by allocating profitable trades to a favored client at the expense of others, a violation of Standard III(B)-Fair Dealing. The standard requires members and candidates to treat all clients fairly when taking investment action. Tukwila should have a systematic approach to allocating trades, such as pro rata, before or at the time of trade execution or as soon as possible after trades are executed. A is incorrect because the analyst believes the bonds are suitable for any of her clients and has not violated Standard III(C)-Suitability. C is incorrect because the analyst does have a reasonable or adequate basis for her investment decision, because it is based upon reliable third party research, and has not violated Standard V(A)-Diligence and Reasonable Basis.
Which of the following statements most accurately describes a valuation allowance for deferred taxes? A valuation allowance is required under: both IFRS and US GAAP on deferred tax assets arising from the translation of foreign operations. IFRS on revaluation of a deferred tax asset. US GAAP if there is doubt about recovering a deferred tax asset.
US GAAP if there is doubt abt... C is correct. A valuation allowance is required under US GAAP if there is doubt about whether a deferred tax asset will be recovered. Under IFRS, the deferred tax asset is written down directly. A is incorrect. Tax differences arising from foreign operations currency adjustments go to equity. There are no deferred tax assets. B is incorrect. IFRS does not have the concept of valuation allowance for deferred tax assets. Deferred tax assets are written down directly instead.
In setting the confidence interval for the population mean of a normal or approximately normal distribution, and given that the sample size is small, Student's t-distribution is the most appropriate approach when the variance is: known. large. unknown.
Unknown C is correct. When the sample size is small (and the population is normally or approximately normally distributed), the Student's t-distribution is preferred if the variance is unknown. A is incorrect. The z-distribution is preferred if the variance is known. B is incorrect. When there is a large sample size, not variance, it is possible to the use either the z-distribution or t-distribution.
When the market rate of interest falls after issuance, a company selecting the fair value option for reporting a liability with a fixed coupon rate will report: no change. a gain. a loss.
a los C is correct. A company selecting the fair value option for a liability with a fixed coupon rate will report a loss when market interest rates decrease. A is incorrect because a company selecting the fair value option for a liability with a fixed coupon rate will report losses when market interest rates decrease B is incorrect because a company selecting the fair value option for a liability with a fixed coupon rate will report losses (not gains) when market interest rates decrease.
https://imgur.com/a/sHoGwMa
b B is correct. Generally, the lower the senior unsecured rating, the larger the notching adjustment. In this case, the three companies have identical corporate family ratings, so we would next analyze each company's debt structure to determine which company's issues would most likely exhibit the greatest loss severity given default. Company B has substantially more secured debt than either Company A or Company C in its debt structure, so Company B's lower-ranked issues will likely exhibit lower recovery rates and require larger notching adjustments than either Company A or Company C. A is incorrect. Notwithstanding the fact that Company A has the largest percentage of subordinated debt in its capital structure, Company A would most likely experience a smaller notching adjustment than Company B because there is a lower percentage of higher-priority claims (secured debt) in its capital structure, which should result in higher recovery rates for its lower-rated credits (subordinated bonds). Higher recovery rates for subordinate bonds translate into smaller notching adjustments C is incorrect. Company C would most likely experience a smaller notching adjustment than Company B because there is a lower percentage of higher-priority claims (secured debt) in its capital structure, which should result in higher recovery rates for lower-rated credits (subordinated bonds). Higher recovery rates for subordinated bonds translate into smaller notching adjustments
If an investor uses derivatives to make a long investment in commodities, the return earned on margin is best described as: convenience yield. collateral yield. price return.
collateral yield. B is correct. Collateral yield is the return on cash used as margin on derivatives used to gain commodity exposure. A is incorrect because the convenience yield (also known as "roll yield") is the return from rolling forward the maturity of the derivatives position. C is incorrect because price return is the difference between the forward and spot price.
Which of the following is most likely a characteristic of a country that follows the dollarization exchange rate regime? The country: is able to monetize its domestic debt. has the currency credibility of the US dollar. has a term structure similar to that of the United States.
credibility of US Dollar B is correct. When a country adopts the US currency as its currency, hence the name dollarization, the dollarized country inherits the currency credibility of the US dollar. A is incorrect. Adopting the US currency will impose fiscal discipline, preventing the government from monetizing its debt. C is incorrect. The interest rates in a country that adopts the US currency as its currency are generally not the same as in the United States.
Which of the following are most likely a kind of supranational bonds? Bonds issued by the: Federal Farm Agency of the United States. Government of Malaysia. European Investment Bank.
eu inv bank C is correct. Supranational bonds are bonds issued by such supranational agencies as the European Investment Bank and the International Monetary Fund. A is incorrect because bonds issued by Federal Farm Agency of the United States are a type of quasi-government bonds. B is incorrect because bonds issued by the government of Malaysia are a type of government bonds.
Present value models follow a fundamental tenet of economics that states that individuals invest: to defer consumption. based on the law of one price. for the expected future benefits.
for ex future benenfits C is correct. Present value models follow a fundamental tenet of economics stating that individuals defer consumption—that is, they invest—for the future benefits expected. A is incorrect because, while people must defer consumption to invest, their motivation for doing so is that they expect a rate of return over the investment period that will create future benefits. B is incorrect because, while the law of one price is the economic rationale underlying the method of comparables for judging asset valuation, it is not the economic reasoning that explains why people invest.
https://imgur.com/a/V6KRXjJ
https://imgur.com/a/hxwcq7I
The post-audit performed as part of the capital budgeting process is least likely to include the: provision of future investment ideas. rescheduling and prioritizing of projects. indication of systematic errors.
rescheduling and prioritizing of proj B is correct. Rescheduling and prioritizing projects is part of the planning stage of the capital budgeting process, not the post-audit. The post-audit's purpose is to explain any differences between the actual and predicted results of a capital budgeting project. This process can aid in indicating systematic errors, improve business operations, and provide concrete ideas for future investment opportunities. A is incorrect. Rescheduling and prioritizing projects is part of the planning stage of the capital budgeting process, not the post-audit. The post-audit's purpose is to explain any differences between the actual and predicted results of a capital budgeting project. This process can aid in indicating systematic errors, improve business operations, and provide concrete ideas for future investment opportunities. C is incorrect. Rescheduling and prioritizing projects is part of the planning stage of the capital budgeting process, not the post-audit. The post-audit's purpose is to explain any differences between the actual and predicted results of a capital budgeting project. This process can aid in indicating systematic errors, improve business operations, and provide concrete ideas for future investment opportunities.
Jennifer Ducumon, CFA, is a portfolio manager for high-net-worth individuals at Northeast Investment Bank. Northeast holds a large number of shares in Babyskin Care Inc., a manufacturer of baby care products. Northeast obtained the Babyskin shares when they underwrote the company's recent IPO. Ducumon has been asked by the investment banking department to recommend Babyskin to her clients, who currently do not hold any shares in their portfolios. Although Ducumon has a favorable opinion of Babyskin, she does not consider the shares a buy at the IPO price nor at current price levels. According to the CFA Institute Code of Ethics and Standards of Professional Conduct the most appropriate action for Ducumon is to: ignore the request. recommend the shares after additional analysis. follow the request as soon as the share price declines.
ignore the request. A is correct because Ducumon should refuse to recommend the shares as her opinion of the Babyskin shares must not be affected by internal pressure. If Ducumon followed the request from the investment banking department at her company, she would be in violation of Standard I(B)-Independence and Objectivity. Ducumon must refuse to recommend the Babyskin shares until they are an attractive purchase based on fundamental analysis and market pricing. B is incorrect because Ducumon should refuse to recommend the shares, as she must issue only recommendations that reflect her independent and objective opinion. Ducumon must refuse to recommend the Babyskin shares until they are an attractive purchase based on fundamental analysis and market pricing. C is incorrect because Ducumon should refuse to recommend the shares, as she must issue only recommendations that reflect her independent and objective opinion. Ducumon must refuse to recommend the Babyskin shares until they are an attractive purchase based on fundamental analysis and market pricing.
Which of the following is most likely associated with poor corporate governance? Reduction in exposure to regulatory actions Increased control and compliance monitoring of corporate decisions Management of a company to a lower risk profile relative to shareholder tolerance
mgmgt of a company to alower risk profile relateve C is correct. Poor governance can result in ineffective decision making. Management may make decisions that benefit themselves at the cost of shareholders, such as taking less risk than is appropriate to create a more stable environment. Managing the company at a lower risk profile than necessary based on shareholders' tolerance is an example of ineffective decision making. Increased control and compliance monitoring are usually the result of good corporate governance. A reduction in exposure to regulatory actions would be the result of good, not poor, corporate governance. A is incorrect. A reduction in exposure to regulatory actions would be the result of good, not poor, corporate governance. B is incorrect. Increased control and compliance monitoring are usually the result of good corporate governance.
The central bank of a developing country wants to effectively import the inflation experience of the United States. The developing country's economy is most likely to experience: interest rates similar to those in the United States. economic growth similar to that of the United States. more volatile domestic money supply.
more volatile domestic mS C is correct. When the central bank chooses to target an exchange rate (which effectively imports the developed country's inflation experience), interest rates and conditions in the domestic economy must adapt to accommodate this target and domestic interest rates and money supply can become more volatile. A is incorrect. Interest rates may become more volatile when the central bank targets the exchange rate rather than the inflation rate. B is incorrect. The economic growth rate of a developing county is likely to be greater than that of the United States.
A graphical depiction of a continuous distribution shows the left tail to be longer than the right tail. The distribution is best described as having: negative skewness. leptokurtosis. positive skewness.
negative skew
The market structure in which a firm sells all of the product it produces at the market equilibrium price is best described as: oligopoly. perfect competition. monopolistic competition.
perf comp B is correct. In a perfectly competitive market, sellers have no pricing power and thus sell their product at the price established by demand and supply in the market: the market equilibrium price. A is incorrect. In an oligopolistic market, there are so few firms in the market that pricing decisions are interdependent. C is incorrect. In a monopolistically competitive market, sellers have some pricing power as they are able to differentiate their product through advertising or other non-price strategies. Because the product is somewhat different from that of competitors, in the short run the firm can charge the price determined by the demand curve. Unlike perfect competition, there is no well-defined supply function.
Concentrated portfolio strategies are attractive because of their: potential to generate alpha. ability to track market indices. low risk.
potential to gen alpha A is correct. Concentrated portfolio strategies focus on only a few securities, strategies, or managers. This focus reduces diversification but may enable investors to achieve alpha. B is incorrect. Portfolio concentration makes it harder to track market indexes. C is incorrect. Portfolio concentration increases risk.
Which of the following is most likely to be an explanation of the power of a test? The power of a test is the probability of: rejecting the null when it is false. not accepting the alternative when it is false. a Type I error.
reject the null when false. (correctly rej null)
According to the GIPS standards, a verification report confirms all of the following exceptwhether: specific composite presentations are accurate. a firm has complied with all firm-wide composite construction requirements. processes and procedures are designed to calculate and present compliant performance results.
specific composite presentations are accurate. A is correct. According to the Global Investment Performance Standards (GIPS), verification does not ensure the accuracy of any specific composite presentations. Verification tests if a firm has properly constructed composites, and if the firm's systems are designed to properly calculate and present performance in compliance with the GIPS standards. Verification does not, in any way, provide assurance about the results of a specific composite. That level of assurance is provided through an additional level of testing of a specific composite, called a performance examination or performance audit. B is incorrect because GIPS verification confirms that a firm has complied with all firm-wide composite construction requirements. C is incorrect because GIPS verification confirms that a firm's processes and procedures are designed to calculate and present compliant performance results.
A two-tailed t-test of the hypothesis that the population mean differs from zero has a p-value of 0.0275. Using a significance level of 5%, the most appropriate conclusion is: to accept the null hypothesis. that the chosen significance level is too high. to reject the null hypothesis.
that the chosen significance level is too high. C is correct. The p-value is the smallest level of significance at which the null hypothesis can be rejected. In this case, the given p-value (0.0275) is less than the given level of significance (0.05); therefore, the null hypothesis is rejected. A is incorrect. Candidates might misunderstand the use of p-value or they may have incorrectly doubled the p-value or inappropriately, in this example, divided the significance level by two. B is incorrect. The p-value is the smallest level of significance at which the null hypothesis can be rejected. In this case, the given p-value (0.0275) is less than the given level of significance (0.05); therefore, the null hypothesis is rejected.
For which of the following assets is it most appropriate to test for impairment at least annually? Land A patent with a legal life of 20 years A trademark with an indefinite expected life
trademark with indefinite exp life C is correct. Intangible assets with indefinite lives need to be tested for impairment at least annually. Property, plant, and equipment (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment. A is incorrect. Property, plant, and equipment (including land) are not tested annually but only when significant events suggest a need to test for impairment. B is incorrect. Intangible assets with finite lives are not tested annually but only when significant events suggest a need to test for impairment.
When considering the long-run aggregate supply curve, the long run is best described as the time required for which of the following combinations of items to become variable? Wages and prices Wages, prices, and expectations Wages, prices, expectations, and physical capital
wage, price, expectation B is correct. The long-run aggregate supply curve represents the level of domestic output that companies will produce at each price level. "Long run" is defined as the time required for wages, prices, and expectations to adjust but not long enough for physical capital to become a variable input: Capital and available technology to use that capital remain fixed. A and C are incorrect. Wages, prices, and expectations are variable inputs in the long-run aggregate supply curve, but the time is not long enough to allow physical capital to become a variable input.
